The Theory of Constraints (TOC) is a body of practical know-how developed by Dr. Eli Goldratt, to finally enable management to effectively and systematically define, build and implement the connection from where an organization finds itself today, to where it needs to be meet its goals.  Through systematic use of TOC methodologies, an organization's management can clearly identify what needs to be changed, produce breakthrough ideas and approaches, construct a robust solution that satisfies short and long term objectives and create a clear picture and road map for al levels and functions to implement the strategy. 

There are proven logistical solutions in functional areas such as Production, Distribution, and Project Management. 

TOC has helped 

·        Bethlehem Steel- Sparrows Point Division to improve its on time delivery from 60-75% to over 99%.

·        General Motors-Cadillac Division to improve its delivery time from 75 days to 19 days, fill rate (delivery promises kept) from 60% to over 95%, and inventory to 20% of earlier inventory.

·        Ford Motor Company-Electronics Division to reduce its lead-time from 8.5 days to 2.2 days to currently less than two shifts.

·        Avery Dennison to increase net sales by 23% and market share by 17-25%.

·        Harris Semiconductor to increase inventory turns from 2 to 7 to 10.

·        Harris Semiconductor to shrink Project execution time for its 8" Wafer plant from Industry Benchmark of 36 months to 13 months.

·        Boeing-Printed Circuit Board Center to reduce scrap by 90%, improve lead-time by 75%, and increase output by 75%.

·        An Indian Capital Goods Manufacturer to turn around in 100 days that had been losing money in the previous two and half years without laying off employees.

The core idea in TOC is that every profit making enterprise must have at least one constraint.  If it were not true, then the system would produce an infinite amount of whatever it strives for.  In the case of a profit-making enterprise, it would be infinite profits.  A business manager who wants more profits must manage constraints because a constraint is a factor that limits the system from getting more of whatever it strives for.  There is really no choice in this matter.  Either you manage constraints or they manage you.  The constraints will determine the output of the system whether they are acknowledged and managed or not.

Most businesses can be viewed as a linked sequence of processes that transforms inputs into saleable outputs.  In TOC, an analogy often is drawn between such a system and a chain.  If you want to improve the strength of a chain, what is the most effective way to do it?  Do you concentrate on strengthening the strongest link?  Do you concentrate on strengthening the largest link?  Do you apply efforts uniformly over all the links?  Or should you attempt to identify the weakest link and concentrate efforts on strengthening that single link?  Clearly the last course will bring the biggest benefit in relation to the effort expended.

 Continuing with this analogy, the procedure to follow in strengthening the chain is straightforward.

 ·        Identify.  First, identify the weakest link, which is the constraint.  Identifying it may not be easy because most business processes attempt to cope with fluctuating demands and random disruptions by maintaining buffer inventories at each step of the process.  These work-in-process inventories hide problems, obscure interdependencies, and make it difficult to identify the real constraint in the system. 

·        Exploit.  Second, don't try to subject the system to too great a load.  If a larger load is placed on the chain than the weakest link can handle, the chain will break.  The weakest link should set the pace for the entire system.  Get the most from this link without

 ·        Third, concentrate improvement efforts on the weakest link

 ·        Fourth, if the improvement efforts are successful, eventually the weakest link will improve to the point it is no longer the weakest link.  Any further efforts to improve the former weakest link will provide little or no benefit.  At this point, the new weakest link must be identified, and the improvement efforts must be shifted over to that link.

 For a business organization, with the goal being to make money now as well as in the future, TOC defines three operational measurements that measure whether operations are working toward that goal.  They are:

 Throughput: The rate at which the system generates money through sales.  This is considered to be the same as Contribution Margin (selling price -- cost of raw materials/ all truly variable costs).  Labor costs are considered to be part of Operating Expense rather than throughput.

 Continuing with this analogy, the procedure to follow in strengthening the chain is straightforward.

 ·        Identify.  First, identify the weakest link, which is the constraint.  Identifying it may not be easy because most business processes attempt to cope with fluctuating demands and random disruptions by maintaining buffer inventories at each step of the process.  These work-in-process inventories hide problems, obscure interdependencies, and make it difficult to identify the real constraint in the system.

 ·        Exploit.  Second, don't try to subject the system to too great a load.  If a larger load is placed on the chain than the weakest link can handle, the chain will break.  The weakest link should set the pace for the entire system.  Get the most from this link without

 ·        Third, concentrate improvement efforts on the weakest link 

·        Fourth, if the improvement efforts are successful, eventually the weakest link will improve to the point it is no longer the weakest link.  Any further efforts to improve the former weakest link will provide little or no benefit.  At this point, the new weakest link must be identified, and the improvement efforts must be shifted over to that link.

For a business organization, with the goal being to make money now as well as in the future, TOC defines three operational measurements that measure whether operations are working toward that goal.  They are: 

Throughput: The rate at which the system generates money through sales.  This is considered to be the same as Contribution Margin (selling price -- cost of raw materials/ all truly variable costs).  Labor costs are considered to be part of Operating Expense rather than throughput.

The following four measurements are used to identify results for the overall organization:

      Net Profit = Throughput - Operating Expense

      Return on Investment (ROI)= (Throughput - Operating Expense) / Inventory

      Productivity = Throughput / Operating Expense

      Turnover = Throughput / Inventory

 Given the measurements as described, employees can make local decisions by examining the effect of those decisions on the organization's overall Throughput, Inventory, and Operating Expense.  A decision that results in increasing overall Throughput, decreasing the overall Inventory or decreasing the overall Operating Expense for the firm will generally be a good decision for the business.

 The Theory of Constraints does away with much of cost accounting.  It is clear that application of cost accounting principles (primarily the allocation of costs in order to make decisions at the local level) leads to poor management decisions at the department as well as in upper levels of the organization.  In fact, TOC virtually eliminates the use of Economic Order Quantities (EOQ), production lot sizes, deriving product costs, setting prices, determining productivity measures, and the use of performance incentives.

Most individuals will readily see the use for the Theory of Constraints in the improvement of production scheduling or in improving manufacturing.  This is simply incorrect.  Although it is true that the Theory of Constraints provides us with simple examples in the manufacturing environment, TOC is truly applicable to any process in any organization.  This includes universities, hospitals, service providers of all varieties, government, and, of course, manufacturing.