17.03.2023, 10.09 ‘Theory of Constranis of Elyahu M. Goldatt- Theory of Constraints Institute THEORY OF CONSTRAINTS INSTITUTE ABOUT FUNDAMENTALS KNOWLEDGE CENTER SERVICES. CONTACT US Theory of Constraints (TOC) of Dr. Eliyahu Goldratt ‘The Theory of Constraints is a process improvement methodology that emphasizes the importance of identifying the "system ‘constraint” or bottleneck. By leveraging this constraint, organizations can achieve their financial goals while delivering on-time full (OTIF) to customers, avoiding stock-outs in the supply chain, reducing lead time, etc. ‘Other common benefits of implementing the Theory of Constraints include better control over operations, less inventory, reduced conflicts between team member and drastically reduced firefighting. Often, additional capacity gets exposed without further capital investment or hiring additional workers, @ The Core Idea — Every system has a limiting factor or constraint, Focusing improvement efforts to I better utilize this constraint is normally the fastest and most effective way to improve profitability Constraints - The Chain Analogy ‘No chain can ever be stronger than its weakest Ink, Similarly, every system must have a constraint that limits it's output. We know this because no system has infinite output... or example, you will never find any company with infinite sales or profit! SY 7 SSoSce—Seosocsese ATTEN {goods inventory will in turn incur hefty carrying charges and cost of capital. A resulting cash crunch might also delay payments to vendors, thereby triggering supply problems which delay orders, tamish the reputation with customers and reduce future sales, What if we made efor to utilize the weakest link more fully? We could exploit it more by minimizing idle time of the chain, or subordinate everything else to it by avoiding sudden jerks that add adcitional stress when itis fully loaded. Once we have mastered how to utlize the chain well, we might begin searching for ways of strengthening the weakest link itself. Even a small increase in the strength of the weakest link could have a rather large impact on the overall stength of the chain: Mita, S S SSeS S Sos Aconstraint limits the output of every system, whether we acknowledge it or not. When properly identified and managed, constraints provide the fastest route to significant improvement and form the bedrock for continuous growth. When ignored, the constraint may lie idle, squandering system capacity. An out-of-control constraint may also wreck havoc on dolivery schedules and cause unpredictable delays. Its therefore crucial for any manager to make the most oftheir constraint and learn to manage it well hitps ww tocinsttute-orgtheory-of constraints himl 4817.03.2023, 10.09 ‘Theory of Constranis of Elyahu M. Goldatt- Theory of Constraints Institute TOC shifts the focus of management from optimizing separate assets, functions and resources to increasing the flow of throughput generated by the entire system, TOC’s key processes are focused on removing barriers that prevent each part from working together as an integrated whole. Knowledge Check Many people overestimate their grasp of the Theory of Constraints. Take a moment to check your understanding so fa. Imagine you are responsible for managing the below process flow. Each letter represents a different sub-process such as sales, design, operations stage 1, operations stage 2, customer invoicing, payment collection, etc, Take a moment to visualize a simple ‘sequential process that you are familiar with, perhaps in manufacturing or services, or even a government process such as issuing drivers licenses. 65% 60% 72% 92% 75% 80% You are given the above report detailing the overall efficiency of each sub-process. 4, Where wil you FOCUS most of your attention? 2. Where will you avoid putting ANY attention? Which sub-process did you choose...” Did you have any questions or information that you felt might be missing? Just after you decided where to focus your attention, you receive a report containing the maximum capacity of each sub-process: 15 16 14 10 13 12 Thr Thr Thr Thr Thr Thr ‘Substitute any measurement of capacity that suits your chosen process. For example, tons per hour. 41. Were you focusing in the right place? Most people focus on Process B, even though process D is actually the constraint 2, What are the necessary consequences if you focus primarily on optimizing process B? 3. The efficioncy report remains equally accurate before and after receiving the capacity report. What changed? 4. What would you expect the maximum possible output from such a system to be? What is the Theory of Constraints? ‘The Theory of Constraints (TOC) as developed by Dr. Eliyahu Goldratt was introduced in his landmark book "The Goal.” Over the years, TOC has come to encompass a wide variety of different concepts: + The Five Focusing Steps — the original expression of TOC which will be explained in detail inthis article ‘+ Throughput Accounting — 2 robust method of measuring operations which removes certain problematic distortions in financial accounting practices to accurately measure progress towards the goal and facilitate better decision-making hitps ww tocinsttute-orgtheory-of constraints himl17.03.2023, 10.09 ‘Theory of Constranis of Elyahu M. Goldratt- Theory of Constraints Institute + TOC Thinking Processes & Philosophy — a sot of problem solving tools and assumptions for developing breakthroughs across a wide variety of situations and environments. They help decide’ 4. What to change? 2, What to change to? 3. How to cause the change? + TOC Applications — highly evolved strategies and tactics that apply to specific industries or environments such as S-DBR for make-to-order discreet manufacturing, hospital management, rapid replenishment for distribution & retail, and Critical Chain for project environments. These methodologies, developed using the TOC thinking processes, are beyond the ‘scope of this article but will be references with links at appropriate places so that you can learn more, Despite i's name, the "Theory of Constraints" is extremely practical in that it helps find simple, effective solutions to real-world problems, Delivering Extraordinary Performance Improvements Implementing the Theory of Constraints has yielded remarkable results for companies around the world. An independent study discovered that companies achieved the following impact (on average): Profit Revenue Increase, aes. Increase, 82% Delivery, cx 60% Inventory Reduction, cycle-Time 50% Reduction, 66% Those results were observed across various geographies and industries. in many cases, they represent a partial implementation ‘of TOC tools, leaving us to wonder what sort of impact might have been possible using the the fll set of applications, Constraint Theory Works for Services Also ‘The overwhelming popularity of Dr, Goldratt’s bestselling business novel “The Goal” (set in a manufacturing company) has led ‘some to believe that the Theory of Constraints applies primarily to the manufacturing environment. Although initially developed in response to speeifie challenges in this sector, other TOC applications have been developed for a wide variety of industries using the TOC Thinking Processes. These are successfully implemented in sectors ike Heavy Capital Equipment, Retail, Banking, FMCG, Logistics, Job Shops, Mining, Healthcare, etc. TOC has also been applied in Not-for-Profits including primary education, organized religion, the military, the judicial system and others with equally impressive results, Overview of TOC Applications Eli Goldratt developed specific applications or tools to assist in specfic industry situations: + Availability in Supply & Distribution: Reliable Rapid Replenishment + Availability in Finished Goods: Simplified Drum-Buffer-Rope (S-DBR) for make-to-stock of make-to-availabilty + On-Time Production: Simplified Drum-Buffer-Rope (S-DBR) for make-to-order + On-Time Assembly: Full Kit + On-time Projects: Critical-Chain Project Management ‘+ Turnaround of Sick Units: Evaporating Cash Constraint ising Customer Demand: Un-Desirable Erfect, Unrefusable "Mafia Offer” + Reducing Demand Risk: Customer Segmentation + Causing Change: 6 Layers of Resistance/Buy-in + Sound Financial Decision-Making: Operational measurements TIVOE hitps ww tocinsttute-orgtheory-of constraints himl17.03.2023, 10.09 ‘Theory of Constranis of Elyahu M. Goldatt- Theory of Constraints Institute Click here for more details about the TOC Applications. Learn More Dr. Goldratts business novel The Goal is the original classic that started the TOC movement, and serves a good starting point for anyone interested to explore the field, especially those from the traditional manufacturing sector, ‘The following list of resources is carefully curated to help you zero in on some of the best ways to leam more on each given topic below: ‘Surveys of the TOC Landscape + Viable Vision (book by Gerald Kendall) - a concise, broad-based introduction to all of the major TOC applications ‘summarizing the entire TOC body of Knowledge + Goldratt Satellite Program (video series by Eliyahu M. Goldratt)— perhaps the most intense yet delightful way to cover the TOC fundamentals in a fry style that only Ei himself can pull off. Separate DVDs covering 1. Operations - DBR and Buffer Management 2, Finance and Measurements - T, | & OE and Throughput Accounting 3. Projoct Management and Engineering - Critical Chain and Product Development 4. Distribution and Supply Chain - Pull System and Replenishment 5, Marketing - Unrefusable Offers and Market Segmentation 6. Sales and Buy-in - Overcoming Resistance and Handling Reservations 7. Managing People - Communication and Team Building 8. Strategy and Tactics - Immunizing the Future of Your Company + Theory of Constraints Handbook - a compilation of up-to-date articles covering a wide range of topics authored by leading TOC experts in each respective area. Production & Planning + Production the TOC Way with Simulator (book by Eliyahu M. Goldratt) - elaborates the TOC production solution and also includes a MS Windows simulator for gaining fst-hand experience managing different types of operations. ‘+ Critical Chain (book by Eliyahu M. Goldratt) - Chapters 11, 12, and 15 contain a summary of what the character in this book leamed while doing a year-long sabbatical at UniCo - the company featured in “The Goal.” + Supply Chain Management at Warp Speed (book by Eli Schragenheim, H Wiliam Dettmer and J Wayne Patterson) a conceptual explanation of many ofthe latest developments including plenty of formulas, details and diagrams. Distribution & Reta + It's Not Luck tiled "The Goal 2" in certain countries (book by Eliyahu M, Goldrat!) - this business novel explains the ‘essence of the TOC replenishment solution through the "! Cosmetics" example + Necessary but Not Sufficient (book by Eliyahu M. Goldratt, El Schragenheim & Carol A. Ptak) - Chapters 16 & 17 nicely ‘summarize the problem and the solution + Isn't it Obvious (book by Eliyahu M. Goldrat)- this business nove! set in the retail sector explains the replenishment solution from a retail perspective + The Choice, Revised Edition (book by Eliyahu M. Goldratt and Etrat Goldratt-Ashlag) — this compelling dialog between father and daughter includes a detailed solution tailored for the fashion industry ‘+ Supply Chain Management at Warp Speed (book by Eli Schragenheim, H Wiliam Dettmer and J Wayne Patterson) = this conceptual explanation of many ofthe latest developments includes plenty of formulas, details and diagrams. Sales & Marketing + It's Not Luck titled "The Goal 2" in certain countries (book by Eliyahu M. Goldrat!) - this business novel demonstrates 3 ifforent methods of growing sales and how they are arrived upon. + Mafia Offers: Dealing with a Market Constraint (chapter by Lisa Lang in the Theory of Constraints Handbook) - this article summarizes what a mafia offer is and how to construct one including ilustrative examples +The Machine (book byJustin Roft Marsh) — @ TOC-based approach to the design of an effective and efficient sales function +The Cash Machine (book by Richard Klapholz & Alex Klarman) - this business novel illustrates the Theory of Constraints approach for sales management Critical Chain Project Management (CCPM) + Critical Chain (book by Eliyahu M. Goldratt)- this business novel ilustrates the TOC approach for on-time within- budget projects for the mult-project environment. + Lean Project Management (book by Lawrence P. Leach) - a quick and practical guide explains the nuts & bolts of implementing CCPM and lean for project management. hitps wc tocinsttute-orgtheory-of constraints himl 4517.03.2023, 10.09 ‘Theory of Constranis of Elyahu M. Goldratt- Theory of Constraints Institute + Project Management in the Fast Lane (book by Robert C. Newbold) - an advanced explanation of CCPM including many of the finer nuances Throughput Accounting + The Haystack Syndrome (book by Eliyahu M. Goldratt)- How can you sift information out of the ocean of data? This ook offers a detailed description ofthe logic underpinning sound management information systems so as to offer a clear picture of what is really going on in a business. + The Measurement Nightmare (book by Debra Smith) - explains how to interpret financial accounting numbers (created to adhere to government standards like GAAP and tax compliance) for taking better business decisions. Developing New Technology + Necessary but Not Sufficient (book by Eliyahu M, Goldratt, Ei Schragenheim & Carol A, Ptak) - this business novel develops a step by step framework to get the most out of technological breakthroughs. TOC Thinking Processes & Philosophy + It's Not Luck titled "The Goal 2" in certain countries (book by Eliyahu M. Goldrat! - this business novel demonstrates the TOC Thinking Processes being applied across a three different business environments facing diverse challenges to arrive at unique and powerful strategies for success. + The Choice, Revised Edition (book by Eliyahu M. Goldratt and Efrat Goldratt-Ashlag) — this compelling dialog between Iather and daughter exposes the core ssumptions and philosophical underpinnings behind TOC, and their practical usefulness across wide-ranging personal and professional situations. + Thinking for a Change (book by Lisa J. Scheinkop*) - a readable, step-by-step guide to the TOC Thinking Processes including evaporating clouds, current realty trees, future realty trees, prerequisite trees, transition trees, etc, Certifications & Conferences + TOCICO is an international industry association responsible for certification of TOC consultants and practitioners. They also conduct webinars and hold annual conferences for showcasing implementation case studies and sharing advances in the TOC body of knowledge. Photo Attribution (clip): hitp:/waw.Aickr.com/photos/kylemacdonald/66016576isizes/o! © Copyright 2021 TOC Institute hitps ww tocinsttute-orgtheory-of constraints himl17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite THEORY OF CONSTRAINTS INSTITUTE ABOUT FUNDAMENTALS KNOWLEDGE CENTER SERVICES. CONTACT US The Goal Summary & Book Review The Goal is a book designed to influence industry to move toward continuous improvement. First published by Eliyahu Goldratt in 1984, ithhas remained a perennial bestseller ever since. Itis written in the form of a gripping business novel. A WHATII! Since when are novels written about a factory located in a small town??? Who is This Book For? Everyone from production managers to college students to CEOs should read The Goal. tis surprisingly easy for people ofall levels to read because its written as a story. likes of Tom Peters for display purposes, the one management book they have actually read from cover to cover is The Goal." e e A.survey of the reading habits of managers found that though they buy books by the - The Economist Although it descrives manufacturing operations, The Goal book is relevant for all types of situations because it is about learning what makes the world tick so that you can improve it. As the characters “think logically about their problems" they gradually uncover the "cause and effect relationships" between actions and results The Goal is one of three books that Jeff Bez0 requires his top management team to read. In fact, he uses tas a framework for sketching out the future of Amazon.com. The Goal Summary: Outline of This Article ‘This comprehensive book review of the Goal contains six sections: + Quick Overview + Cast of Characters + Chapter-wise Summaries + Main Lessons From The Goal + Key Takeaways for Managers: How to Drive Continuous Improvement + Final Thoughts, Click on the links above to visit whatever section interests you most. tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers ane17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite Quick Overview Alex, an educated and competent manager at UniCo, is excited to get transferred back to his hometown Bearington with his family. But his moment of bliss quickly evaporates once he realizes that his factory is facing difficulties and might even get closed down! ‘Shipments are always late and their production backlog is growing, yet somehow inventories also keep soaring. The team wonders why they can't seem to ship on time with good quality ata reasonable cost, Alex resolves to do whatever takes to save the manufacturing plant. Meanwhile his wife, Julie, struggles to adjust to the monotonous life in the small town. Alex’s long hours at office put additional strain on their relationship, as things go from bad to worse. Given three months to turn the plant around, Alex chances to bump into his old Physies professor, Jonah, who challenges his thinking and gives a series of clues about how to save the division, Jonah takes on complex subjects ike "productivity" and defines them in simple terms. For example: “Every action that brings @ ‘company closer to its goa! is productive. Every action that does not bring a company closer to its goal is not productive.” But what Is the goal? Following Jonah's clues, Alex mobilizes his team at the plant to find ways to improve the flow of production and somehow ship the hhuge backlog of orders on time. Along the way they discover the importance of constraints and learn how to manage them to achieve growth and profitability Alex eventually realizes that the goal is not cost-effective purchasing, employing the right team members, the latest technology, producing quality products, capturing market share, customer satisfaction, ete. but rather making more and more money. ‘Once the plant's operations stabilize, Alex finds himself spending more time with his family. He wins back his wife's affection and his plant suddenly becomes the most productive one in the company. Alex is promoted to President at UniCo and entrusted with the task of implementing Jonah’s advice throughout the entire division {A porsuasiv sluton fr fctros struggling with production delays and ow revenues." e e = Harvard Business Review ‘Towards the end, he begins to realize that ‘bottlenecks! or constraints can change over time, and hence he must adapt his way of ‘managing the business, But Jonah has given him the key questions to find solutions to these challenges as they arise... the secrets to the Process of On-Going Improvement (POOG)). Cast of Characters + Alex Rogo: manufacturing plant manager (the main character) tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers 2217.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite + Jonah: Alex's college professor, who offers ertical advice & clues + Julie Rogo: Alex Rogo's wife + Bill Peach: division vice-president + Fran; Alex's secretary + Lou: the head accountant + Stacoy: the plant inventory manager + Bob Donovan: the production manager + Ralph Nakamura: Data Processing Manager + Herbie: a boy scout who comes to metaphorically symbolize the bottleneck in the plant + Dave: Alex's son + Sharon: Alex's daughter Chapter 1 (The Goal) ‘This chapter introduces the main character Mr. Alex Rogo, an industrial engineer and an MBA graduate who manages a plant of the Unio Manufacturing Corporation. He arrives atthe office one morning to discover that his parking slot has been taken by the division Vice President Mr. Bill Peach. The conversation becomes heated when they discuss order #41427 that is seven-weeks overdue. Bills very angry and warns Alex that he must turn around the factory within 3 months or it will he shut down, Furthermore the overdue order must be shipped that very same day or else. Chapter 2 (The Goal) Alex reflects back back on his travels, finding himself back at the place where he started from. “I'm 38 years old and a crummy plant manager." The scene shifts to Alex's home life. His wife Julie is from the city and is struggling to adjust to small town life. They get into an argument when Julie wants to go out for lunch. He promises her to be back early that night and then heads towards the plant, ‘Alex reaches office only to discover a worse-case scenario wherein a machine has completely stalled. He pushes all the ‘employees to work extra hours and somehow, order #41427 finally gets shipped late that night. But this achievement comes at the cost of declining efficiencies and further delays for other orders. Later that night, while at dinner witha colleague, he reflects upon the mismatch between the company's MIS system reports and actual profits, Chapter 3 (The Goal) The next morning, Alex rushes to attend a meeting of plant managers at headquarters. In the elevator Alex’s co-worker Nathan, ‘Selwin explains why Peach has been behaving so strange lately. The entire division has been given one year to improve or it's going to be sold! [At the meeting, Peach explains how bad things are and hands out new stretch targets for the next quarter. Chapter 4 (The Goal) While at the meeting, Alex remembers running into his old physics professor, Jonah, at the airport. Jonah marvels Alex with his intimate knowledge of how badly Alex's plant is doing. With no prior knowledge, he accurately predicts problems lke high inventories and missed shipping deadlines. tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers ana17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite How did Jonah know so much about Alex's factory??? ‘Their conversation is interrupted so that Jonah can catch his fight, But he leaves Alex with a lingering question: "What is his company's ultimate goal?” Chapter 5 (The Goal) Alex mind keeps wandering and he leaves the meeting to take a break, He cannot stop pondering over Johan's question, ‘Suddenly it tikes him that the Goal of his company is to make money! Anything that brings him claser to the Goal is productive. Hence, all other activities are non-praductive! Chapter 6 (The Goal) Back at the office that evening, Alex sits with the plant's controller, Lou. Together, they discuss the details of how the plant could {go about achieving the Goal and the new targets. There is an urgent need to increase cash flow, ratum on investments, and the net profits. When Alex runs the numbers, the task seems daunting, almost impossible. Their conversation stretches late, and Alex finds himself in trouble once again with Julie when he calls home, Chapter 7 (The Goal) Returning home at a very late hour, Alexis surprised when his daughter greets him in the doorway. She wanted to show him her ‘school grades, but this is the only time when should could gether father’s attention, ‘After tucking her into bed, he begins to rethink the situation from a more positive perspective, But he realizes that he might need guidance from Jonah once again Chapter 8 (The Goal) ‘The next morning at work, Alex ries to apologize to Peach after skipping out of his meeting the previous day, Unable to get through, Alex decides to trace down Jonah instead. In response to Alex's questions, Jonah reveals three operational ‘measurements. “Throughput is the rate at which the system generates money through sales." "Inventory is all the money that the system has invested in purchasing things which it intends to sell” “Operational expense is all the money the system spends in ‘order to turn inventory into throughput." Their conversation gets cut short once again, Alexis left wondering how to relate them in terms of the plant's operation Chapter 9 (The Goal) ‘The head of the company decides to come down for a photo shoot with the robots in the factory, Alex begins to reflect on the Viability ofthe robots. With the help of Lou the accountant, the inventory control person, and the production manager, Alex discovers that the robots increased operating expenses without reducing any costs like direct labor, which was merely shifted to ‘other parts of the plant. Since inventory stayed the same and throughput did not increase, the productivity ofthe plant declined because of adding the robots! Chapter 10 (The Goal) ‘Alex and his team (Bob from production, Lou from accounting and Stacey from inventory control) reviewed the meaning of throughput, inventory and operating expense until everyone was satisfied, Lou, summarizes them as follows, "Throughput is. tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers ana17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite ‘money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make throughput happen." Bob remains skeptical that everything can be accounted for with just three measurements. But Lou explained that machines, tooling and the whole the ulding are all just different forms of inventory, Stacey remarked, "So investment is the same thing as Inventory." Together they decide that something drastic must be done with the machines. But how can they do that without lowering efficiencies? They call Jonah in search of answers, but to speak to him Alex must visit New York... Chapter 11 (The Goal) ‘Alex catches Jonah briefly n his hotel in New York City and shares the details of the plant's problems, Jonah assures Alex that all the problems can be solved despite their looming deadline, He advises Alex to forget about the robots, and stop chasing efficiencies. Afterall, “a plant in which everyone is working all the time is very inefficient." Jonah rejects Alex's notion of a balanced plant, claiming that “the closer you come to balanced plant, the closer you are to bankruptcy." Then he leaves Alex with another riddle: consider what “dependent events” and "statistical fluctuations” have to do with your plant? Both harmless enough to Alex, who feols confident that both should work themselves out farther on down the production line, Chapter 12 (The Goal) Upon his return home, Alex gets caught in an argument with his wife about all the unanswered phone calls. At this point his marriage is very strained due to the pressure of work and lack of time available for hs family, Alex promises to set aside some time for her over the weekend, Chapter 13 (The Goal) ‘Alex wakes up on Saturday morning surprised to find his son dressed and ready to go on an overnight Boy Scouts hike. Alex forgot that he had volunteered to lead the boys! ‘As they hike, the boys in the troop keep getting spread out further and further. It seems Alex discovered the true meaning of ‘dependent events” in relation to “statistical flictuations" by fluke! This analogy between a single file hike through the mountains ‘and a manufacturing plant, makes Alex realize the diffculty of making up the downside of the fluctuations following “dependent events". The last event must always catch up everything to average out, which rarely ever happens. Chapter 14 (The Goal) To observe the effect more carefully, Alex devises a dice game to play with the boys. It quickly becomes clear that any balanced plant faced with “statistical fluctuations” and “dependent events” will see throughput going down and inventory going up. Jonah \as right - a balanced plant is not the answer! Chapter 15 (The Goal) ‘The next day the troop begins to hikes again. But this time, Alex decides to let the slowest kid named Herbie lead the line, He also distributes some of the extra weight that Herbie was carrying, As expected, the fluctuations of the ine balance out and the hikers reaches together on time, thus increasing the “throughput” of the entire troop! Chapter 16 (The Goal) ‘Sunday evening when they reached home from the camping trip, Julie has gone missing. In her note, she expresses frustration that Alex is spending all his time at work and has yet again broken his promise to spend time with her. He picks up his daughter from his mother’s house and tries to reach Julie on the phone, Despite making several calls to fiends and acquaintances, he is unable to locate her anywhere. Now the kids and the job are all Alex's responsibilty, Chapter 17 (The Goal) ‘The nex! day at work, Alex explains his revelation about dependent events and statistical futuations to a hesitant team of co- workers. Fortunately, he is able to prove his point by using these principles to complete a large overdue order. The team's, ‘skepticism fades and even the production supervisor agrees. Now what...? Chapter 18 (The Goal) hitps tw tocinsttute.orgthe-goal-summary htmlitakeawaysformanagers 5i1217.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite ‘The team is beginning to trust their boss and appears ready to act on his command, But Alex, on the other hand, remains unsure what to do next. Predictably, Jonah is consulted once again, This ime, the professor discloses the Theory of Constraints: “A bottleneck is any resource whose capacity is equal to or less than the demand placed upon it, Anon-bottleneck is any resource whose capacity is greater than the demand placed on it." Jonah carefully explains that Alex must NOT try to balance capacity with demand, but instead balance the flow of product through the plant ‘Alex and his team set out to find their bottleneck and zero in on the NCX-10 machine and heat treatment section, Chapter 19 (The Goal) Jonah finally visits the plant in person. He explains to Alex that every plant should have bottlenecks (!), and that a system can only increase production by increasing capacity at the bottleneck operations. But Alex is confused, What must he do to increase the capacity ofthe plant? Ideally he would lke to purchase an additional ‘machine, but they have neither the time nor the budget for that. Jonah muses that more machines to do the bottleneck operations ‘might help, but weren't they forgetting about making the existing machine run more effectively? How much does it costs when the bottlenecks (NCX-10 and heat treatment) machines go down? Lou quotes $32 per hour for the former and $21 per hour for the latter. And how much does it cost when the whole plant goes down’ About $1.6 milion, How many working hours are available per month? About 585, Jonah then reveals that when the bottlenecks are down for just an hour, the true opportunity cost is more like $2,735. That is because each minute of downtime at a bottleneck translates into lost throughput for the enti plant! Chapter 20 (The Goal) ‘Alex priotzes the bottlenecks to work on the overdue orders starting from the most overdue down to the least. While this production plan is being set into motion, Alex discovers that his wife Julie had been staying with her parents, But when he tries to ‘convince her to come home, she insists that she needed more time to herself Chapter 21 (The Goal) ‘The crew works out a detailed plan to keep the bottlenecks fully utilized. They soon discover that they need a mechanism to inform workers about the priority sequence at non-bottlenecks as well. A system of red and green tags is put into place to map priorities visually: Red for bottleneck parts (to be worked on first) and green for non-bottleneck parts (to be worked on second). Alex is determined to make up for the weekend he owes Julie, so he asks her out for Saturday, She is excitedly agrees to this, plan. Ths time, Alex manages to keep the date he promised his wife without any interference from work. Chapter 22 (The Goal) Monday moming, Alex is excited to learn that their new system is actually working... the plant managed to ship twelve overdue orders! Alex is pleased, but he definitely wants more. He invites suggestions from the team for additional improvements. Bob, the production manager, finds and refurbishes an old machine to take some of the load off the NCX~10. Things are finally beginning looking up. Chapter 23 (The Goal) New problems crop up at the bottlenecks to disrupt production. There is nothing to do while waiting for the bottleneck to fnish its batch, so workers have been shifted to other areas between batches to keep busy. To prevent this, Alex dedicates one foreman at each constraint location al all times, One of his dedicated foremen discovers how to process more parts by mixing and matching orders by priority, thus hiking efficiency by a full 10%. Meanwhile, things are beginning to work out between Alex and Jule as wel Chapter 24 (The Goal) ‘The team Is excited about the sudden increase in performance and decides to celebrate. Afterwards, Stacey dropped Alex home ‘but Jule is waiting up for him, She becomes suspicious that Alex might be cheating on her and leaves! Back in plant, the new priority system isin place. The rate of flow has increased considerably, thus reducing inventory. tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers ene,17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite But now that the productivity of the bottleneck has improved, new bottlenecks begin to surface! This intrigues Jonah and he decides to visit the plant to have a look. Chapter 25 (The Goal) ‘After studying the problems, Jonah explains that there aren't any new bottlenecks! Rather, the current practice of prioritizing non= bottlenecks to work first on bottleneck parts inadvertently caused the problem. Another part, which is required for final assembly, does not requite any work by the bottleneck. Hence those parts were produced on lowest priority, leading to shortages at final assembly. ‘The solution might be to rework the tagging system to create an equal supply of the two parts, The focus now expands to include ‘matching the production of bottleneck parts to ensure timely availabilty of non-bottleneck child parts. If successful, tis could also reduce the accumulation of bottleneck parts in WIP inventory at the assembly line (while awaiting their respective matching parts from the non-bottlaneck processes). Chapter 26 (The Goal) Jonah & the team (including Ralph, the computer whiz) devise a plan to anticipate which products needed to be finished by when and release them into production accordingly. It might take some time since there are so many parts stacking in front of the bottleneck, But this would eventually create a balance between production of the bottleneck and non-bottleneck parts. Tired but relieved, Alex drops Jonah back to catch his fight at the airport. Chapter 27 (The Goal) ‘Once again, Alex is summoned for another corporate meeting. But this time, he is expecting plenty of appreciation for the achievements of his team, Instead, the meeting turns into a disaster. Though Alex's plant made progress over the last couple of months, none of the others are doing well at all. Management is considering closing the entire division. When Alex confronts Mr. Peach in private, he is told that if he can improve another fteen percent, he might be allowed to keep his plant open. It seems pretty challenging because this would require generating additional new demand from the market. Despite his secret misgivings, Alex promises to achive it When he retums to spend time with his wife and kids, he manages to get into another fight with his wife. But they eventually resolve their differences and make up, Chapter 28 (The Goal) Later, as Alex ponders over how to increase demand from the market (15% !7#!) while reducing inventories, his thoughts are Interrupted by the ring of the telephone. Jonah has called to inform that he will not be available for advice over the next few weeks. ‘Alex informs him about his new stretch targets and how difficult they appear. Jonah suggests reducing the batch sizes down to half of their current evel. Doing this could potentially reduce inventory lovels by half. Also, they could achiove faster response times and shorter times for orders. But it would mean several operational changes including negotiating new deals with the vendors. Alex bumps into Johnny Johns, the division sales manager, and requests him to create a new marketing strategy to achieve the new targets. Chapter 29 (The Goal) John has found a customer wiling to purchase 1,000 products in ust two weeks’ time. In fact, this order may lead to more business in the future as well But can the plant produce that much, given their existing commitments? The team realizes that ‘smaller batch sizes can help but will not completely solve the problem. Working together, they find a novel way to spread out new contract deliveries over four weeks (250 products per week). The customer loves their proposal and they win the order. Thus, ‘smaller batches become a key factor in their ability to increase sales, But Alex remains worried about the fact that his efficiencies and P&L statement appear to be getting worse, despite al the growth and productivity improvements. Lou the accountant tells him not to worry and promises to contest the MIS reports which are clearly misrepresenting the reality oftheir improvements, Chapter 30 (The Goal) tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers m217.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite ‘The month is over and results ae in. Lou calculates an improvement of Seventeen Percent as per his new accounting method! Most ofthis increase is thanks to delivering on the new order. But Hilton the productivity manager gets a whif of the news and drops in to audit the plant. According to his calculation there is, only a 12.8% increase when going by the standard method of accounting Meanwhile, the owner oftheir new customer, Mr. Burnside, shows up to personally shake hands with the team for delivering their coder so quickly. He has decided to increase the size of the contract from 1,000 parts to 10,000! ‘Afterwards, Alex meets Julie and they reclaim their relationship. But tomorrow is the final day of reckoning back at the division headquarters, Chapter 31 (The Goal) Instead of meeting directly with the boss, Alex finds himself discussing matters with a committee of Mr. Peach's subordinates. ‘They seem to believe that thatthe plant's extraordinary growth is just temporary, and that the plant will soon begin to show major losses. Lou tries to point out the flaws of the old accounting model to the division controller, demonstrating thatthe actual growth for that month was almost 20%. {As the discussion drags on, Alex becomes impatient. He tracks down Mr. Peach to defend his plant's growth, but the decision has already been made... the plant will continue operations and will not be shut down! Moreover, Peach has been promoted and Alex is to take over his old position as head of the division! Now, Alex has to manage three plants instead of just one! Alex calls Jonah in search of urgent advice, but Jonah refuses to offr much assistance. He has specific questions to ask st Chapter 32 (The Goal) ‘Alex and his wife decide to celebrate his promotion with a candlelt dinner in an expensive restaurant. Over wine, they discuss Jonah's critical role in the events that transpired in the past months, Why couldnt they do it without Jonah's questions and ‘occasional advice, which seem like litle more than common sense? ‘Alex now faces the challenge of getting a whole new set of workers to buy in to these ideas from scratch. How can he do this, without pulting them off and being condescending? Chapter 33 (The Goal) ‘Alex makes his appearance at the plant, but this time as the division Vice-President. He promotes his team members Lou, Bob, Stacey, and Ralph, to higher positions within the division, carrying greater responsibilties. Now he is all set to embark upon the next major stage of planning and growth. Chapter 34 (The Goal) Now that Alex's core team has taken up their new positions, its time to take their model to @ new level. The concepts that were: ‘boing applied for ust one plant must somehow be modified to work for the entire division. This will involve plenty of work and each team members intense involvement. So they decide to meet on a daily basis to work out their strategy and tacts. Chapter 35 (The Goal) ‘As the team brainstorms, they discuss how chemists invented the periodic table of elements. How were they able to classify ‘something so vast into one simple table? Maybe this is how they can approach the massive problems oftheir division! Those scientists began by observing vast chaos and gradually derived i's underlying order. By thinking like scientists, they must design ‘a common framework to examine all the issues ofthe division Chapter 36 (The Goal) {As the team reviews the process they followed to fix he situation at their plant. Gradually they formulate a five-step Process Of ‘On-Going Improvement (POG): + Step 1: Identify the system's bottlenecks + Stop 2: Decide how to exploit those bottlenecks + Step 3: Subordinate every other decision to step two decisions’ + Stop 4: Elevate the systems bottlenecks + Stop 5: if, ina previous step, a bottleneck has been broken, go back to the beginning (Step 1). tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers ane.17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite it seemed simple, clear yet... ough to implement Chapter 37 (The Goal) ‘As the team reviews the five focusing steps, they discover various issues to be addressed. The last step in the five-step process, for example, must ensure that inertia does create any system constraints, ‘They discover some fcitious orders were created to keep the bottlenecks busy. Eliminating this can free up 20% capacity, which ‘can be used to full real orders in the future. Stacey modifies the tagging system, and Alex and John plan future expansion in the market. Chapter 38 (The Goal) John finds a new client in Europe which is large enough to utlze the excess capacity that has been freed up. But there is a catch ~ the deal would have to be priced significantly lower than thelr offering to the local market. But the deal could open up new ‘opportunities in Europe, which has a lot of other potential large customers. ‘Alex decides to analyze the situation from the perspective of a physicist. They could use their existing spare capacity to meet the contract requirements and the only additional cost would be raw materials. Despite the lower pricing, this would stl lead to incremental profitin the division's book of accounts... and since the customer is in Europe, selling there should not cause any reduction in the pricing for domestic orders. Eurekal Chapter 39 (The Goal) ‘Another problem at the plant... ll the fresh orders seem to be creating new bottlenecks all over the place! Julie, who has been reading Socrates, explains the theory of i... then’ deduction. She explains the importance of considering all ofthe scenarios that can arise and how prepare forall the side effects of a new initiative. ‘After analyzing the problem, the team decides to increase the inventory infront ofthe bottlenscks to ensure utilization of their full capacity. This will increase cycle times and hence the sales team can promise to fulfill new orders after four weeks, twice as long as before. Athough this may jeopardize some of their new customer relationships, it appears to be required. Business is an ‘ongoing process of improvement, and when new problems arise they must be dealt with head-on. Meanwhile, Alexis called upon by Peach to help Hilton with his plant's improvement and is asked to visit the plant and teach his practices. Chapter 40 (The Goal) While Alex and Lou ponder over Jonah's questions, they creates a few of their own + What to change? + What to change to? + How to cause the change? Alex realizes that he can no longer keep running back to Jonah for help; he must tread alone on the path shown by Jonah. As a manager, he must master the art of how to get to the core of a complex situation and solve it without creating new problems, Main Lessons From The Goal Book Initially, Alex's thinking is distorted by conventional management accounting metrics, This causes him to waste time and energy “improving efficiency" even though it has no impact on the profits ofthe division. Jonah helps Alex align his organization to the Goal by distinguishing between three operational measurements: + Throughput: the rate at which the system generates money through sales net of variable costs. This corresponds to the value added by the system. + Inventory: ‘all the money that system has invested in purchasing things which it intends to sell” This was later expanded to include all investment such as plant, property, equipment ete, + Operating Expense: “all the money the system spends in order to tum inventory into throughput.” These fixed costs like ront and salaries are incurred whether or not throughput increases or decroases. tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers anna17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite Recommended Operational Measurements T= value created = sales us Totally Variable Costs ‘Armed with these definitions, Alex has a sound bas's to analyse whether his decisions are helping the plant move towards the Goal (fo make money, as characterized by increasing throughput andlor decreasing inventory and operational expense). Between these three operational measurements, increasing Throughput impacts profitability far more than reducing Inventory or Operating Expense, ‘The slowest operation always determines the maximum speed at which products can be produced and therefore also the rate at Which throughput can be realized. This slowest machine is called the Bottleneck or Constraint. A lost production hour on this bottleneck tends to be very costly, Jonah outlines the secrets to managing constraints (Theory of Constraints) by asking questions. The answers to his questions form five focusing stops to improve the performance of any system (sometimes known as the Process of On-Going Improvement or POG!) 1. Identify the system's constraint(s) 2, Decide how to exploit the system's constraint(s) 3. Subordinate everything else to exploit the constraint(s) 4. Elevate the system's constraint(s) 5. If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system's constraint. ‘These five steps follow a specific sequence. In other words, you should exploit the constraint before elevating it, because adding capacity requires capital investment. Also note that the bottleneck may be internal or external, such as customer demand. Click hore to read more about The Five Focusing Steps. Key Takeaways for Managers: How to Drive Continuous Improvement 4) Measurements Drive Behavior: any misalignment in measurements causes a wide range of destructive tendencies. Its your responsibilty to identify The Goal of your organization. Be sure that your metties align completely to this Goal 2) Seek Answers: Be active in your quest for knowledge, The answers are out there, you just have to discover them. Sometimes the answers can be found in unlikely places, such as Jonah, an old physies professor. 3) Teamwork: Teams are very important to diving change and improvement. The more heads on the job the better. People have different opinions and outlooks; someone else may think differently than you ever would have, tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers son17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite 4) Never Give Up: There is always a chance to recover as long as your organization instil running. Don't be afraid to challenge the status quo. The battle is not lost unt the moment you give up and stop trying. '5) Work Smarter, Not Harder: Oftentimes our greatest efforts are ineffective and sometimes even counter-productive. But by focusing on the right areas we can achieve breakthrough results 6) Improve the Overall System, Not Just the Individual Parts: Effective coordination between Operations and Marketing/Sales {s entical to achieving the Goal, not just optimizing @ single link in the value chain. Like Mrs. Fields and her cookies, The Goal was fo0 tasty fo remain obscure. Companies began ‘buying big batches and management schools included itn their curriculums." = Fortune Magazine Final Thoughts ‘The Goal continues to transform a variely of different fields including + Operations Planning + Accounting & MIS Reporting + Process Improvement + Sales & Marketing + Achieving Worksife Balance But Dr, Goldratt did not intend his book to be only for managers. It should be taught as part of every MBA, accounting course and leadership development program because of i's thought provoking explanation of business fundamentals, ‘Also: click here for an interesting back story about events leading up to the writing of The Goal, tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers we17.03.2023, 10:13, ‘The Gaal Summary & Book Review - Theory of Constraints Insite © Copyright 2021 TOC Institute tps stwwictocinsttute.orgthe-goal-summary htmlitakeawaysformanagers 2217.03.2023, 10:14 Constraint Defition, Management & Examples - Theary of Constraints Insitute THEORY OF CONSTRAINTS INSTITUTE ABOUT FUNDAMENTALS KNOWLEDGE CENTER SERVICES. CONTACT US Definition of Constraint noun | constraint | ken'strant In everyday language, the word “constraint” could refer to just about any inconvenience, limitation, setback, restriction of fluctuation in capacity. Sometimes it seems ike constraints are lurking everywhere! But according to Dr. Goldralt, the word constraint means something specif: Aconstraint is what "limits a system from achieving higher performance versus it's goal” In other words, the constraint is what, if we had just a litle more ofit, would generate higher Throughput (sometimes referred to as “contribution"). Throughput is a useful way to measure the flow of goods and services to market and to help guide sound decisions and actions to improve it aver time. Quick Guide to Constraints This in-depth article explains what a constraint is and how to manage constraints effectively. Click on a section to go straight to the topic you are interested in + Definition of Constraint + Why Do Constraints Matter? + Where Are Constraints Located? + Can There Be Multiple Constraints? — What isthe Difference Between a Bottleneck and a Constraint? = Why do Constraints Exist? » Can Inventory Overcome This Problem? » Should Capacity Be Balanced? + What is a Strategie Constraint? — What is a Capacity Constrained Resource? + How to Manage the Constraint? + Controlling Flow Through the Constraint + Key Takeaways About Constraints = Discover More About Constraints Why Do Constraints Matter? When driving continuous improvement, itis tempting to ty to improve everything all at once. As thing as this might seem, it rarely leads to sustained improvement in the overall performance of the organization over time, This is because not allimprovements are created equal... a few impact the constraint while most do not. This seemingly minor distinction makes all the difference. ‘The classic analogy is a chain which has a specific iting capacity, Note that the strength of this chain is determined by it's weakest link (the constraint): hitps twin tocinstute.org/constraint- definition himl 11617.03.2023, 10:14 Constraint Defition, Management & Examples - Theary of Constraints Insitute Note that if you “improve” a non-weakest link by adding more steel, the overall strength of the chain can never increase. ‘The strength of the chain can only be increased by strengthening the weakest link ‘That is why improvements that impact the constraint influence the overall system performance disproportionataly ‘Thus, constraints represent the leverage-polnt to make substantial improvements with loss effort in a relatively short time. Where Are Constraints Located? Going by the narrow definition af constraint pioneered by Dr. Goldratt and further developed Eli Schragenheim, constraints can only be located in a few specific places: + Market Constraint: is where a company captures the bulk of the market and runs out of further space to grow. For example, De Beers controlled >80% of the global diamond market inthe late 1980s, Hence, their growth was governed by the overall size of the diamond market. Regulated electrical utiles or office productivity software are other examples of a ‘market constraint. This type of constraint is quite rare. + Demand Constraint: when market demand at current prices is less than the ability to produce the product or service. This ‘can be indicated by always delivering on-imefin full with no delivery backlog in a make to order environment or maintaining 100% availabilty ofall products / services with negligible wait time in a make-to-stock environment. For ‘example, it is very rare for customers to face retail stockout on popular brands of toothpaste. + Internal Capacity Constraint: when the current abilty to deliver is less than market demand for those produets or services. This is usually accompanied by a backlog of sales orders, low on-time delivery due date performance, andlor stockouts, But the real test of an intemal capacity constraint is very high utlization of atleast one internal resource (95%). Note that lots of unsold finished goods in storage may indicate that there is more available capacity than you think! + Supply Constraint: when the system is unable to meet all demand placed upon it due to shortages in the supply available in the market. In most genuine cases, the systemwide consumption ofthat material, component or item is very high 2.9, >50% of the global suppl. For example, certain rare earth elements have dwindling availabilty globally, and can only 'bo found in a single mine located in China, This type of supply constrain is fairly uncommon. + Supplier Constraint: when the system is unable to meet some demand due to shortages in the supplies by vendors. Most often, what appear to be material constraints are actually caused by internal purchasing policies and practices, rather than a genuine unavailability in the market. Such policies might include restricting purchases to a pre ‘approved vendor list, only purchasing from lowest price suppliers, extended payment terms, late payment practices, etc. A famous example of a supplier constraint happened at the Royal Philips Plant in Albuquerque, New Mexico. In 2000, a fire at the plant reduced the global supply of key semiconductor chips used in Nokia and Ericsson's flagship cell phones. Through quick action, Nokia was able to tie down additional supply agreements and purchase some of these chips on the ‘open market, effectively locking Ericsson out of the high-end cell phone market for an entire product cycle. + Cash Constraint: when the abiliy to purchase inputs is less than market demand due to inabilly to pay suppliers. In other words, there is sufficient customer orders, delivery capacity, workers, etc. accompanied by a shortage of inputsimaterials/components/etc. Some suppliers may have blacklisted the organization due to late payments, andior disputes may have been taken to court. In other words, mast supplies are available on a payment-frst basis, only. Therefore a small increase in cash usually can increase sales, throughput, on-time delivery and available cash in a relatively short amount of time, usually less than 13 weeks, hitps twin tocinstute.org/constraint- definition himl17.03.2023, 10:14 Constraint Defition, Management & Examples - Theary of Constraints Insitute Can There be Multiple Constraints? ‘Any given organization or system is usually not constrained by too many different resources at the same time. Stil, there may be ‘more than one independent paths of low. Every independent path of flow will have its own constraint, This is why it can seem so difficult to identify the constrain in very large organizations such as the government of a country or trllion-doliar conglomerates, because they usually have many different independent flows going on at the same time. As the definition of the “system” becomes too complex, the word “constraint” begins to lose its clear meaning What is the Difference Between Bottleneck and Constraint? bottleneck is any resource with lower capacity than the current load. If several bottlenecks are present in the same line of flow, the one with the Jeast capacity is the constraint Note that a constraint can also be a resource that is NOT a bottleneck! This happens when the resource has, on average, more than enough capacity to process the current load, Nevertheless some sales are delayed or lost due to inadequate exploitation of and subordination to that capacity, Examples of this include mis-prortization, late release, poor synchronization of components to be assembled (lack of fl kits), early release (causing excessive muttitasking), ete. Why do Constraints Exist? Every system is characterized by dependent activitias of some form. For example: + Asales team depends on leads generated by their marketing team, so that they have prospects to reach out to + Procurement depends on the finance department to pay suppliers on time, so that vendors will continue to supply materials + An automotive dealership depends on the manufacturer to supply the right vehicles for sale to customers + Alarge project requires customer specifications to be finalized by the customer before proceeding to the next phase + Aloan processing department requires certain details about each applicant in order to check their credit history ‘Those dependent activities are inextricably linked together to form a chain. For example, the logical flow of a very simple system might look something like this: In other words, without recelving inputs from Stage A, Stage B cannot perform its function at al And without inputs from Stage D, ‘Stage E will idle. These inputs might comprise of physical work-in-process inventory or intangibles such as services, information, ete. Each stage is has a certain capacity, whether related to machine capacity, computer processing speed or the number of worker hhours dedicated to the process. For example, the capacity of each stage below is estimated in Tons per Hour: 15 16 14 10 13 12 The = The = Thr The Thr Thr Note that the above capacities are never completely stable. If machine breaks down, or an employee is absent, etc. the capacity of that stage might reduce dramatically. Similarly, if employees are trained to improve their ski, sotup time is suddenly reduced, or ually yield improved, capacity might increase significantly. Capacity, therefore, is subject to enormous variation and is almost never as stable as it may appear, ‘This variation in capacity can lead to periodic starvation of resources to the extent that they are nat able to produce flow, even if there is a large backlog of customer orders: hitps twin tocinstute.org/constraint- definition himl17.03.2023, 10:14 Constraint Defition, Management & Examples - Theary of Constraints Insitute 15 0 14 10 13 12 The = The = The Thr Thr Thr Note how the above disruption in Stage B capacity will necessarily lead to starvation of all downstream processes. This reduction in output comes at high cost in terms of lost sales and associated Throughput. Even if customers can somehow be convinced to wait and no sales are lost directly, long term demand is likely to be impacted by a poor reputation for reliability in the market. Can Inventory Overcome This Problem? ‘Accumulated inventory can be used to minimize the immediate damage caused by this variation. For example, if there is inventory stock after Stage B, then downstream processes can temporarily sustain operations and create flow even while Stage B is disrupted: But f Stage B capacity remains affected for any lenath of time, the inventory will deplete and prove inadequate balance the flow. Should Capacity be Balanced? To deal with the ongoing fluctuation in resource availabilty, as well as demand volatility, every operational system must have considerable extra capacity of most intemal resources to remain stable, Such excess capacity, known as “sprint capaci, provides the flexibility needed to deal with a wide variety of potential disruptions in supply and demand. What is a Strategic Constraint? ‘There will always be a constraint in every system... otherwise it's performance would be unlimited! The world has never seen a ‘company with infinite sales, for example. Just the thought of such a thing seems totally absurd. The question, therefore, is which constraint do you prefer to maintain? Allowing constraints to shift continuously is difficult to manage and leads toa situation of chaos. Why not choose the constraint we wish to have and find ways keep it there? We can usually cause any specific resource, or ‘market demand, to become the constraint by simply elevating the current constraint until it becomes $0, This is the meaning of a ‘Strategic Constraint ‘One common argument for keeping the constraint intemal is that "we can manage it better.” But can you really manage it better sven the fluctuations in market demand? The problem with this approach is the how customers may respond, In today's competitive world, will your largest customer really tolerate being put “on hold?" How will this affect long term relationships and your perception in the market? In 82C will consumers sill choose to return to your brand, after having been forced to tral the ‘competition? In certain specific environments, customers may be forgiving and such concems might not be an issue. But for most ‘companies, having an internal constraint for any significant period can become extremely problematic. ‘Therefore customer demand is a good choice as the strategic constraint for most companies. Elevating the internal resources ‘enough to make customer demand the constraint is worthwhile because it allows faster response to the market — which often leads to a decisive competitive edge. The only time when itis NOT worthwhile to elevate a constraint is when this would requires ‘more investment of time, energy or capital than the extra Throughput is ikely to justity. ‘What is a Capacity Constrained Resource (CCR)? hitps twin tocinstute.org/constraint- definition himl 41617.03.2023, 10:14 Constraint Defition, Management & Examples - Theary of Constraints Insitute A Capacity.Constraint-Resource (CCR) limits the total Throughput generated by the organization. CCRs may not be active all the times, but they have potential to become active at any time. For example, an injection moulding factory with multiple machines and many different finished products might have only one mould of a given type. Most ofthe time, this mould does not limit the capacity ofthe factory, but if they receive several large orders for that specific type of product at the same time, it creates a constraint. Many times, organizations have a seasonal CCR leading up to major cycles such as the Christmas shopping season in the United States, Diwali Holidays in India, Chinese New Year, etc. Itis useful to identify CCR(s) in advance so that proper planning and order promise date quotation can be done. Most resources should not be permitted to become CCRs because thelr value is so low compared to other resources. Ideally, CORs should be resources that are very expensive or dificult to elevate, Often expanding the CCR would involve high Capital Investment andlor Operating Expense, for example a paper making machine or steel furnace. Other times the CCR might be a scarce skill such as an SAP ABAP programmer or aluminum welder. Stil other times the CCR might have very long process time within the overall cycle time, such as with a heat treatment oven. The location/sequence of the constraint within the routing ‘Sequence can make some difference — but this is not usually the most important issue. In certain environments, a particular type of skill might be very hard to find and replace, such as a doctor, charlered accountant, aluminum welder, or high-end engineering resource. Other operations can be very difficult to control, such as automotive painting booths, But eventually, the choice of CCRs usually boils down to the first characteristic: the cost and difficulty of elevation. How to Manage the Constraint? ‘Assuming we decide to keep the constraint in Market Demand ~ one must stil monitor CCRs as potential future ‘weakest links." Fluctuations in market demand and productiservice mix can cause sudden shifts in the load on CCRs, potentially creating new constraints in a short period of time. ‘To prevent this from happening, one can calculate the current load on each CCRs and thereby estimating the "Planned Load’ bbased on sales ofders in hand. Arise inthis Planned Load gives an early warning when a new constraint is emerging and can help estimate safe delivery promise dates as well When a CCR threatens to become active, several possible actions can be taken depending upon the situation: + Increase the lead time of order delivery dates promised to customers to manage thelr expectations + Divert capacity from one product line or function to another (e.9. deploying cross-trained workers onto a different process) + Increase pricing to temporarily reduce demand (e.g, surge pricing by taxi cab operators) + Decline orders from lower priority customers, for example those with a reputation for not paying on time + Outsource work at the relevant CCR(s) + Increase capacity at the relevant CCR(s) ‘Thus, Planned Load is a critical control system that can give a warning when changes in the market might turn a critical resource Into @ constraint, so that appropriate corrective actions can be taken, before the new constraint emerges. Controlling Flow Through The Constraint Time buffers (in a make-to-order environment) or stock buffers (in a make-to-availabilty environment) provide a simple way to control flow and focus efforts towards utilizing the current resources, Through a simple color coded system, Blacks and Reds can bbe expedited, Ambers can be monitored, and Greens can be left to progress without intervention, Itis especially important to monitor these colors at the constraint or CCR location(s). They guide the operation to ensure that highest priorty items are being completed first (Blacks first, then Red, Amber and Green in that order). Periodically, the reasons for buffer penetration (missing due date performance, fresh stockouts, etc.) should be analyzed to reveal improvement areas and possible new constraints. But by the time this data reveals a resource to have become a real “trouble maker,” it might be too late to take the corrective actions in time to preserve on-time delivery. Key Takeaways About Constraints hitps twin tocinstute.org/constraint- definition himl17.03.2023, 10:14 Constraint Defition, Management & Examples - Theary of Constraints Insitute In summary, most “operational improvements” achieve negligible nancial impact. Yet, certain improvements offer the potential to generate tremendous results! (One “Active Constraint” governs Throughput at all imes. Improvements that affect performance of this constraint impact sales and hhence Throughput. Other changes do NOT affect sales. You can locate this active constraint by checking avallablity/reliablity at ‘each link. Understanding and managing the constraint is a powerful tool for genuinely improving the performance of any organization. Ignore itat your peri, Manage your constraint, ort wll manage youl Discover More About Constraints ‘Check out the below inks to more resources: 1g Steps - a Process of On-Going Improvement (POOGH) + How to Identify the Constraint + Examples of Constraints + Getting Started in TOC + TOC Institute Advisory Services + In-House Training Programs © Copyright 2021 TOC Institute hitps twin tocinstute.org/constraint- definition himl17.03.2023, 10:14 Five Focusing Stops, a Process of Or-Going Improvement - Theory of Constraints Institute THEORY OF CONSTRAINTS INSTITUTE ABOUT FUNDAMENTALS KNOWLEDGE CENTER SERVICES. CONTACT US The Five Focusing Steps (POOGI) ‘Once Dr. Goldrat, the founder of the Theory of Constraints, was challenged by an aggressive reporter o "summarize TOC in a single sentence.” Eli replied: “never mind a sentence, Il explain in one single word: FOCUSP Eli's Five Focusing Steps, also known as the Process of On-Going Improvement or POOG! for shor, serve as guideposts for driving on-going improvement. The Five Focusing Steps 5 of POOGI* Prevent inertia from becoming the ‘the constraint! everything to the constraint Exploit the constraint +2 Process of On-Going Improvement Focusing Step #1: IDENTIFY the system's constraint ‘Strengthening any link of a chain (apart from the weakest) is a waste of time and energy. Similarly, the vast majority of efforts to "improve" something in the organization fil to result in more profits for shareholders, delight for customers, or satisfaction for employees. This is because most initiatives are not focused on the constraint ofthe organization. Yet itis impossible to manage a constraint untl you find out what iis! And itis surprisingly easy to find, once you know how to look. Chack out our free Constraint Checker Too! Focusing Step #2: EXPLOIT the constraint ‘The output of the constraint governs or restricts the output of the organization as a whole, Its therefore imperative to squeeze as much as possible out of it. Maximize the utilization and productivity of the constraint (NOT ulization and productivity of non- constraints). Rather than immediately purchasing more of the constraint (by buying machines, hiring workers, increasing the advertising budget, et.) we should frst learn to use the resources that we already have more efficiently, The constraint of most organizations is not well utlized, often less than 50% on a 24x7 basis, Ifthe reasons for under-utlization ‘are not immediately clear, try measuring the constraint's OFE including the breakup of availabilty/qualityiperformance, Gather the underlying data and analyze it using Pareto techniques. Once the primary causes are identified, use fishbone diagrams and Five Why analysis to drill down to the root cause for under-performance, When the root causes are clear, eliminate them on a permanent basis. Quality and productivity tools such as Six Sigma, Poka- Yoke, design of experiments, SMED, ete, often provide the answer, depending upon the nature of the problem, Focusing Step #3: SUBORDINATE everything else to the constraint By definition, any non-constraint has more capacity to produce than the constraint sel Left unchecked, this results in bloated WIP inventory, elongated lead times, and frequent expediting/firfighting. Hence, itis crucial to avoid producing more than the ‘constraint can handle. In a manufacturing environment this is accomplished by choking the release of raw material in ine with the capacity ofthe constraint, hitpsilwwiztocinstute.orgive-ocusing-steps.html 1817.03.2023, 10:14 Five Focusing Stops, a Process of Or-Going Improvement - Theory of Constraints Institute Equally important is ensuring that the rest of the system supports the work of the constraint at all times. it must never ever be starved for inputs, or fed poor quality materials. This can be achieved by maintaining a reasonable buffer of safety stock. Similarly, other established policies and habits can hamper productivity at the constraint and must be systematically aligned to achieve ‘maximum performance. Focusing Step #4: ELEVATE the constraint ‘Once the capacity ofthe system is exhausted, it must be expanded by investing in additional equipment/land, hiring people, or the like. Warning! We tend to instinctual gloss over the first 3 steps and jump straight to elevation. Implementing the fist 3 steps properly typically expose a minimum of 30% hidden capacity within the first few months! This capacity s available free of cost, without any investment. Investing too soon raises risk unnecessarily. Only elevate once exploitation & subordination (Steps 2 & 3) is fully complete, if at al! PREVENT INERTIA from becoming the constraint! ‘Once elevated, the weak link may not remain weakest. Consider elevating other resources to retain the old constraint, depending ‘on where you wish to have the constraint in the long-term. A new constraint demands a whole new way of managing the the system, We therefore retum to Step 1, and thus begins our journey of continuous improvement. Focusing Step #! POOGI in Action - Examples Please find below some example actions that could be taken, based on which focusing step you hare on. Think of it as a starting point to gather ideas for implementing the Process of Ongoing Improvement (POOGI), This assumes an intemal constraint (not always the case) and a manufacturing-type organization. To locate your constraint, try ‘out our constraint finder tool Exploit (Utilize 24x7) + Measure OEE at the constraints + Set OEE improvement target + 24/7 operation at the constraint + staggered breaks + Provide adequate lighting & safety at constraint + Fullstaffing at the constraint + surplus! backups + Station only rained operators at the constraint + Educate constraint operators - importance! urgency of thelr job + Install quality checks immediately before the constraint + Sharp! fast tooling at the constraint + Uninterrupted consumables at constraint + Preventative maintenance at the constraint + TOMILean/Six Sigma on the constraint as appropriate + Adequate storage space before / after the constraint + Rapid material movement before / ater the constraint + Monitor OEE & improvement over time: ‘Subordinate hitpsilwwiztocinstute.orgive-ocusing-steps.html17.03.2023, 10:14 Five Focusing Stops, a Process of Or-Going Improvement - Theory of Constraints Institute Install management hotline & plant alarm at the constraint Monitor protective WIP in front of constraint multiple times per shift Expedite as required to ensure uninterrupted supply to constraint Routinely question all WIP buildup accumulating at non-constraints Educate staff: constraint first (tooling, maintenance, material movement, ete. ) Ensure raw material availabilty at all imes Ensure uninterrupted power supply to the constraint at al times Prevent stealing before! after constraint Elevate Estimate present & future capacity requirements Plan & execute expansion - no. of machines, space, operators + Expand non-constraint sprint capacity BEFORE constraint capacity + Bring old machines out of retirement, where feasible + Upgrade existing machines if feasible + Make expansions as incremental as possible Purchase finished parts outside as stopgap measure if required Repeat POOG! until constraint shifts to where you want it to be Please Note: Its probably NOT NECESSARY to complete all of the above. Rather, use them as ideas to point you in the right direction. Adapt and use as the situation requires. Surprising Facts about Constraints ‘You will always have a constraint, so choose wisely .. perhaps the most capital intensive, or energy consuming, or largest batch, or longest touch time, ete. Ifyou identify the wrong constraint, itis easily rectified and causes no permanent damage. The Five Focusing Steps auto- correct for errors made over time. ‘The constraint may appear to shift suddenly based on product mix, however this is often due to batching practices rather than actual shiting ofthe constraint. Most systems typically have ONE SINGLE RESOURCE CONSTRAINT such as a machine or department, This constraint, which may or may not be binding at any given point of ime, is referred to as the Capacity-Constrained Resource (CCR). In certain cases there may be 2-3 COR, but rarely more, Permanent constraints typically include salesimarketing (with better techniques we could always raise prices) and R&D (with more awesome products we could make far higher margins). Eventually the constraint should be stabilized; frequently shifting constraints wreck havoc on policies, procedures and people, © Copyright 2021 TOC Institute hitpsilwwiztocinstute.orgive-ocusing-steps.html