How does TOC help companies:
An interview with Ravi Gilani, Goldratt India
What is it that limits your organization from increasing its profits year after?
Do you know of any organization that reports infinite profits? Certainly none. This verifies that there is a constraint that limits your performance. The constraint might be production capacity, or ability to generate new orders, or capability to procure raw material, or even the market size itself. If you can find a way to manage the constraint you can dramatically increase sales, cash and profit without any significant investment.
In an interview to Industrial Business Mart, Ravi Gilani shares his experiences with Theory of Constraints (TOC) implementation in India.
Highlights from the interview
- In colloquial usage, constraint refers to any obstacle that impedes progress. In TOC terminology, constraint is used for the leverage point. It is akin to the weakest link in a chain. To improve the strength of the chain, the first step is to increase the strength of the weakest link.
- The common assumption is that system performance is the sum total of parts performance. misleading. System performance is controlled by the performance of its weakest link i.e. the constraint. And in most cases, the constraint is a policy of the top management as reflected in its measurements. When individual KRAs are not aligned with the overall goal measurement of the company, improvement in one area does not improve the performance of the company.
- The decision makers of successful enterprises often become overambitious and start expanding their business without taking into account that market demand may not grow at the same pace. They invest in new facilities, new products, new markets etc. without taking into account increasing cash and working capital requirements. In turn, their sales drop and this reduction in sales impacts profit and cash, and the downward spiral may lead to a cash constraint. The key to overcoming cash constraint is for the decision makers to accept that they are facing cash constraint.