Theory of Constraints (TOC) in Supply Chain Management

Theory of constraint (TOC) is based on the dictum- “A chain is only as strong as its weakest link”. Theory of constraint was propounded by Dr. Eliyahu M. Goldratt and was published in his book “The Goal” in 1984. Theory of constraint is a management paradigm that views any manageable system as being limited in achieving more of its goals by a very small number of constraints. There is always at least one constraint, and TOC uses a focusing process to identify the constraint and restructure rest of the organization around it.

It focuses on improving the productivity and performance by identifying the most important bottlenecks and eliminating them through a systematic process and is a great way of implementing Continuous Process Improvement initiatives.

Constraints are the elements that prevent the system from achieving its goal and determine how much a system can accomplish. The theory suggests that every system, no matter how well it performs, has at least one constraint that limits its performance – this is the system's "weakest link." The theory also says that a system can have only one constraint at a time, and that other areas of weakness are "non-constraints" until they become the weakest link.

According to Dr. Goldratt- organizational performance is dictated by constraints. These are where bottlenecks occur that prevent an organization from maximizing its performance and reaching its goals. Constraints can involve people, supplies, information, equipment, or even policies, and they can be internal or external to an organization.

According to TOC International Certification Organization (TOCICO), TOC Knowledge covers the following areas of management:

·    Operation (production) management – Make to Order (MTO) environment and Make to Availability (MTA)

·    Project Management –CCPM – Critical Chain Project Management

·    Distribution & Supply Chain Management – DTA – Distribute to Availability

·    Finance & Measurements – Throughput Accounting

·    Sales Management

·    Marketing – Developing Market Offers

·    Managing People –Management Tools (MT)

·    Strategy & Tactics –Developing a company-wide improvement plan

And has already proven TOC Success in following Industries:

·    Manufacturing

·    Distribution

·    Financial Services

·    Health

·    Defense

·    Government

·    Education

·    Social Services

Types of Constraints:

Constraints can be either internal or external to the system. A core principle within TOC is that there are not tens or hundreds of constraints. There is at least one but at most only a few in any given system. There are various types of constraints:

• People Constraints
• Policy Constraints
• Equipment Constraints
• Capacity Constraints
• Market Constraints
• Time Constraints

The Theory of Constraints provides a powerful set of tools for helping to achieve that goal, including:

• The Five Focusing Steps (a methodology for identifying and eliminating constraints)
• The Thinking Processes (tools for analyzing and resolving problems)
• Throughput Accounting (a method for measuring performance and guiding management decisions)

Theory of Constraints suggests an effective solution called “Five focusing steps” to eliminate these constraints. These five focusing steps are:

1. Identify the system's constraint
2. Decide how to exploit the system's constraint
3. Subordinate everything else to the above decision
4. Elevate the system's constraint
5. If in the previous steps a constraint has been broken, repeat from step 1, but do not allow inertia to cause a system's constraint

 

 

Thinking Process:

Managers need a systematic approach to develop plans for the pursuit of a significant improvement of their systems. This systemic approach is known as thinking process and it is all about finding answers to the four questions of system improvement:

1.     WHAT to change? 

2.     WHAT to change TO? 

3.     HOW to cause the change? 

4.     WHAT creates the process of ongoing improvement?

Throughput Accounting:

Unlike the traditional accounting practice, throughput accounting method focuses on increasing the throughput rather than slashing the expenses. Throughput accounting practice is based on the premises that there is a limit to reducing the expenses but there is no limit to increasing the throughput.

Benefits of TOC:

Companies can reap the following benefits through a successful TOC implementation:

·         Be dynamic with the market requirements

·         Improve their on-time performance

·         Decrease unnecessary costs

·         Increase the overall quality of the product or the service.

·         Increased profit

·         Fast improvement by focusing only on one constraint at a time

·         Improved capacity through the optimization of constraint

·         Reduced lead times

·         Reduced inventory by eliminating bottlenecks and thus reducing the reducing work-in-process

Measures of TOC:

The underlying premise of theory of constraints is that organizations can be measured and controlled by variations on three measures: 

1.      Throughput

Throughput is the rate at which the system generates money through sales.

2.      Inventory

Inventory is all the money that the system has invested in purchasing things which it intends to sell.

3.      Operational Expense

Operational expense is all the money the system spends in order to turn inventory into throughput.

Implementation of TOC in Supply Chain: Practical Challenges

1.      Differentiating between a problem and a constraint

In some organizations people find it quite perplexing to differentiate between a problem and a constraint.

2.      Active participation of employee

TOC extensively requires active participation of employees along with the participation of higher management with a supportive mindset and facilitate required resources.

3.      Interdepartmental and Intradepartmental Cooperation 

     Not only employees of the same department must be ready to cooperate with each other but a healthy

     interaction between the employees of different departments is also very crucial.

I found a very beautiful explanation of theory of constraints on a website called leanproduction.com. You can click here to read this.