CHAPTER 23: THEORY OF

CONSTRAINTS
LO23–1: Explain the Theory of Constraints (TOC).
LO23–2: Analyze bottleneck resources and apply TOC
principles to controlling a process.
LO23–3: Compare TOC to conventional approaches.
LO23–4: Evaluate bottleneck scheduling problems by applying
TOC principles.

McGraw-Hill/Irwin Copyright ©2017 McGraw-Hill Education. All rights reserved.

ELI GOLDRATT’S THEORY OF CONSTRAINTS
• Goldratt contends that manufacturers were not doing a
good job in scheduling and in controlling their resources
and inventories
• Goldratt developed software that scheduled jobs through
manufacturing processes
• It takes into account limited facilities, machines, personnel, tools,
materials, and any other constraints
• This was called optimized production technology (OPT)
• Scheduling logic was based on the separation of
bottleneck and nonbottleneck operations

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Goldratt’s Rules of Production Scheduling
1. Do not balance capacity, balance the flow
2. The level utilization of a nonbottleneck resource is not
determined by its own potential but by some other
constraint in the system
3. Utilization and activation of a resource are not the
same
4. An hour lost at a bottleneck is an hour lost for the
entire system
5. An hour saved at a nonbottleneck is a mirage

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Goldratt’s Rules of Production Scheduling
Continued

6. Bottlenecks govern both throughput and inventory in the

system
7. Transfer batch may not, and many times should not, be
equal to the process batch
8. A process batch should be variable both along its route
and in time
9. Priorities can be set only by examining the system’s
constraints, and lead time is a derivative of the schedule

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Goldratt’s Theory of Constraints (TOC)
1. Identify the system constraints
2. Decide how to exploit the system constraints
3. Subordinate everything else to that decision
4. Elevate the system constraints
5. If, in the previous steps, the constraints have been
broken, go back to step 1, but do not let inertia become
the system constraint

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Goldratt’s Goal of the Firm
• The goal of a firm is to make money
• Organizations have many purposes
• Provide jobs
• Consume raw materials
• Increase sales
• Increase market share
• Develop technology
• Produce high-quality products
• These do not guarantee the long-term survival of the
organization

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Performance Measurement
• Financial
• Net profit-an absolute measurement in dollars
• Return on investment-a relative measure based on investment
• Cash flow-a survival measurement
• Operational
• Throughput-the rate at which money is generated by the system
through sales
• Inventory-all the money that the system has invested in purchasing
things it intends to sell
• Operating expenses-all the money that the system spends to turn
inventory into throughput
• From an operations standpoint, the goal of the firm is to
increase throughput while simultaneously reducing
inventory and reducing operating expense
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Productivity
• Productivity typically measured in terms of output per
labor hour
• Does not guarantee profitability
• Has throughput increased?
• Has inventory decreased?
• Have operational expenses decreased?
• Productivity is all the actions that bring a company closer
to its goals

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Unbalanced Capacity
• In earlier chapters, we discussed balancing assembly
lines
• The goal was a constant cycle time across all stations
• Synchronous manufacturing views constant workstation
capacity as a bad decision
• Random variations must be handled using inventory
• When one process takes longer than the average, the time can not
be made up

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Dependent Events and Statistical Fluctuations
• The term dependent events refers to a process sequence
• A flows to B, B flows to C, and C flows to D
• Each must be completed before moving on to the next
• The ability to do the next process is dependent on the preceding one
• Statistical fluctuation refers to the normal variation about a
mean or average
• When statistical fluctuations occur in a dependent sequence
without any inventory between workstations, there is no
opportunity to achieve the average output
• When one process takes longer than the average, the next
process cannot make up the time
• Rather than capacities being balanced, the flow of product
through the system should be balanced
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 Processing and Completion Times, Process A to
Process B

Exhibit 23.4 Copyright ©2017 McGraw-Hill Education. All rights reserved. 23-11
Bottlenecks, Capacity-Constrained
Resources and Synchronous Manufacturing
• Capacity: the available time for production
• Bottleneck: what happens if capacity is less than demand
placed on resource
• Nonbottleneck: what happens when capacity is greater
than demand placed on resource
• Capacity-constrained resource (CCR): a resource
where the capacity is close to demand on the resource

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Basic Manufacturing Building Blocks
• All manufacturing processes and flows can be simplified
to four basic configurations
• Shown on next slide
• With these four blocks, a production process can be
greatly simplified for analysis and control
• Rather than track and schedule all of the steps in a
production sequence, attention can be placed at the
beginning and end points

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 The Basic Building Blocks of Manufacturing
Derived by Grouping Process Flows

Exhibit 23.6 Copyright ©2017 McGraw-Hill Education. All rights reserved. 23-14
 Methods for Synchronous Control

Exhibit 23.7 Copyright ©2017 McGraw-Hill Education. All rights reserved. 23-15
Time Components
1. Setup time: the time that a part spends waiting for a
resource to be set up to work on this same part
2. Process time: the time that the part is being processed
3. Queue time: the time that a part waits for a resource
while the resource is busy with something else
4. Wait time: the time that a part waits not for a resource
but for another part so that they can be assembled
together
5. Idle time: the unused time that represents the cycle
time less the sum of the setup time, processing time,
queue time, and wait time

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Finding the Bottleneck
1. Run a capacity resource profile
• Obtained by looking at the loads placed on each resource by the
products that are scheduled through them
2. Use your knowledge of the particular plant
• Look at the system in operation
• Talk with supervisors and workers

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Saving Time
• Bottlenecks govern both throughput and inventory in the
system
• An hour saved at the bottleneck adds an extra hour to the
entire production system
• An hour saved at a nonbottleneck is a mirage and only
adds an hour to its idle time

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Drum, Buffer, Rope
• Every production system needs some control point or
points to control the flow
• If the system contains a bottleneck, it is the best place for
control
• This control point is called the drum
• It strikes the beat that the rest of the system uses to function
• If there is no bottleneck, the next-best place to set the
drum would be a capacity- constrained resource
• There are two things that we must do with a bottleneck
1. Keep a buffer inventory in front of it
2. Communicate back upstream
• This communication is called the rope

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 Linear Flow of Product with a Bottleneck

Exhibit 23.9 Copyright ©2017 McGraw-Hill Education. All rights reserved. 23-20
Importance of Quality
• An MRP system allows for rejects by building a larger
batch than actually needed
• A JIT system cannot tolerate poor quality because JIT
success is based on a balanced capacity
• Synchronous manufacturing is more tolerant than JIT
systems
• Excess capacity throughout system
• Except for the bottleneck
• Quality control needed before bottleneck

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Batch Sizes
• What is the batch size?
• One?
• Infinity?
• Larger batch sizes require fewer setups and therefore
leave more time for processing
• Desirable for bottleneck resources
• For nonbottleneck resources, smaller batch sizes are
desirable
• Reduces WIP inventory

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How to Determine Process Batch and Transfer
Batch Sizes
1. A bottleneck with no setup required when changing from
one product to another
• Process jobs in the order of the schedule
• Without setups, only sequence is important

2. A bottleneck with setup times required to change from

one product to another
• Large batch sizes combine separate jobs into the sequence
• This means reaching ahead in the schedule
• Some jobs will be done early
• Large batches saves setup and increases throughput

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How to Determine Process Batch and Transfer
Batch Sizes Continued
• A capacity constrained resource (CCR)
3. With no setup required to change from one product to another
4. With setup time required when changing from one product to
another
• Handling similar to a nonbottleneck
• Smaller batches so there can be more frequent changes of product
• Decreased lead time

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How to Treat Inventory
• Traditional view is the only negative impact of inventory is
carrying cost
• However, can also lengthen lead times and create
problems with engineering changes
• Less WIP reduces the number of engineering changes
• From a constraint management perspective, inventory is a
loan given to the manufacturing unit

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Dollar Days
• Dollar days: a measurement of the value of inventory and
the time it stays within an area
• We could simply multiply the total value of inventory by
the number of days inventory spends within a department
• Techniques can be instituted to try to reduce the number
of dollar days
• Need to be careful that a measure does not become a local
objective and hurt the global objectives

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Benefits from Dollar Day Measurement in Other
Areas
• Discourages holding large amounts of
Marketing finished goods inventory

• Discourages placing large purchase orders

Purchasing that, on the surface, appear to take
advantage of quantity discounts

• Discourage large work-in-process and

Manufacturing producing earlier than needed

Project • Quantify a project’s limited resource

investment as a function of time
management
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Comparing Synchronous Manufacturing (TOC) to
Traditional Approaches
• MRP
• Uses backward scheduling
• Schedules through a BoM explosion
• MRP develops capacity utilization profiles
• Trying to smooth capacity is difficult
• Synchronous manufacturing
• Uses forward scheduling
• This ensures a feasible schedule
• Batch sizes can vary

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JIT Drawbacks
1. JIT is limited to repetitive manufacturing
2. JIT requires a stable production level
3. JIT does not allow very much flexibility in the products
produced
4. JIT still requires work-in-process when used with
Kanban so that there is “something to pull”
5. Vendors need to be located nearby because the system
depends on smaller, more frequent deliveries

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Relationship with Other Functional Areas
• Accounting’s influence
• Global measurements show net profits, ROI, and cash flow
• Local cost accounting measurements show efficiency or utilization
rates
• Marketing and production
• Marketing and production should work in harmony
• In practice, they act independently
• Data for evaluating marketing and manufacturing are different

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Example 23.1: What to Produce?
• Three products are sold in the market
• A, $50
• B, $75
• C, $60
• The market will take all that can be supplied
• Three workcenters (X, Y, and Z) process the three
products
• Times given on next slide
• Raw materials, parts, and components are added at each
workcenter to produce each product
• Shown on next slide
• What should be produced?

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Example 23.1: Data

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 Example 23.1: Prices and Production
Requirements for Three Products and Workcenters

Exhibit 23.14 Copyright ©2017 McGraw-Hill Education. All rights reserved. 23-33
Example 23.1: Solution
• Three different objectives could exist that lead to different
conclusions
1. Maximize sales revenue because marketing personnel are paid
commissions based on total revenue
2. Maximize per unit gross profit
3. Maximize total gross profit
• In this example, we use gross profit as the objective and
provide a solution
• Other objectives can be worked out similarly

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Example 23.1: Objective 3 – Maximize Total
Gross Profit
• We can solve this problem by finding either
• Total gross profit for the period
• Rate at which profit is generated
• We use rate to solve the problem both because it is easier
and because it is a more appropriate measure
• We use profit per hour as the rate
• Note that each product has a different workcenter that
limits its output
• The rate at which the product is made is then based on this
bottleneck workcenter

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Profit per Hour Calculations

• It is clear that product C provides the highest profit per

hour
• In order to maximize total gross profit, the firm should
produce as much of the C as possible

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Summary
• TOC is an alternative way to think about improving processes
• It is essential to concentrate on system limitations imposed by
capacity-constrained resources
• To do this, the firm must simultaneously increase throughput, reduce inventory,
and reduce operating expenses
• Maintain perfectly balanced capacity leads to many problems
• Managing the flow through the bottlenecks is essential to the TOC
synchronous manufacturing approach.
• Bottlenecks are identified by calculating the expected utilization
(percentage of capacity used) for each resource
• Saving time on a bottleneck resource is the only way to increase
throughput
• Synchronous manufacturing is flexible and focused on maximizing
flow through the system while minimizing cost
• TOC can be used to schedule production
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Practice Exam
1. According to Goldratt, the goal of a firm is to do what
2. At the operational level, Goldratt suggests that these
three measures should guide decisions
3. The goal related to these three measures is this
4. Goldratt argues that, rather than capacity, this should be
balanced
5. This is any resource whose capacity is less than the
demand placed on it

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Practice Exam Continued
6. Goldratt suggests that a production system should be
controlled using these three mechanisms
7. A bottleneck should have this placed in front of it to
ensure it never runs out of work
8. A rope is used for this purpose in controlling a
production system
9. To pace the production system, this is used
10. This is a measure of the value of inventory and the time
it stays within an area

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