Theory of Constraints

Revision as of 22:50, 21 September 2015

The theory of constraints is a management paradigm that advocates improvement of a system by looking at constraints rather than the opportunities. The big idea of the theory is best described with the idiom: “a chain is no stronger than its weakest link”, meaning that the performance of the system is no greater than the limits of its constraints. System performance improvement is thus achieved by adjusting the system to the most limiting constraint.

Key assumptions

An assumption about the management of organizations has to be made in order to apply the theory of constraints. It is assumed that the work of organizations can be measured by looking at three key measures:

1. Throughput, which is the rate at which the system generates revenue (e.g. the quantity of sold goods).
2. Inventory, which is the money invested in the purchase of materials required to generate revenue (e.g. purchase of raw materials, outsourced components, etc.).
3. Operational expense, which is the money spent on turning inventory into throughput (e.g. rent of factory, employee pay, costs of running machinery, etc.). %%REFERENCE3%%

Some necessary conditions must be met before applying the theory of constraints. Issues of safety, quality, legal obligations, etc. must be satisfied and cannot be included in the analysis of constraint. Where the goal for many organizations is to generate revenue, for NGOs it is a necessary condition to sustain themselves by making money. As a consequence of this, it is of utmost importance to possess financial expertise when making decisions regarding throughput, inventory, and operational expense. %%REFERENCE3%%

The five focusing steps

The theory of constraints assumes that the performance of a system is limited in achieving its goals by at least one constraint. By identifying the most limiting constraint, improvements to the performance of the system can be introduced. Examples of system improvements can be either to increase the throughput or to decrease the operational expense.

The five focusing steps describe the process of applying the theory of constraints:

1. Identify the constraint(s) of the system.
2. Decide how to utilize the constraint(s) in order to improve the system.
3. Make the exploit of the constraint(s) a top priority and rearrange the rest of the system to the previous decision.
4. Implement the changes and dissolve the limiting constraint(s).
5. Be aware whether a constraint has been broken in the previous steps. If so, begin the process from step 1 again. %%REFERENCE4%%

The steps are designed to focus on the constraints of a system in order to improve it by recognizing and utilizing them to the advantage of the system.

Types of constraints

Basically, a constraint can be anything that limits the performance of a system and prevents a it from attaining its goals. Constraint can take many shapes and be found in many place, but within the theory of constraints only the most limiting constraints are taken into consideration. Internal constraints are evident when the system is incapable of satisfying a given market. The removing of an internal constraint will allow for a greater throughput and thus attempt to satisfy the market. External constraints are evident when the demand from a given market is less than the capacity of the system. In this case, measures must be made in an attempt to increase the demand for its throughput.

More specifically, internal constraints include:

Equipment

- Insufficient number of machines

- Poorly utilized equipment

- Understaffed work stations

- Outdated equipment, etc.

People

- Lack of skilled employees

definition 2-2