Theory of constraints: What’s limiting your organization?

The Theory of Constraints (TOC) is a methodology for identifying the most important limiting factor – i.e. constraint – and systematically improving it. It was developed by Dr Eliyahu Goldratt, introduced in his 1984 book, The Goal.

TOC differs from traditional management views, in that traditional methods seek to make improvements throughout the organization. They divide the organization into smaller, more manageable pieces. The objective, thus, is to maximize the performance of each part, resulting in global improvement.

On the other hand, TOC takes a more focused approach. Instead of improving everywhere, the TOC approach seeks only to improve the few variables (or constraints) that have the largest impact on the organization’s performance. By trying to improve everything everywhere, the risk is that nothing will be improved that counts. TOC follows the adage “a chain is no stronger than its weakest link.” An interesting phenomenon about chains is that strengthening any link except the weakest one does not improve the strength of the whole chain. Strengthening the weakest link produces an immediate increase in the strength of the whole chain, but only up to the level of the next weakest link.

3 types of constraints exist in an organization:

  • Capacity Constraint – This constraint occurs when a resource which cannot provide timely capacity as demanded by the system.
  • Market Constraint – This is when the amount of customers’ orders is not sufficient to sustain the required growth of the system.
  • Time Constraint – This occurs when the response time of the system to the requirement of the market is too long to the extent that it jeopardizes the system’s ability to meet its current commitment to its customers as well as the ability to win new business.

The POOGI approach

TOC practitioners follow a 5-step approach known as Process of on-going Improvement (POOGI). The 5 steps are as follows:

  1. Identify the Constraint
    First, identify the system constraint. Remember, strengthening any link of a chain (apart from the weakest) is a waste of time and energy. It is impossible to manage a constraint until you find out what it is. The good thing is, it is surprisingly easy to find, once you know how to look.
  2. Exploit the Constraint
    We can exploit the constraint by leveraging various Lean Management tools. Lean Management is a management philosophy based on the Toyota Production System (TPS). The objective of Lean Thinking is to eliminate everything that does not add value (i.e. “waste”) from the customer’s perspective. The general approach to Lean is learn-by-doing and to foster a culture of continuous improvement. Examples of Lean tools include Value Stream Mapping (VSM), 5S, Kanban, Kaizen, Poka Yoke, Gemba Walk, Hoshin Kanri, Plan-Do-Check-Act (PDCA), Root Cause Analysis (RCA), Heijunka, etc.
  3. Subordinate Everything to the Constraint
    Next, subordinate everything else to the constraint(s). By definition, any non-constraint has more capacity to produce than the constraint itself. Left unchecked, this results in bloated WIP inventory, elongated lead times, and frequent expediting/firefighting. Therefore, it is critical to avoid producing more than constraint can handle. In a manufacturing environment, this is accomplished by choking the release of raw material in line with the capacity of the constraint.
  4. Elevate the Constraint
    Once the capacity of the system is exhausted, it must be expanded by investing in additional equipment, investing in additional land, hiring people, etc. Instinctually, we tend to gloss over the first three steps and jump straight to elevation. Implementing the first three steps properly, typically exposes a minimum of 30% hidden capacity within the first few months. This capacity is available free of cost, without any investment.
  5. Prevent Inertia from Becoming the Constraint
    Lastly, in step 5, prevent inertia from becoming the constraint. Once elevated, the weak link may not remain weakest. Consider elevating other resources to retain the old constraint, depending on where you wish to have the constraint in the long-term. A new constraint demands a whole new way of managing the system. Therefore, we return to Step 1, and thus begins our journey of continuous improvement.

Rules of thumb about constraints

Here are general principles about TOC:

  • You will always have a constraint, so choose wisely (perhaps the most capital intensive, or energy-consuming, or largest batch, or longest touch time, etc.).
  • If you identify the wrong constraint, it is easily rectified and causes no permanent damage. The POOGI process autocorrects for errors made over time.
  • The constraint may appear to shift suddenly based on product mix. However, this is often due to batching practices, rather than an actual shifting of the constraint.
  • Most systems typically have one single resource constraint, such as a machine or department.
  • Permanent constraints typically include sales/marketing and R&D.
  • The constraint should eventually be stabilized. Frequently, shifting constraints cause havoc on policies, procedures, and people.
Continuous Improvement

About the author

David Tang is the founder of Flevy.com, the marketplace for high quality business documents (e.g. business frameworks, training guides, presentation templates, financial models, Lean tools, etc.). Our users save themselves and their companies time, money, and effort by leveraging Flevy’s pre-existing documents for their business and organizational needs. These documents are of the same caliber produced by top tier consulting firms, like McKinsey, Bain, and Deloitte. Most documents were developed by seasoned executives and consultants with 20+ years of experience.

Prior to Flevy, David worked as a management consultant for 8 years. He has US and international (EMEA and APAC) project experience; and has worked with clients across industries of Media & Entertainment, Telecommunications, Consumer Products, High-Tech, and Life Sciences.