Articles/Economics/Other/Theory of Constraints

The goal is to make more money now and be in a position to make more money in the future.

The strength of TOC is that it is direct. It defines progress in terms of the attainment of the goal of the organization, without getting bogged down in trying to make every aspect and process perfect.

TOC assumes that the goal of most operations is to make more money now and be in a position to make more money in the future. Few would argue with this statement of an overall goal but it's hard to look at a specific action and know how it affects goal attainment. TOC gives us the tools to measure the impact of actions or proposed actions in terms of the goal.

TOC says that the measure of whether the company is attaining its goal begins with examining the cash flow and return on equity. If the cash flow is increasing and at the same time, the return on equity is increasing, then the company is making money. Overall Company cash flow and return on equity are high level concepts that really are only visible to those at the top of the organization. In order to develop tools for everyday use in decision making, TOC explodes the concepts of cash flow and return on equity down into three tools that are more practical. The practical tools of TOC decision making are a threesome: throughput, operating expense, and inventory expense.

-Throughput is all the money the company earns through sales. It is not the number of widgets produced, the amount of stock on hand, or finished goods inventory in the hands of retailers.

-Operating expense is the amount of money it takes to keep the operation running to produce the throughput.

-Inventory expense is all the money the company spends on things that it intends to sell.

With these three measures, we can judge the effectiveness of our daily operations toward the attainment of the goal. Throughput is good, we want it to be increasing, operating expense and inventory expense are bad, we want them to be declining, or at least be declining in proportion to throughput.

Using this perspective we can now assess any operating question, such as: Should we replace machine #A with machine #B?

-How much, and in which direction will it affect throughput?

-How much, and in which direction will it affect operating expense?

-How much, and in which direction will it affect inventory expense?

No matter what the question, this focus will insure that we are keeping the global goal of the organization in mind rather than trying to perfect a process or refine some aspect of the company for its own sake.

Using this line of reasoning, one eventually comes to the realization that for a company to grow the emphasis cannot be on reducing operating expense. While me must know and control our expenses; operating expense will never go to zero. And the law of diminishing returns says that each incremental improvement in this finite category of operating expense reduction will become increasing hard to extract.

The same logic tells us that after a certain point increased saving in inventory expense will also be subject to the law of diminishing returns.

This leads, or rather impels us to seek the source of growth in our company from increasing throughput: the amount of money our company earns through sales. There is no inherent limitation to the amount of money our company can earn through sales. The whole world waits outside our door. No governmental agency, any law of nature, God, or morality limits the amount of money our company can make. The only limitation to the amount of money our company can make through sales is in the way we manage the company.

Ah, there's the rub, how do we identify the aspect of our company that is limiting our ability to generate more money through sales? TOC has a method for defining, locating, and dealing with the factor that is restraining our throughput.

Making things better is not the answer. We can make the product shinier, fatter, thinner, shorter, or longer. We can make the seats softer. We can make the type fonts in our brochure slicker. In fact this is exactly the problem; whatever the product, it can be improved in an infinite number of ways. But since we don't have infinite resources or time, how will we decide on the priorities and budgets for these improvements? What is equally bad is that money spent to make our product better is a waste unless this "better" aspect translates into making more money.

Instead of focusing on the things our company does best (we make the best buggy whips ever made). We have to look at the undesirable effects our current system is producing. These undesired effects will provide us with the avenue toward a better future.

Nearly everyone sees some element of the present system as undesirable; but a productive appraisal of undesirable effects is not simply the development of a litany of gripes. The analysis of undesirable effects that will lead us to improvement begins by limiting attention to ideas that have certain clearly defined characteristics:

-The undesirable effects must be expressed as a complete sentences.

-The sentences must express ideas that are clearly bad in terms that others would understand.

-The sentences must express ideas that are bad in terms that most others would agree.

-The stated undesirable effects must really exist. Can you prove or measure them?

-The sentences must express ideas that are important to you.

-The subject matter of the sentences must describe factors that affect the amount of money the company earns through sales?

-A final check is to ask "So What" of each undesirable condition. If there is a valid "because," that explains why the undesirable condition is bad; then, that "because" may be the real undesired effect that should be analyzed.

These sentences should be written down on separate slips of paper. These slips can then be arranged so that the ones that seem to be related are placed together in a cause-and-effect sequence. Seemingly, unrelated sentences can be linked together by speculating new connecting ideas that can be tested for reasonableness. Eventually nearly all the undesirable effect sentences should be able to be linked into a sort of logical tree. As we examine the interconnections between these undesirable effects:

1.We'll focus the attention of the group within the organization on the same things.

2.We'll see that some undesired effects are a part of reality that is beyond our control (except to decide how we will respond to them).

3.We'll see that solving one problem at the same time eliminates other related undesired effects.

TOC says that 70% of the undesired effects of an organization can be traced back to a single cause. That single cause is the core problem facing the enterprise and is the constraint that is throttling the performance of the entire system.

Once this constraint has been identified, it must be exploited and buffered. It is exploited by making every other activity within the organization subordinate to the flow through that constraint. It is buffered by never letting it go idle for lack of work.

Once the constraint has been exploited and buffered it must be overcome. That is the problem constraint must be solved. The solution to this core problem lies in the creation of its diametric opposite: Assume that this optimal diametric opposite condition exists,

-What new features of our organization would be needed to support and maintain it?

-What are the obstacles to creating and maintaining these new conditions?

-What are the means available for overcoming, not necessarily eliminating these obstacles?

-In what sequence would these means have to be implemented?

-What new undesirable side effects could be expected to accrue from taking this new action?

-What do we have to do to overcome these expected new undesirable effects?

To answer and implement responses to the above questions is the project that will eliminate the undesired effects of the organization and create optimal performance.

Then we must start all over again; because since no company is going to make an infinite amount of money, solving the existing problem only means that some new problem will take its place, but at a higher plane of efficiency in reaching the goal.