Management Philosophy of the Theory of Constraints

Management Philosophy of the Theory of Constraints

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Management Philosophy of the Theory of Constraints

Abstract

The Theory of Constraints (TOC) is a systems management philosophy aimed at promoting and improving an organization. It broadly consists of problem solving and decision making tools that was developed by Dr.Eliyahu Moshe Goldratt in the early 1980s through his novel, The Goal. In any given business society, any form of constraints usually decline the level of output and performance. The theory of constrains thus emphasizes on the role of the subtle constraints in limiting the performance of a given organization and how they can be tackled leading to improvement of performance in a given organization. (Andersen and McNair 1-2)

The theory has several benefits for an organization, market system or an institution including the increase in profits, improved quality of products, management of constraints and challenges, continuous improvement of the supply chains level and the reduction in the statistical fluctuations. (Andersen and McNair 2-3)

This research paper focuses on the management philosophy of the theory of constraints in totality; its history, components, the steps of main focus the logistics that govern it among others. It also looks at the benefits and uses, some of which have been alluded to in the previous paragraph. As a management philosophy, TOC focuses mainly on an institution’s obstacles and their effect as a whole to the entire system, both negative and positive. It then uses this to enable the company or institution to improve itself ultimately leading to more profits by the organization or institution. (Atwater and Gagne 6)

Introduction

Developed in 1984 by Dr.Eliyahu Moshe Goldratt, in his book entitled The Goal, The Theory of constraints is a management philosophy mainly aimed at improving the functionality and the goals of a company or an organization by large. He developed a paradigm for the theory and was the first ever to use the theory. He was an Israeli physicist who worked at the Goldratt Institute in New Haven in Connecticut who developed the concept with an aim to educate people in a Socratic manner on how to tackle their business issues and problems. (Goldratt and Cox 7)

Discussion

The theory of constraints (TOC) is a concept that emphasizes the role of constraints in limiting the performance of an organization. TOC drives managers to attack constraints in order to reach their primary goal; to make more money. (Goldratt and Fox 3)

TOC assumes that every organization is composed of several subsystems and each subsystem is often faced by several challenges; it therefore advocates for identification of a company’s solution of the different problems as a whole. The main constraints usually involved in several organizations include marketing, production planning and control, materials procurement, product engineering effectiveness, product quality and product costs. All these if mismanages usually lead to a company’s profits and inflow of cash. It then views the organization as a chain composed of several resources. The contribution of a given resource in the chain is assumed to be dependent on the performance of the other resources. Furthermore, for every organization to be successful, all the various resources or links have to be peacefully and effectively synchronized into one. For performance improvement to be achieved, an organization must thus lean to identify and manage its weakest and most feeble resource or link. (Goldratt and Cox 9-13)

It has several benefits which include the following; To begin with, it facilitates the continuous improvement of a given organization and ensures employee involvement and empowerment. This in turn facilitates better working condition which ultimately leads to more profits to the organization. It also establishes clearly defined quality measurements and stresses companywide education and cultural transformation. Most importantly, it breaks down departmental barriers giving stress on the global goals rather than the local departmental goals. (Bushong and Talbott 15-16)

The theory is composed of some components consisting of interrelated concepts that enable one to measure the level of improvement in a given duration of time. These include the performance measures, focusing steps, logical thinking processes and the logistics. Performance measurements include indices such as throughput, inventory and operating expense. Throughput is defined as the rate at which the system generates money through sales and not production. Inventory defined as the money invested in goods that the organization intends to sell or the material that the organization intends to convert into salable materials. Operating expenses on the other hand includes all the money the organization spends converting the inventory into the final throughput. Any organization’s goal should therefore always be aimed at increasing the throughput and decreasing the inventory and operating expense so as to increase their profit and cash flow. Anything that prevents the organization from achieving this goal is thus defined as a constraint. From time immemorial, constraints have been known to limit the ability to improve throughput. (Gardiner Stanley, Blackstone and Gardiner R. Lorraine 5-6)

There are several types of constraints including capacity constraints (bottleneck or physical), market constraints, logistical constraints and behavioral constraints. A capacity constraint involves a situation whereby the demand for a product or produce exceeds the amount of produce that the system can supply. An example is seen in the personal hiring guidelines and traditional manning practices. In market constraints, an organization is capable and is willing to sell more products than what the market is willing to buy. This can for instance be seen in sales and commission policies and the giving of prices according to the standard cost for the product. These performance measurements allow the management to focus on the main issues and the causes of the problems and constraints rather than the symptomatology of the problems themselves. (Atwater and Gagne 9-11)

Goldratt came up with five main focusing steps to help organizations deal with any form of constraints. They are also believed to be the most important aspect of the TOC. The first step involves the identification of the constraint in the system that limits throughput or progress towards the goal. The next step is to decide on how to explore the constraint(s).One decides on a plan for the primary constraint that best supports the system’s goal. This requires taking advantage of the existing capacity at the constraint, which is often wasted by making and selling the wrong products, and by improper policies and procedures for scheduling and controlling the constraint. The third step involves the subordination of everything else to the above decisions made. This includes altering and managing the system’s policies, processes, and/or other resources to support the above decisions. Management directs its efforts toward improving the performance of the constraining task or activity and any other task or activity that directly affects the constraining task or activity. (Atwater and Gagne 11-14)

Next is the elevation of the constraint(s). In this step, additional capacity is obtained that will increase (elevate) the overall output of the constraining task or activity. This differs from step 2 in that the added output comes from additional purchased capacity, such as buying a second machine, tool, or implementing new technology. In the final step, there is the return to the first step. One is cautioned not to let inertia cause a new constraint or bring back the previous one. Once all this is done, one then uses the performance indices described earlier to detect if the constraints have been cleared or not. If not then one has to come back to the five step analysis and sort out the complaint. (Atwater and Gagne 14-15)

There are several key principles that underlie TOC and according to Goldratt, converge to make fertile ground for TOC. A few of these key concepts are worth emphasizing because of their significance for the management approach used in adopting organizations. The principles include to begin with, Processes/organizations as chains. This is crucial to TOC. If processes and organizations function as chains or flows, the weakest links can be found and strengthened. The linkages in question can be between the different steps or activities in a process or between diverse organizations within a supply chain. (Andersen and McNair 2)

Next is the Local versus system optima. Because of interdependence and variation, the optimum performance of a system as a whole is not the same as the sum of all the local optima. (Local optima are calculated measures for functional areas within an organization.) In other words, an organization that maximizes the output of every machine will not perform as well as one that ensures optimization of the flow of materials and value created through its linked set of activities. Also there is the cause and effect. All systems operate in an environment of cause and effect. One event causes another to happen. This cause-and effect relationship can be very complex, especially in complex systems. Capturing the essence of cause and effect within the system and identifying measurements that emulate these relationships are the keys to optimizing system performance. (Andersen and McNair 2)

Fourth is the Physical versus policy constraints. Most of the constraints faced in systems originate from policies, not physical things. Physical constraints, such as the number of nurses in a hospital or the number of production machines in a factory, can be objectively identified and dealt with. Policy constraints (e.g., behavior patterns, attitudes, lack of information, and assumptions) are potentially more damaging than physical constraints, yet are much more difficult to identify and deal with. The belief that producing in large batches is optimal is an example of a policy constraint that can make implementing TOC or related advanced manufacturing approaches difficult. Finally is the Total system impact. All organizations are systems made up of interdependent activities, each with its own level and type of variability. In order to optimize performance, management needs to understand and focus on the total system impact of a decision or event, not just on its local or immediate effects. (Andersen and McNair 2)

In conclusion, the management philosophy of the theory of constraints consists of several elements which are, to begin with; The Logistics and scheduling which involve methodologies such as the drum-buffer-rope, buffer management, V-A-T logical structures analysis, the five step focusing process, and supply chain management. These are used to establish and control the flow of materials to the final product within a TOC environment. (Andersen and McNair 2-4)

Next, is the performance measurement, this is built around the core metrics of throughput, inventory, and operating expense. TOC develops and uses a series of measurements that directly link financial performance with nonfinancial performance. The third element involves the problem-solving and thinking process. This process consists of effect-cause-effect (ECE) diagramming and its components, the ECE audit process, and the “evaporating cloud” methodology for conflict resolution. The essence of ECE is the scientific method, which suggests that if a secondary confirming effect is found when a cause or event occurs, then it can be argued that the cause truly leads to the hypothesized effect. In other words, two or more occurrences of the same cause-and effect relationship are needed to uncover the primary cause of the majority of the detected problems within the system. The fourth element is project management. The standard concepts in project scheduling and management have been the critical path method (CPM) and the program evaluation review technique (PERT). TOC’s critical chain concept removes the implicit assumption of infinite capacity from the project management domain, just as the TOC drum-buffer-rope technique removes it from the factory floor domain. (Andersen and McNair 3)

The final component is Market Segmentation. While TOC originated as a production scheduling technique, it has evolved into much more. TOC offers important insights to all managers, and especially to cost managers, in the areas of product mix and product pricing decisions. (Andersen and McNair 3-4)

Works Cited

Andersen and McNair. Theory of Constraints (TOC) Management System Fundamentals, Institute of Management Accountant, 1999, Print.

Atwater and Gagne. The Theory of Constraints versus Contribution Margin Analysis for Product Mix Decisions. Journal of Cost Management, January/February 1997, Print.

Bushong and Talbott. An Application of the Theory of Constraints. CPA Journal, 1999.Print

Gardiner Stanley, Blackstone and Gardiner R. Lorraine, The Evolution of the Theory of Constraints. Management Accounting1994, Print.

Goldratt and Cox. The Goal. Great Barrington, MA: North River Press, 1992.Print
Goldratt and Fox. The Race. Croton-on-Hudson, NY: North River Press, 1986. Print

McMullen Introduction to the Theory of Constraints (TOC) Management System. Boca
Raton, FL: St. Lucie Press, 1998.Print
Noreen, Smith, and Mackey. The Theory of Constraints and its Implications for Management Accounting. Montvale, NJ: Institute of Management Accountants, and Great Barrington, MA: North River Press, 1995.Print.