Theory of Constraints

Theory of constraints 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. 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%%