understanding theory of constraints

©2012 Vector Consulting Group. All Rights Reserved. 1

Is it an OPERATIONS IMPROVEMENT TOOL such as SIX SIGMA, TPM etc.?

What is Theory Of Constraints

Is it a way of MANAGING BUSINESS?OR

Is it SOMETHING ELSE?OR

OR A tool for improving SUPPLY CHAIN??


What is the goal of a company?

MakeMoney

Cut Cost

Increase Sales


How does a company try to make money?

IncreaseSales

DecreaseCosts

Reduce Lead Time

Marketing

Improve Quality

Quality

Increase Production

Production

Small lots,Large variety

Marketing

Reduce Inventory

Finance

Reduce Raw

Material Cost

Purchase

Reduce Man

Power

HR

Large lots, Small variety

Production

IncreaseSales

DecreaseCosts

Decisions taken in one department can be in conflict with the needs of another!!


The company is rendered “Directionless”!!!!!

HR

PPC

Sales

Quality

Manufacturing

Each department would like decisions to be made in a different direction!

What decisions to make?


Why is the company rendered “Directionless”?

• Performance Targets are set for each function so as to get desired behaviour to control financial and operational elements.

• Unfortunately, an action which has positive impact on one element creates negative impact on some other element. For example:• Reducing inventory may result into unavailability of

materials for production thereby increasing lead times.• Trying to deliver on time may result in sacrificing quality

or increase in costs.• Management is continuously engaged in doing a tight rope

walk to achieve balance between these elements.• The strategy of the company based on its Vision and Mission is

lost in the process.


Why is the company rendered “Directionless”? (Cont..)

The Company is continuously struggling to reach a balance between Sales and Cost…

We do not have a mechanism to know what is the optimum balance among sales and cost related elements.

As a result it becomes impossible to get consensus of all functional heads for the target levels of all the elements together.

Cost Sales


What is the conventional way of managing a company?

• Decide a Vision and derive the Mission for the company

• Prepare the Annual Business Plan based on goals and objectives it strives to achieve

• Divide the goals and objectives and distribute it to the departments

• The departments set annual targets and distribute the same to there functions

• Each department/function initiates multiple improvement programmes to achieve desired objective

What is the hidden assumption?The Assumption

Sum of improvements in each part of the system.

Overall improvementin the system.


But is the assumption true?

No!! The additive rule does not apply when the components in a system are interdependent

To analyze and manage organizations, the four fundamental principles of Theory Of

Constraints have to be applied!

Is there another way to manage an organization?


Fundamental Principles or Beliefs of TOC

InherentPotential

InherentGoodness of people

InherentHarmony

InherentSimplicity


Fundamental Belief No 1

InherentSimplicity


The interdependent systems are inherently simple

System BSystem A

Which one is less Complex ? System B is less complex! Interconnected systems offer a leverage point!


Belief 2 : Inherent Harmony

• Every unresolved chronic problem is because of a conflict. Conflicts are only because of erroneous assumptions

• Win-Win solutions are possible

InherentSimplicity

InherentHarmony

Win-Win


Belief 3 : Inherent Goodness

InherentSimplicity

InherentHarmony

Win-Win


• All people are good• Blaming individuals stops the effort to solve real systemic

problems


Belief 4 : Unlimited Potential

InherentSimplicity

InherentHarmony

Win-Win


Unlimited Potential

• All organizations have the potential to grow

• Take the next leap in Performance


I smile and start to count on my fingers: One, people are good. Two, every conflict can be removed. Three, every situation, no matter how complex it initially looks, is exceedingly simple. Four, every situation can be substantially improved; even the sky is not the limit….

Eli Goldratt


Benefits of TOC implementation

• TOC implemented successfully in hundreds of companies worldwide

• Typical Benefits experienced*:1. Increase in revenue/ throughput (approx 63%)2. Improved due date performance (up by 44%)3. Reduced Inventory (down by 49%)4. Reduced Lead times (down by 70%)* source: “The world of theory of constraints“ by V. Melbin and S.Balderstone,2000