Constraint Management

Goldratt maintains that ongoing improvement requires efforts to increase Throughput, decrease Investment, and decrease Operating Expense. Management traditionally emphasizes reduction of Operating Expense first, followed by increasing Throughput and, finally, Investment reduction. But according to Goldratt the biggest gains are to be realized by first increasing Throughput, then by reducing Investment. Operating Expense reduction should be the third priority. Goldratt's rationale for this order of priorities involves the law of diminishing returns: both Operating Expense and Investment have a theoretical lower limit of zero (and a practical limit considerably higher), but theoretically there is no upper limit to the increase of Throughput.

The Theory of Constraints likens each system (company) to a chain, or a network of chains. In any chain there is one weakest link which limits the performance of the entire chain. This weakest link is the system's constraint. Improving the performance (Throughput) of the chain requires strengthening that weakest link; improving any other link will cost money (increase Operating Expense) but will not contribute to the increased strength of the entire chain as long as the weakest one is ignored. However, as soon as that weakest link is strengthened to the degree that it is no longer the weakest link, (i.e., the constraint is broken), the next weakest link becomes the constraint.  

The primary benefit of the TOC approach is its orientation toward the output of the entire system, rather than a compartmentalized look at components which may have little or no positive effect on overall performance.   In every system there is typically an “elephant in the parlor” that overshadows all other deficiencies. With a TOC focus, a system's constraint can be precisely located, whether it resides within the company or outside (e.g., the market place). If the constraint is internal, it can be readily ascertained whether the constraint is physical (i.e., a machine, person, or facility) or a policy which inadvertently discourages improved performance.  Efforts to break the constraint can then be applied without delay or distraction, for the least possible expenditure of time, money and energy.

The fourth determinant is a set of powerful tools that Goldratt created for dealing with system constraints. Foremost among them is a five-step process which ensures that improvement efforts remain on track toward system level improvement, rather than digressing into non-productive sub-optimization of system components. These five steps include:

1. Identify the system's constraints. Determine precisely what limits the system's performance.
2. Decide how to exploit the system's constraint. Eliminate inefficiency from the constraint.
3. Subordinate everything else to the above decision (step #2). Make effective management of the existing constraint the top priority.
4. Elevate the system's constraint. Break the constraint by increasing its capacity above the level of demand.
5. If, in the previous steps, a constraint has been broken, go back to step 1, but do not allow INERTIA to cause a new constraint. Go back and find the next weakest link which limits system performance.

With the ongoing improvement process now defined, Goldratt introduces a rigorous five-stage logical thinking process which zeroes in on what to change, what to change to, and how to effect the change with a minimum of errors and false starts. These processes include the current reality tree, the evaporating cloud, the future reality tree, the prerequisite tree, and the transition tree. In concert with the five focusing steps mentioned above, these logical thinking processes provide a contextual basis from which to apply more commonly known quality tools, such as statistical process control, design of experiments, quality function deployment, and other structured problem solving methods.

Is cost reduction passé?  Of course not.  But it should be viewed in its proper context as part of a larger strategy to realize the company's goal, but not necessarily the most important part.

By now it's probably obvious that there is considerably more to the Theory of Constraints than is possible to address here. If you're interested in learning more about it, try Goldratt's book, The Goal, available in the business section of most bookstores.