Operations

Theory of constraints

The ‘theory of constraints’ is a set of tools that allows managers to identify and resolve the bottlenecks – or constraints – in a firm’s processes that hold it back from achieving higher productivity levels

The 'theory of constraints' is a set of tools that enables managers to identify and resolve bottlenecks – or constraints – in a company's processes that prevent it from achieving higher levels of productivity.

When to use it

● To identify bottlenecks in a manufacturing process.
● To find ways to improve the efficiency of a manufacturing process.

Origins

Eli Goldratt coined the phrase "theory of constraints" in his best-selling business novel The Goal in 1984. The underlying ideas on which the book is based, however, are very old. In the world of business, the ideas can be traced back to early innovations in the manufacturing process, such as Henry Ford's introduction of the assembly line in the early 1900s, and then the 1960s shift toward just-in-time manufacturing spearheaded by Toyota and other Japanese firms. All of these innovations were aimed at making the manufacturing process more efficient. Process engineers used to talk about "balancing the line," which was an informal way of saying "removing bottlenecks." Many of these ideas were formalised by Goldratt's theory of constraints.

From a theoretical standpoint, Goldratt's ideas built on the concept of'systems dynamics,' which emerged in the late 1950s as a result of Jay Forrester's pioneering work. Systems dynamics is a method of understanding how the components of a system interact with one another, particularly how positive and negative feedback loops produce somewhat unpredictable results.

What it is

Businesses rely on a series of interconnected processes to convert resources into saleable services or products. Every organization, according to the theory of constraints, has at least one constraint. This constraint prevents the organization from achieving its objectives of increased profit and/or market share. Manufacturing constraints include bottlenecks in a production system caused by a lack of manpower or parts, and non-manufacturing constraints include the effectiveness of a sales team in closing deals or the fact that market demand is waning.

The theory of constraints provides managers with tools to deal with the constraints they identify. Despite what every manager believes, there are few true constraints in organizations, according to Goldratt. Nonetheless, the tools direct managers' attention to a single constraint, and this narrow focus results in overall improvements.

How to use it

Applying the theory of constraints entails five steps:

● Determine the constraint: This is the component of a system that is the "weakest link." It can be a physical constraint (such as timely delivery of components to a factory) or a policy constraint (for example, union rules that limit the number of hours worked per week).
● Determine how to exploit the constraint: You should try to extract as much capability as possible from a constraining component while avoiding costly changes or upgrades. You could, for example, reduce or eliminate the downtime of a bottleneck operation.
● Everything else must be subordinated: Adjust the system's other (non-constraint) components to allow the constrained component to operate at peak efficiency. After that, the overall system is evaluated to see if the constraint has shifted to another component. If the constraint has been removed, proceed to step five.
● Elevate the constraint: Take additional steps to eliminate the constraint. This frequently entails major changes and significant investment. This step is only considered if steps two and three have failed.
● Return to step one: Once the constraint has been resolved, you return to the beginning of the cycle to identify the next constraint. However, you should be aware of the cultural or social factors that frequently stymie organizational change, as this frequently requires adjusting your speed of action so that others can keep up.

The following measures are most relevant when using the theory of constraints as a model to improve the efficiency of a manufacturing process:
● Throughput: The rate at which money enters an organization as a result of the sale of a product or service.br> ● Inventory: A measure of the working capital and investment tied up in operations, including facilities, equipment, and traditional 'inventory' items such as raw materials, work in process, and finished goods.
● Operating expense: Operating expense: What the company spends to convert inventory into throughput, including direct labor, heating and power costs, supplies, and machine depreciation.

Because these three measures are interdependent, any change in one automatically causes a change in one or both of the others. In a nutshell, the theory of constraints seeks to "maximise throughput while minimizing inventory and operating expense."

Top practical tip

Before implementing the theory of constraints in your company, consider the end goal and work backwards. To reduce bottlenecks in service workflows, for example, reordering the schedule to ensure that Friday shifts are covered by more than one person at a time may be sufficient. In a manufacturing setting, by providing real-time information about defects to line employees, changes can be made before the problem escalates. In all of these cases, the basic logic is the same: identify the most significant single constraint and then seek the simplest possible ways to overcome it.

Top pitfall

While the theory of constraints is extremely useful for diagnosing and correcting inefficiencies in a manufacturing process, it does have limitations. One thing to keep in mind is that the constraint may be beyond your control; for example, customers may refuse to buy more of your products, or regulations may limit how much you can sell. In such cases, you can try to overcome the constraint, but your ability to do so is limited.

Another thing to keep in mind is that this is an efficiency-based model: it is about making an existing system work faster and at a lower cost. If your company is dealing with a more strategic issue, such as trying to compete in a market undergoing disruptive changes, you will be much better off using other management models to assist you.