what is theory of constraints by dr alan barnard

7/18/2019 What is Theory of Constraints by Dr Alan Barnard

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What is The

A

A generic Management

How do we achieve

Every manager, and espetheir organization becomethat is continuously improvalue to all stakeholders,taking significant risks.

However, even though it iand funding) to improve emost prosperous organizainvest in making changes

How do managers knowtheir organization (includinorganization?

To answer this question,differentiate between all ththat CAN be improved, froachieve more goal units fo

The extent of the Proble

Every improvement in pechange to the organizati

will result in a

In fact, research shows thinitiated by managementresult in a measureable ipercentage of these chanperformance. These statismergers & acquisitions, thimplementation of new ITorganizational transformat

With such a low success rresistance in most organizis so much skepticism frothe full investment and/or

The (major underlying)

Is it the inherent compl

ry of Constraints (TOC

thor: Dr Alan Barnard, CEO Goldratt Resea

roblem

ongoing improvement within an organizati

ially every company owner, wants to ensus an Ever-flourishing organization an orging performance and stability, while increaithout ever exhausting resources and with

almost always possible (with the right resoery part of an organization, even the large

tions have limited resources and time availneeded to improve their organizations.

here and when to invest the scarcest resoug their own time) to achieve an ever-flouris

anagers need a reliable method/mechanise MANY parts (processes, policies, skills, cm the FEW that MUST be improved in order the organization, now and in the future.

rformance and value to stakeholders resultns. However, not every change in the orga

improvement in performance and value.

t the majority of changes (typically 60 80nd owners to improve their organizations,provement in the bottom line and a signifies actually deteriorate the organizationaltics are true for every type of change include introduction of new products or services,systems, new incentive schemes as well asion projects.

ate, it is no wonder that there is such highations to new change initiatives and also w

owners resulting in most changes not recesource allocation needed.

ause of the Problem

xity or not capitalizing on the inherent sim

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There are typically two oplow success rate of chang

The first view relates to ancomplex and that there arunderlying root causes of

success and to predictingthe organization as a wholfocus mainly on reducing torganization or problem uare more known/certain) aparts. The assumption beiequal the improvement forMore (performance in eacespecially considering the

The second view acknowlare governed by inherent

performances are causedthe leverage points in theperformance improvementbut simply the result of imat the level of good enouunits.

The second view (based osame way that the strengtweakest link, the performperformance of the systeImproving any of non-wea

improving the weakest linorganization as a whole.

This holistic approach alswhen a change is considethat a win:lose between stdeteriorate to a lose:lose.stakeholders is the key tocontribution and commitm

Need for a Holistic Focu

How do we kn

In the 1980s, an Israeli pmindsets and methods ofand improving organizatioorganizations are limitedthis (insight) can provide t

osing views on what the underlying cause( e initiatives are within organizations.

acknowledgement that organizations are vhigh levels of uncertainty related to identif

poor performance or necessary conditions f

the impact of such changes on the performe. Those managers that ascribe to this vie

he complexity and uncertainty by breakinginto simpler parts (where the cause-effect

nd then aiming to improve or optimize eachng that the sum of these local improvementthe organization as a whole. i.e. They asspart and more initiatives) are always bett

uncertainty in success rate.

dges that all complex systems (like organiimplicity that the majority of problems/po

by very few underlying causes (Pareto prinystem. This theory acknowledges that a sis not equal to the sum of ALL local improrovements of only those FEW parts not pe

h to support the current target for win:win:

n an holistic approach) acknowledges that iof any chain is limited by the strength of t

nce of any organization is limited by theconstraint (the organizations weakest li

kest links will not improve the organization

will always result in an improvement to th

acknowledges that people only resist chared a lose for them or other stakeholdersakeholders in an organization, will alwaysEnsuring that changes will be a win for allturning resistance to change, into activeent to successfully implement the right cha

ing Process

w where to focus our efforts to improve?

ysicist, Dr Eli Goldratt, started applying thehe hard sciences to the soft science of ms. He realized that the performance of

y a system constraint (the weakest link) ane necessary focusing mechanism for all le

s) of the

erying the

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management to differentiaresponsibility that CAN behelp the organization achi

This focusing process shonot only what that part mu

the whole organization butdoing that is not contributidamaging the performancrealized that such a focusinecessary holistic thinkingcapitalize on the cause-effconstraints which govern t

Dr Goldratt called this neTOC. TOCs five focusingholistically included:

Step 1: Identify the Systeorganization)

Step 2: Decide how to ex

Step 3: Subordinate every

Step 4: Elevate the Syste

Step 5: If in a previous stethe system constraint, go

Over the past 30 years, Dtogether with an increasinacademics have createdfocusing steps to differentto different parts of the orprojects, sales, marketingholistic decision support frlogical Thinking Processeorganizations are stuck on

The 5 focusing steps canmanaging operations, sal

even to a whole supply chWhere to Start?

Should we start with t

The application of TOCsinherent potential when aconstraint to profitable groapplied to a whole supply

te between the MANY parts within their areimproved from the FEW that MUST be imp

ve more goal units for all stakeholders.

uld enable each part of an organization to ist START doing to contribute to the improv

also (more importantly) what that part musg to or in some cases, in conflict and thereof the organization as a whole. Goldratt al

ng process needs to be supplemented withtools and decision support system to develect relationships between the constraint anhe system.

body of knowledge the Theory of Constrasteps to analyze and improve any organiza

Constraint (to achieving more Goal units f

loit (not waste) the system constraint

thing to the above decision

Constraint

p a constraint was broken, don't let inertiaack to step 1.

r. Eli Goldratt, the creator of Theory of Conpool of TOC practitioners, implementersvast body of knowledge of how to apply thtypes of organizations from different industanization (operations, finance, supply chaiand managing people), and also developedamework (Throughput Accounting) and a s

and Management Skills that can be applieone or more of the above steps.

e applied to a function within an organizatis, finance, logistic etc), to a total organizati

ain.

he low hanging fruit or highest leverage poi

focusing steps will sustainably unlock theplied to an organization as a whole (i.e. whwth for the company) and even more so whchain

a ofroved to

entifyment of

t STOPforesotheop and

non-

ints ortion

or the

ecome

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The example that follows ipotential that can be unloto only one part of the org

Consider a company withExpenses of $45m and N

From time to time, the orgdemand, resulting in highsales (which can be miniduring low demand period

Applying the TOC 5 Focumanagement of operationManagement), it will redutimes, poor due date perfoinventory due to internal bunsynchronized priorities,

variability in demand and/local optima/efficiency me

Such an implementationreduce lead times (and thsignificantly reducing theunlocked capacity is solperformance or shorter leline will be the reduction ithe reduction interest paidcommon that these will eaannum or the equivalent o

But what will happen if TOwhole to develop a busioperational improvementsand sustain a decisive co

Such a strategy is develosystem constraint to whicand that deciding how tothose customer significantto buy more or pay more (get more newcustomers t

constraint).

Sales Revenue $1Variable Cost $

Throughput $Operating Expenses $

Net Profit $

llustrates the order of magnitude of inherenked with the TOCs 5 focusing steps whennization vs. to the whole organization.

$100m in Sales, Variable Cost of $50m, Ot Profit of $5m and with Inventory of $25m.

nizations internal capacity is insufficient tor operating expenses (overtime etc) and evized by increasing inventory with excess cs).

ing steps to improving planning and execut(called Drum-Buffer-Rope and Buffer

e the main causes of low throughput, long lrmance and higher operating expenses anottleneck(s). These causes include overproineffective and inefficient buffering against

r supply, unfocused improvement initiativerics.

ill typically expose 10-50% of protective carefore inventory) by between 10 and 50%,eed for overtime or expediting costs. Unlesor sold at higher prices (based on higher dd times), the only benefit that will flow to thovertime and other related expediting coston the higher than necessary inventory. It isily add up to around a $1m to $2m cost saf a 20% to 40% increase in Net Profit.

Cs 5 focusing is applied to the organizatioess strategy that aims to grow sales by turfrom a TOC implementation to build, capitpetitive edge within its target markets.

ed with the assumption that the Market is tthe whole organization should be subordinxploit the system constraint means identifneeds, that if satisfied, will get existingcus

better exploiting the system constraint) ando buy more or pay more (elevating the syst

Current % Change Fut

00.00 100% +10% $110.0050.00 50% +10% $ 55.00

50.00 50% +10% $ 55.0045.00 45% 0% $ 45.00

5.00 5% +100% $ 10.00

tapplied

erating

meeten lostpacity

ion

ead

uction,

and

acity,whiles thisue datee bottoms and/orsving per

as aing the

lize on

eated toyingtomersto finallym

re

100%50%

50%41%

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Investment $

ROI 20

Figure 1: High leverage i

Considering the previouscompany can capitalize othroughput with shorter lesales volume and/or high

A 11% increase inpreviously hiddeincrease Net Proincrease in Sales

A 100% increase i

was previously hiincreasing) Oper1000% ($100m iCost).

A 10% increase inreliability or leadwill result in an inincrease in SalesOperating Expen

The order of magnitude in

case of why TOC shouldbusiness strategy focuseddecisive competitive edgeexhausting resources andjeopardize sustainable grocompany.

Developing and Commu

One of the major challengthe necessary and sufficiechanges and related contr

all levels within these functheir contribution to the gowhat not), question the codisempowered due to gapbetween local vs global orof failure can result in dishorganizational goal.

In recent years, Dr Eli Gol

25.00 25% -20% $20

% +125% 45%

pact of a 10% increase in Sales on Net PROI

ase, what will be the bottom line impact if tthe improved operational performance (hid times) by turning these improvements intr prices:

Sales Volume (selling the 10% capacity w) without increasing Operating Expensesit by $6.5m or more than 100% increase ($less 50% Variable Cost).

n Sales Volume (selling the 50% capacity

dden) without increasing (or at least signifiting Expenses will increase Net Profit by $crease in Sales less 50% increase in Varia

the average selling price (capitalizing on bimes and simply reducing unnecessary dis

crease in Net Profit of $10m or 200% ($10Revenue within increase Variable Cost or

ses).

rease in bottom line provides a good busin

lways be implemented holistically as part oon building, capitalizing on, and sustainingwithin a large enough market and withoutor without taking high risks- both of whichwth towards becoming an ever-flourishing

icating Harmonious Strategies & Tactic

s in organizations is defining and communnt changes and the required sequences ofibutions to all functions within the organizati

tions. Managers and employees that do notal of the organization (both what to focus otribution of others in the organization, feel

s between authority and responsibility, faceshort vs. long term optima, or are paralyzearmony that will jeopardize the achievemen

ratt has started using what is considered b

18%

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hehero more

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as the most powerful TOCTree to overcome these used not only to capture trequired actions (tactic orall the assumptions relate

These include assumptionthe higher level objectiveswhy the strategy is possiblway for achieving this objor warnings about why thithe level below to ensurehigher level objectives (su

Figure 2 below shows anManufacturing company.S&T with the second leveledges needed to grow th

can include four blocks forefficiency/productivity, 2.Social Responsibility. Thto build, capitalize on andachieve profitable growth.

Each of the blocks on thisblock 3.1.1 which details treliability by achieving re

Thinking Processes called Strategy and Tengines of disharmony. This thinking proce specific objective (strategy or what for)how to) for every recommended change,

to this change.

s about why this change is necessary to ac(necessary assumptions), the assumptionse and why the tactic is the best or even thective (parallel assumptions) and lastly assu

level of detail is still not actionable informufficiency and correct sequencing for achificiency assumptions).

xample of such a Strategy and Tactic treehe tree structure shows the first three leveltypically defined as the decisive competitisales and profitability at the desired growt

2.1: Exploiting market constraint, 2.2 Im3: Elevation market constraint and 2.4 Exthird level typically define the necessary c

sustain decisive competitive edges needed

S&T is defined to the level of detailed shoe logic for building a decisive competitivearkable due date performance.

acticss isandut also

hieveaboutonlymptionstion forving the

for as of thee

h rate or

rovingeedingangesto

ed fordge of


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Figure 2: Example of S

Conclusion

The bottlene

It is possible to improvekey to achieving ongoingway to focus their scarcesthat part that are currentlysystem constraint, leveragelevating a system constrsystem.

In its essence, TOC aimsand stability for any organiassumptions about what tmechanism, proven logisti

differentiate between all thmust be improved to achi

Over the past 30 years, Ttype of organization imagithat when management triorganizations the possitheir time on identifying anperformance (the highest lpossibleachieving more

For those readers that are interapplying the various solutionsimprove both private and publicapacity or cash constraints, plBarnard, CEO of Goldratt Rese

rategy & Tactic Tree for Manufacturing Co

k, is always at the TOP of the bottle

ll parts of an organization or system. Howrowth and stability for any organization is firesource (management time and attention

limiting or blocking further improvement te point or weakest link. Better exploiting anint will improve the performance of the wh

o show that the core problem to ongoing grzation (and for individuals) is our erroneoufocus on (and what not). TOC provides a

cal solutions and thinking processes to hel

e parts that can be improved and those feve more with less in less time.

C have been successfully applied to almoable. Each of these success stories has s

ed previously to improve all parts of theirle became impossible. When they started f

d improving only those parts that currentlyeverage points), suddenly the impossible bwith less in less time.

ested to learn more about TOC and how organizationd thinking processes within TOC to analyze and hsector organizations with either market demand, su

ase review the appendices to this article or contactarch Labs at [email protected]

pany

ver, thending a) on onlyhed orle

owth

ractical

that

t everyown

ocusingonstrain

ecomes

ns arelisticallypplyDr Alan


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Appendices

Theory of Constraint

A number of websites conimplemented TOC. Most nlisting of over 200 such orthat have published theirviewed on www.toc.Tv

One of the most comprehby Professors Victoria Madocumented implementatipublications and 30 booksimprovements achieved w

- Lead-Times: Mea

- Cycle-Times: Me

- Due-Date-Perfor

- Inventory Levels:

- Revenue / Throug

- Combined Financi

TOC Publications

Since Dr Eli Goldratt wrotTOC books (books with TTOC) have been publisheinitiated two years ago byMcGraw-Hill Publishing. Tlaunched in June 2010. Tthe leading TOC academihandbook's table of conteTOC applications and boddevelopment and evolutio

Interesting facts related to

The Goal, publisheand still rank within

"Theory of Constrai"Goldratt" more tha

(TOC) Reference Bank

ain listings of organizations that have succotable is www.toc-goldratt.comwhich contanizations from both the public and privateOC implementation results, many of which

nsive studies on TOC implementations wain and Steven Balderston. The survey incln case studies and results from over 300

. The findings of the survey showed meanith TOC implementations as:

Reduction 69%

n Reduction 66%

ance: Mean Improvement 60%

Mean Reduction 50%

hput: Mean Increase 68% (outlier exclusiv

ial Variable: Mean Increase 82%

THE GOAL which first appeared in 1984,eory of Constraints in their titles or dedicat. The largest ever TOC publishing initiativ

two professors, Dr Jim Cox and John Slayhe result was the Theory of Constraints Hae handbook contains 38 Chapters writtens, practitioners and implementers in the wts provides a good overview of the scope

y of knowledge after 30 years of continuou.

TOC publications include:first in 1984 has sold more than 3 million

the top 500 books in sales on Amazon at ants" generates over 180,000 hits on Googln 220,000.

ssfullyin asectorcan be

doneded

)

ver 100d towas

r anddbooky 42 ofrld. Thef the

opiesny timeand


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TOCICO (www.tocicThe Theory of Constraintswas founded in 2001 and iTheory of Constraints pracertification in TOC Funda

Finance, TOC for ProjectsStrategy. There are currepractitioner and implemen

Many universities and othand post-graduate prograevaluating the use of thecertify their students.

Goldratt Group

Shortly after Dr Eli Goldratrepresentation in over 20Consulting - GC (www.gol(www.goldrattschools.comgoldratt) and Goldratt Res

Geographic Spread: GolVision (Holistic TOC impleJapan, China, South Africaddition to this, there areVV contract analysis (thatas well as in the UK, Taiw

operations (most will "go-liUkraine, Germany, Italy a

GC Resources: GC has 3TOCICO certified), 10 adTOC consultants on theirTOC training, S&T develoconsultants and VV client

Published Results on Vpresented their exceptionover the past 3 years. The

Pharmaceutical), Decor (and Plastigomez (Equadoavailable from www.tocico

TOC SoftwareGoldratt Consulting haveprovide the TOC supportThese include:Realization (www.realiza

.org) Certification

International Certification Organization (Ts the organization responsible for the certifititioners, implementers and academics. It hmentals, TOC for Supply Chain Logistics,

, TOC Thinking Processes and TOC for Butly around 550 TOCICO certified memberser level.

r education organizations teach TOC in grs and a significant % of these are using /

OCICO certification exams as the way to t

t retired in 1995 he founded the Goldratt Gountries. Goldratt Group consists of Goldrrattconsulting.com), Goldratt Schools - G

), Goldratt Marketing Group - GMG (www.t earch Labs - GRL (www.goldrattresearchla

ratt Consulting currently has around 25 Vimentation) projects in 10 countries includin, USA, Columbia, Ecuador, Brazil and Melarge number of clients partnering with G

lead to VV contracts) within the above 10 cn and Korea. GC is currently also starting

ve" during last quarter in 2010) in Chile, Ped Turkey.

0 full-time experienced TOC expert consultin people and currently use up to 50 sub-cV projects. GC is based in Israel and mostment workshops and upgrading of TOC

managers are done at Goldratt House in T

projects: Five of the current VV projects hl performance improvement results at TOCse include Tata Steel (India, Steel), Neulan

anada, Cabinets), Cartmont (Mexico, Pack, Plastics). Each of these presentations ar.org

artnered with three companies that exclusioftware used on GC's Viable Vision project

tion.com) that provide CONCERTO, a Criti

CICO)cation ofasOC for

inessat the

duate

st and

oup withtt

c- s.com).

bleIndia,

ico. Inon pre-

ountriesup

ru,

ants (allntractorof the

l Aviv.

aveICOd (India,

aging)

elys.

cal


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Chain based Planning ancomplex multi-project envi

Inherent Simplicity(wwsoftware that supports thfor Production and Distrib

Goldratt Research LabsHARMONY, software thatplanning and execution machieve ever-flourishing o

Execution Management system used on lronment TOC implementation

.inherentsimplicity.com) that provide SYMTOC planning and execution managemention environments

(www.goldrattresearchlabs.com) that provisupports the design, validation, communic

nitoring of TOCs Strategy & Tactic Treesganizations

rge

HONY,rules

etion,sed to

what is theory of constraints by dr alan barnard

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