What is The Theory of Constraints?

In the early 1980’s, an Israeli physicist, Dr. Eli Goldratt, started applying the mindsets and methods of the hard sciences to the “soft” science of analyzing, improving and managing organizations. Scientist searches for inherent simplicity – simple mechanisms or governing laws that explains complex phenomena. Goldratt realized there was also “inherent simplicity” within complex organizations. In the same way that the weakest link in a chain limits the strength of the whole chain, the performance of any organization is limited by its “system constraint” or bottleneck. He called his discovery and the related body of knowledge “Theory of Constraints” or TOC

Why call it a “theory”?

Dr. Kurt Lewin (1890-1947), one of the pioneers in Psychology, famously said that “There is nothing so practical as a good theory”. In Science, a “theory”, like in “Theory of Relativity” or “Theory of Evolution”, is simply a “good and useful explanation” about why a certain phenomenon exists and/or why it is important and/or useful to know this. Theory of Constraints, as a management “theory”, is simply a good and useful explanation of why “system constraints” exist and why it is very useful to know what the constraint for any system is, especially to managers within organizations who have to make reliable commitments and/or take decisions within an environment with high levels of Volatility, Uncertainty, Complexity and Ambiguity (VUCA).

Knowing that the constraint limits the performance of the whole organization can help us:

1. Set realistic but ambitious GOALS

A constraint sets an upper limit to the performance of the organization. But the organization’s average output or performance - because of constraint capacity losses due to for example starvation, blockage, planned or unplanned downtime and rework - is always below this theoretical maximum level. This performance or exploitation gap between the constraint’s best vs. average performance is a good approximation of the improvement potential for setting realistic but ambitious goals if we can find ways to reduce the losses. Also, we simply can’t commit to achieve more than the constraint’s existing capability until such time as we elevate the constraint’s potential

2. Decide where to FOCUS improvement efforts or make investments

Management at all levels should focus their improvement and/or investments on only those few changes that will help the organization better protect, exploit and/or elevate their constraint’s performance (at a cost that is well below the resulting benefits). Strengthening a link that is not the weakest link will not help the organization but rather harm it as such efforts wastes scarce resources.

3. Decide what RULES to use to maximize the performance of the system

Deciding which management rules to use to maximize the performance of the whole organization, should be based, not on which rules will improve the efficiency of each part the most, but rather on which rules will allow the organization to better protect, exploit and not waste their system constraint. “Good rules” helps the performance of the constraint. “Bad” rules harms the performance of the constraint and therefore of the whole organization.

4. Decide when to CHANGE the rules used for managing the organization

When a constraint moves, the rules must change. Since any change can result in instability, the best way to achieve both stability and growth is to ensure the constraint remains the same.

5. Judge the IMPACT of changes on the whole system

The impact of a local change or decision on the system constraint is a good approximation of the impact of changes on the whole organization. If a local change helps us better exploit the limited capability or availability of a constraint or help to elevate it, it will benefit the whole organization. The % improvement to the constraint will be a good approximation of the % improvement to the whole system’s throughput.

For these insights to be turned into a practical focusing mechanism for all levels of management to know what to STOP, CONTINUE and/or START doing and measuring, Dr. Goldratt developed the Five Focusing Steps (5FS) as a Process of Ongoing Improvement (POOGI) for any organization.

The five focusing steps are:

Step 1: Identify the System Constraint (to achieving more of the Goal units for the organization)
Step 2: Decide how to exploit (and not waste) the system constraint (to close the gap between the theoretical maximum and average level of constraint exploitation)
Step 3: Subordinate everything to the above decision (changing only those rules and metrics that is in conflict with the decision in step 2)
Step 4: Elevate the System Constraint
Step 5: If in a previous step a constraint was broken, don't let inertia become the system constraint, go back to step 1

Over the past 30 years, Dr. Eli Goldratt, the creator of Theory of Constraints, together with an increasing pool of TOC practitioners, implementers and academics have created a vast body of knowledge of how to apply the five focusing steps to different types of organizations from different industries and to different parts of the organization (operations, finance, supply chain, projects, sales, marketing and managing people), and also developed a holistic decision support framework (Throughput Accounting) and a set of logical Thinking Processes and Management Skills that can be applied when organizations are stuck on one or more of the above steps. Over this time, a number of TOC solutions have been developed that offers managers simple rules for planning, execution and achieving continuous improvement for applications such as managing Operations ( “Drum-Buffer-Rope), Distribution (Demand Driven Replenishment) and Projects (Critical Chain Project Management). This knowledge is captured in the 5 generic Strategy & Tactic Trees that can be found in the Goldratt S&T Library of HARMONY at webapp.harmonyapps.com