Summited by ASHISH MISHRA

Theory of Constraints
The Big Idea – Every process has a constraint (bottleneck) and focusing improvement efforts on that
constraint is the fastest and most effective path to improved profitability.

WHAT IS THE THEORY OF CONSTRAINTS?

The Theory of Constraints is a methodology for identifying the most important limiting factor (i.e.
constraint) that stands in the way of achieving a goal and then systematically improving that
constraint until it is no longer the limiting factor. In manufacturing, the constraint is often referred to
as a bottleneck.

The Theory of Constraints takes a scientific approach to improvement. It hypothesizes that every
complex system, including manufacturing processes, consists of multiple linked activities, one of
which acts as a constraint upon the entire system (i.e. the constraint activity is the “weakest link in
the chain”).

So what is the ultimate goal of most manufacturing companies? To make a profit – both in the short
term and in the long term. The Theory of Constraints provides a powerful set of tools for helping to
achieve that goal, including:

The Five Focusing Steps (a methodology for identifying and eliminating constraints)

The Thinking Processes (tools for analyzing and resolving problems)

Throughput Accounting (a method for measuring performance and guiding management

A successful Theory of Constraints implementation will have the following benefits:

Increased profit (the primary goal of TOC for most companies)

Fast improvement (a result of focusing all attention on one critical area – the system constraint)

Improved capacity (optimizing the constraint enables more product to be manufactured)

Reduced lead times (optimizing the constraint results in smoother and faster product flow)

Reduced inventory (eliminating bottlenecks means there will be less work-in-process)

BASICS OF TOC

Core Concept

The core concept of the Theory of Constraints is that every process has a single constraint and that
total process throughput can only be improved when the constraint is improved. A very important
corollary to this is that spending time optimizing non-constraints will not provide significant benefits;
only improvements to the constraint will further the goal (achieving more profit).

Thus, TOC seeks to provide precise and sustained focus on improving the current constraint until it
no longer limits throughput, at which point the focus moves to the next constraint. The underlying
power of TOC flows from its ability to generate a tremendously strong focus towards a single goal
(profit) and to removing the principal impediment (the constraint) to achieving more of that goal. In
fact, Goldratt considers focus to be the essence of TOC.

The Five Focusing Steps

The Theory of Constraints provides a specific methodology for identifying and eliminating
constraints, referred to as the Five Focusing Steps. As shown in the following diagram, it is a cyclical
process.

The five focusing steps of the Theory of Constraints are used to identify and decrease manufacturing
bottlenecks

The Theory of Constraints uses a process known as the Five Focusing Steps to identify and eliminate
constraints (i.e. bottlenecks).
Summited by ASHISH MISHRA

The Five Focusing Steps are further described in the following table.

Step Objective
Identify Identify the current constraint (the single part
of the process that limits the rate at which the
goal is achieved).
Exploit Make quick improvements to the throughput of
the constraint using existing resources (i.e.
make the most of what you have).
Subordinate Review all other activities in the process to
ensure that they are aligned with and truly
support the needs of the constraint.
Elevate If the constraint still exists (i.e. it has not
moved), consider what further actions can be
taken to eliminate it from being the constraint.
Normally, actions are continued at this step
until the constraint has been “broken” (until it
has moved somewhere else). In some cases,
capital investment may be required.
Repeat The Five Focusing Steps are a continuous
improvement cycle. Therefore, once a
constraint is resolved the next constraint
should immediately be addressed. This step is a
reminder to never become complacent –
aggressively improve the current constraint…
and then immediately move on to the next
constraint.

The Thinking Processes

The Theory of Constraints includes a sophisticated problem solving methodology called the Thinking
Processes. The Thinking Processes are optimized for complex systems with many interdependencies
(e.g. manufacturing lines). They are designed as scientific “cause and effect” tools, which strive to
first identify the root causes of undesirable effects (referred to as UDEs), and then remove the UDEs
without creating new ones.

The Thinking Processes are used to answer the following three questions, which are essential to
TOC:

What needs to be changed?

What should it be changed to?

What actions will cause the change?

Examples of tools that have been formalized as part of the Thinking Processes include:

Tool Role Description

Current Documents the Diagram that shows the current state, which is unsatisfactory and needs
Reality Tree current state. improvement. When creating the diagram, UDEs (symptoms of the problem)
are identified and traced back to their root cause (the underlying problem).

Evaporating Evaluates potential Diagram that helps to identify specific changes (called injections) that
Cloud Tree improvements. eliminate UDEs. It is particularly useful for resolving conflicts between
different approaches to solving a problem. It is used as part of the process for
progressing from the Current Reality Tree to the Future Reality Tree.

Future Reality Documents the Diagram that shows the future state, which reflects the results of injecting
Tree future state. changes into the system that are designed to eliminate UDEs.

Strategy and Provides an action Diagram that shows an implementation plan for achieving the future state.
Tactics Tree plan for Creates a logical structure that organizes knowledge and derives tactics from
improvement. strategy. Note: this tool is intended to replace the formerly used Prerequisite
Tree in the Thinking Processes.

Throughput Accounting

Throughput Accounting is an alternative accounting methodology that attempts to eliminate harmful

In traditional accounting, inventory is an asset (in theory, it can be converted to cash by selling it).
This often drives undesirable behavior at companies – manufacturing items that are not truly
needed. Accumulating inventory inflates assets and generates a “paper profit” based on inventory
that may or may not ever be sold (e.g. due to obsolescence) and that incurs cost as it sits in storage.
The Theory of Constraints, on the other hand, considers inventory to be a liability – inventory ties up
cash that could be used more productively elsewhere.

In traditional accounting, there is also a very strong emphasis on cutting expenses. The Theory of
Constraints, on the other hand, considers cutting expenses to be of much less importance than
increasing throughput. Cutting expenses is limited by reaching zero expenses, whereas increasing
throughput has no such limitations.

These and other conflicts result in the Theory of Constraints emphasizing Throughput Accounting,
which uses as its core measures: Throughput, Investment, and Operating Expense.
Summited by ASHISH MISHRA

Core Measures Definition

Throughput The rate at which customer sales are generated less truly variable costs (typically
raw materials, sales commissions, and freight). Labor is not considered a truly variable cost unless
pay is 100% tied to pieces produced.

Investment Money that is tied up in physical things: product inventory, machinery and
equipment, real estate, etc. Formerly referred to in TOC as Inventory.

Operating Expense Money spent to create throughput, other than truly variable costs (e.g.
payroll, utilities, taxes, etc.). The cost of maintaining a given level of capacity.

In addition, Throughput Accounting has four key derived measures: Net Profit, Return on
Investment, Productivity, and Investment Turns.

Net Profit = Throughput − Operating Expenses

Return on Investment = Net Profit / Investment

Productivity = Throughput / Operating Expenses

Investment Turns = Throughput / Investment

In general, management decisions are guided by their effect on achieving the following
improvements (in order of priority):

Will Throughput be increased?

Will Investment be reduced?

Will Operating Expenses be reduced?

The strongest emphasis (by far) is on increasing Throughput. In essence, TOC is saying to focus less
on cutting expenses (Investment and Operating Expenses) and focus more on building sales
(Throughput).