In the current economic climate, many companies continue to struggle with their future prospects. However companies using applying Theory of Constraints (TOC) are well placed to not only weather the storm but emerge smelling of roses.
Theory of Constraints was introduced in mid 1980s by Dr Eli Goldratt. Since then it has been producing startling bottom line results to companies all over the world. Here are some examples from independent audits:
- Revenue / Throughput – Increased 68%
- Due Date Performance – Improved 60%
- Inventory Levels – Reduced 50%
- Lead Times – Reduced 69%
There have been many organisations reporting profit improvement of more than 100% in the first year of implementing the TOC.
So What is Theory of Constraints?
According to TOC, there are only a few constraints in any organisation at any one time which control the overall performance of that organisation. If these constraints are identified and eliminated, performance can be improved.
Using systems approach, TOC simplifies the identification of these physical and logical constraints or ‘leverage’ points. Depending upon the organisation, these constraints could be internal, e.g. a policy or a functional area of the company or external, i.e. market place.
TOC then provides tools to build and implement the “levers” that synchronise the parts to achieve an order of magnitude improvement in the performance of the organisation as a whole.
The TOC has three underlying assumptions:
Convergence or Inherent Simplicity: However complex an organisation is, there is inherent simplicity in its operations. The more complex a system to describe, the simpler it is to manage.
Consistency: There are no conflicts in nature. If two interpretations of a natural phenomenon are in conflict, one or possibly both must be wrong.
Respect: People are not stupid; even when people do things that seem stupid they have a reason for that behavior
The Theory of Constraints is a proven method that can be used to increase throughput (sales), reliability, and quality while decreasing inventory and work in progress (WIP) etc. TOC also provides tools and framework to help make tactical & strategic decisions for continuous improvement.
The Five Focusing Steps of Ongoing Improvement
As long as a system, company or department’s performance levels (or RoI or whichever other way it is measured) are less than infinite, they can be improved by using these 5 steps:
- Identify the system’s constraint
- Decide how to exploit the system’s constraint
- Subordinate everything else to the prior decisions
- Elevate the system’s constraint
- If, in the prior steps, the constraint has been broken, go back to step one.
Theory of Constraints Jonah Thinking Processes
- Evaporating Cloud or conflict diagram
- Current Reality Tree (CRT)
- Future Reality Tree (FRT)
- Negative Branch Reservation (NBR) or branch
- Prerequisite Tree (PrT)
- Transition Tree (TrT)
- Strategy and Tactics Tree (S&T)
TOC has developed solutions in operations, finance, project management, distribution, marketing, sales, corporate strategy and day to day management.
Six Necessary and Sufficient Questions on Information Technology
- What is the power of the technology?
- What limitation does it diminish?
- What are the old rules that accommodated the old limitation?
- What are the new rules that should be used now?
- In light of the new rules, what changes are required in the technology?
- How to cause the change to take advantage of the new technology (the new win/win business model)?