Understanding the theory of constraints

Abstract

1 Introduction 1.1 A Brief Description of the TOC Framework Theory of Constraints (TOC) was a management paradigm developed by Eliyahu Goldratt and has been in practice since the early 1980s. The theory asserts that the performance of a company is determined by the constraints it faces. ‘Constraint’ is defined as anything that limits the performance of the system relative to its ‘GOAL’. In absence of any constraint the system will have infinite potential to achieve its desired goal. A business as a system will have a goal of making as much money as possible by either increasing production volumes or by increasing the margins as the case may be. The company is engaged in various activities to achieve its desired goal. These activities viz. planning, design, production, marketing, after sales service are the centers responsible for the ability of the company to remain in the business. As we know that all these activities require resources and the resources are scarcely available and are at premium because of the competition. Any misalignment of resource across all these functions might lead to overcapacity in one function and under capacity in the other. This defines the constraint of the system as a whole which is basically the driver of the company in its ability to achieve its goal. The TOC framework states that the first and the foremost measure to understand a system and improve its performance is to identify the constraint in the system. The constraint in this case is not considered to be something that is negative and to be removed, but is looked upon as a focusing point around which the business can be organized and improved. Any business decision that needs to be taken in the functioning of the company is subjected to a conflict. Let’s take an example of decision as to how much of inventory is to be maintained in the system. In order to meet the fluctuations in demand we need large inventory, but to achieve efficient production we want a lean system with minimal inventory. Therein lays a conflict in a business decision. TOC provides a framework to resolve this conflict or to evaporate the conflict cloud as it is said. It offers a five step framework to deal with problems arriving in any sort of condition and at any place in the system. It is basically a way of thinking, a philosophy to be applied in any situation when one is faced with a conflict. The framework is as shown in Exhibit 1.