What is the Theory of Constraints? Here’s What You Need to Know with Examples

Our society has many sayings and axioms regarding things going wrong. For example, we have Murphy’s Law (“Anything that can go wrong, will go wrong”), or sayings like “fly in the ointment” and “waiting for the other shoe to drop,” and “it’s always something!” These phrases, and many others like them, deal with the certainty of obstacles and things going wrong. Even the world of management has a related concept, and it’s called the theory of constraints (TOC).

This article explores the concept of TOC, including defining constraints and the theory itself, the goal of the theory of constraints, the theory of constraints in five steps, the benefits of the theory, and even how it applies to lean methodology.

We begin our journey with a handful of definitions.

What is the Theory of Constraints?

The theory of constraints, also called TOC, is a management-based methodology that postulates that, at any given time, any organization or management system is being held back or limited from achieving its most important goals by a single or small number of constraints or limitations. If you can zoom in on the weakest link in the chain and utilize the constraint, you can improve it until it’s no longer a limiting factor.

Additionally, the TOC postulates that every complex system, which includes manufacturing processes, is composed of multiple linked activities and contains at least one constraint which affects the entire system, so the constraint activity is considered the “weakest link in the chain.” In the manufacturing world, constraints are often called “bottlenecks.”

But let’s backtrack a moment and explain exactly what we mean by a constraint.

Also Read: What Is Process Capability and Why It’s More Interesting Than It Sounds

What’s a Constraint?

A constraint (or, if we’re talking about manufacturing, a bottleneck) hinders an organization from progressing toward its goal. Although various theories on categorizing constraints exist, this four-point model is often employed. Additionally, there are some questions about whether a system can have multiple constraints.

• Market Constraints. The marketplace is constraining throughput; production capacity exceeded sales.
• Paradigm Constraints. Deeply ingrained habits and beliefs constrain the process. For instance, a manufacturing plant may keep specific machines running even if there’s nothing for them to do because that’s what procedure dictates, and it’s (supposedly) cost-effective.
• Physical Constraints. This constraint covers everything from lack of materials to unreliable or substandard equipment.
• Policy Constraints. This constraint is closely related to Paradigm, except that it covers the recommended or required way the company does things, regardless of their actual success (e.g., “We’ve always done things this way!”). Policy constraints are typically handled differently than the other constraints since they are firmly entrenched and often not recognized as a constraint. When addressing a policy constraint, ask three questions:
  • What must be changed?
  • What does it need to be changed into?
  • What actions will bring about these changes?

Remember those three questions. We will see them again later.

Constraints in Project Management

Project management has its unique set of three constraints, often called the “triangle of constraints” and “the iron triangle.” Here are the triple constraints of project management.

• Time constraints. These constraints refer to the project’s schedule and cover key milestone delivery dates for key milestones and final deliverables.
• Scope constraints. Scope constraints manifest if scope creep turns up and the already established scope is sidetracked or adjusted in the middle of the project.
• Cost constraints. This constraint refers to the fixed and variable costs within the project budget, covering fees for labor, materials, resources, and other essential elements.

So, project teams can use the theory of constraints to improve their project processes, producing deliverables comparable to a manufacturer and increasing their product throughput.

What is the Goal of the Theory of Constraints?

The chief goal of TOC is to remove the barriers that limit the team or organization’s throughput. Throughput is the rate at which the team produces the number of items or materials passing through a process or system. Traditionally, this refers to the rate at which the business generates revenue.

In the world of IT, however, throughput describes how many units of information a system processes in a specific amount of time.

In other words, the ultimate goal of TOC is to make more money.

What Are the Benefits of the Theory of Constraints?

The theory of constraints provides organizations with the following benefits:

• TOC offers a framework that makes it easier to find what is slowing down the whole organization’s advancement
• TOC also provides a structure for continuous improvement
• TOC helps personnel to focus better on the improvements that will have the most positive impact on the company’s bottom line
• TOC makes people take a holistic view of the organization and encourages perpetual searching for constraints, making it easier to anticipate backups
• TOC forces staff to solve the issues using the existing resources rather than buying things that may not even be needed, such as more extensive facilities or new equipment

Also Read: What is Lean Methodology?

The Theory of Constraint’s Main Tools

TOC has a single core concept: every process has one constraint, and the entire process throughput will only improve when the constraint is improved. Moreover, this core concept gives rise to a significant corollary: spending time optimizing non-constraints won’t yield substantial benefits; only improving the constraint can further the goal of achieving more profit.

So, TOC focuses on providing precise and sustained emphasis on improving the constraint in question until it no longer hinders throughput. Then, the team can focus on the next constraint.

To that end, three primary tools are used to implement TOC.

Theory of Constraints: Five Steps

The five focusing steps are a cyclical process that identifies and eliminates constraints. They are:

• Identify the First System Constraint. Identify the one part of the process that hampers the rate at which the goal is met. This step is called “the current constraint.” In this step, the team uses their knowledge of constraint types and characteristics to catch one, thus identifying the bottleneck. In fact, the constraint is usually found where there’s a big pile-up of stuff.
• Exploit the Constraint. Use your existing resources to make fast improvements in the constraint’s throughput. Don’t see the constraint as a problem; instead, consider it an opportunity. It’s vital, however, that you use what you have on hand to address the constraint.
• Subordinate and Synchronize to the Constraint. Review and analyze the other activities in the process to ensure they align with and support the constraint’s needs. In other words, check out the parts of the system that aren’t considered constraints (which are called to no one’s surprise, non-constraints) and have them support the constraint.
• Elevate the Constraint’s Performance. If the first three steps didn’t remedy or unblock the constraint, it’s time to escalate things. First, consider what additional actions could address the constraint. Perhaps it means allocating other resources to the issue, such as personnel or material. Whatever the remedy, it will inevitably require additional expenses.
• Avoid Inertia. No time to rest on your laurels! If any of the above steps break the constraint, return to the first step, identify the next constraint, and repeat the process. Remember, the five focusing steps make up a continuous improvement cycle. There is no room for complacency. Instead, dedicate your energy to addressing the current constraint, and when you’ve improved it, move on to the next one.

The Thinking Processes Involved in the Theory of Constraints

In manufacturing, particularly the service and transactional industries, you often don’t find “big piles” when looking for constraints. Thus, it would help if you used other tools to determine what keeps an organization from achieving success. Thinking Processes capture the symptoms, often called undesirable effects (UDEs), to help to find the issue’s root cause.

By arranging these responses in tree diagrams, the organization gets a clearer picture of what’s happening. These thinking processes are designed to work through what are known as “layers of resistance,” defined as the individual perceptions and theories of why things aren’t working the way they should.

Thinking processes are perfect for complex systems with many interdependencies (e.g., manufacturing lines). They are created to act like a scientific “cause and effect” tool, isolating and removing undesirable effects without making new ones.

Thinking processes are used to answer the three essential TOC questions referenced earlier in the section defining a constraint. These questions are rendered in tree diagrams, which help the organization better understand what’s happening.

• What must be changed? This question uses a Current Reality Tree to describe the current state of things. First, you collect the constraint’s UDEs and arrange them until you find the underlying problem.
• What does it need to be changed into? This question uses a Future Reality Tree to illustrate how things should be. It’s a Current Reality Tree with new ideas called injections, creating the desired effects. If there are concerns about injection outcomes, the matter is represented by a negative branch.
  Sometimes, teams create an Evaporating Cloud Tree as a preliminary step in the formation of the Future Reality Tree. This tree quantifies and explores all the conditions that must be established for the injection to work.
• What actions will bring about these changes? The Strategy and Tactics Tree helps diagram what must happen to bring about improvement. Teams then use the tree to identify difficulties and consider ways of avoiding or going through the obstacles.

Also Read: Value Stream Mapping in Six Sigma

Throughput Accounting

And finally, we come to throughput accounting. TOC accounting differs from traditional accounting primarily because it considers accumulating inventory as a bad behavior; cutting costs (a big part of standard accounting) is less important than selling goods (which, again, falls under throughput). Throughput accounting has three fundamental aspects:

• Throughput. This aspect covers all money received from customers minus the costs of raw materials.
• Inventory. Also known as investment, this represents the funds tied up in physical things such as machinery and equipment, real estate, product inventory, etc. Scrap is considered inventory until it’s sold.
• Operating Expense. This aspect covers money spent to generate throughput or to change inventory into throughput. These expenses don’t count variable costs such as taxes, payroll, utilities, etc.)

What About the Drum-Buffer-Rope System?

Drum Buffer Rope, or DBR, is a planning and scheduling tool associated with the theory of constraints. DBR synchronizes production to the constraint while minimizing work-in-progress and inventory.

• Drum. The constraint is the Drum, whose speed is the “beat” for the whole process and determines the total throughput.
• Buffer. The Buffer is the inventory level required to maintain constant production. It represents time and protects the constraint from disruption. The time is typically measured in hours and shows when the work-in-progress should arrive before being used to guarantee the protected resource’s steady operation. The more variations in the process, the larger the Buffers must be. There are typically two kinds of Buffers:
  • Constraint Buffer. This Buffer protects the constraint and is set immediately before it.
  • Customer Buffer. This Buffer protects the shipping schedule and is located at the very end of the process.

• Rope. Rope’s function is maintaining throughput while not allowing inventory to accumulate excessively. The constraint generates a signal (the Rope) showing that a particular amount of stock was consumed. This signal then triggers an equally sized release of inventory into the process.

How Does the Theory of Constraints Relate to Lean Manufacturing?

The theory of constraints and the lean manufacturing methodology are systematic approaches designed to improve manufacturing effectiveness. However, their methods differ significantly:

• TOC emphasizes identifying and eliminating constraints that adversely affect throughput. Thus, if successfully applied, TOC will likely increase manufacturing capacity.
• On the other hand, lean manufacturing focuses on removing waste from the manufacturing process. So, if done correctly, lean results in reduced manufacturing costs.

Here’s a table that clearly illustrates the significant differences between the two methodologies.

It’s possible to use both TOC and lean manufacturing to boost supply chain management, reduce operating expenses, and other ongoing improvements. This is because they both have the same ultimate goal: to boost profits through continuous improvement.

Now, let’s look at a theory of constraints example.

Also Read: Lean Six Sigma Green Belt Exam Questions and Answers

Theory of Constraints: Example

The following example shows how the Theory of Constraints’ Five Focusing Steps halts a company’s dramatic profit decline.

An audio equipment manufacturing company named LoudCo notices that their sales are declining. Apparently, fewer customers are buying EustachianBlasters, their most popular (and profitable) brand of earbuds.

So, here is what the team at LoudCo does in response, using the five steps of the theory of constraints.

• Identify. Data shows that an increasing number of customers fed up with EustachianBlasters’ high failure rate are jumping ship and buying earbuds from LoudCo’s competitors.
• Exploit. LoudCo improves its product testing and offers its customers better tech support.
• Subordinate. LoudCo uses its in-house resources to develop new sub-assemblies, which consist of parts made separately, then added to a larger component.
• Elevate. LoudCo maintains sufficient inventory levels to expedite orders rapidly. They also hired a new sales rep to spearhead the improvements and offer a better product warranty.
• Avoid inertia. LoudCo’s profits increase, the decline is halted, and the company begins applying the same solutions to their other product lines.

Are You Looking for Six Sigma Training?

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