An Introduction to the Theory of Constraints

Ruhl, J. M. 1996. An Introduction to the Theory of Constraints. Journal of Cost Management (Summer): 43-48.

Summary by Jose M. Luis
Master of Accountancy Program
University of South Florida, Fall 2000

The Theory of Constraints

A systems management philosophy developed by Eliyahu M. Goldratt in the early 1980’s.
Fundamental thesis: Constraints determine the performance of any system; systems have only a few constraints.
Constraint: Anything that limits a system’s performance relative to its goal. Can be internal or external.
TOC advocates managers focusing on constraints rather than product costs.

The Goal

To make money, both now and in the future. (Not reducing costs or improving efficiencies).
In efforts to reduce costs, managers often make it more difficult for the company to make more money.
Major culprit: Cost accounting, the "number one enemy of productivity".
New type of accounting: Throughput accounting.

New Measurements ("Tell me how you will measure me and I will tell you how I will behave").

1. How much money is the company generating? – Throughput.

Rate at which a system generates money through sales (not through production).
Not the same as sales. Subtract all money not generated by the company (materials, commissions, etc.).

2. How much money does the company capture? – Inventory.

Money a system invests in purchasing things it intends to sell, including buildings & machinery.
Product inventories are liabilities, not assets. Liability: Something that frustrates achievement of the goal.
Value of product inventory does not include the value added by the system (DL, DOH), only materials.
Not important to add value to products, managers must add value to the company.

3. How much money does the company spend to operate? – Operating Expense.

All the money a system spends in turning inventory into throughput (DL, sales, managers, etc.)
Depreciation is also Operating Expense; represents a cost of turning inventory into throughput.

Priorities on how to achieve the goal

Traditional Management Practice	TOC
Decreasing operating expenses. Increasing sales. Little attention paid to inventory.	Increasing throughput. Decreasing inventory. Decreasing operating expenses.

Bottleneck: A resource on which the load placed exceeds its available capacity.

If demand exceeds capacity, there must be at least one bottleneck in the production process.
There can be one or more bottlenecks, and their location may change.
Capacity Constraint Resource (CCR) - Limits the entire system’s throughput.

Gaps in the production line are explained by

Dependent events – One operation must be completed before a second operation can begin.
Statistical fluctuations – The time required to complete a task varies slightly every time. The fluctuations accumulate and lead to reductions in average speed.

Drum-Buffer-Rope systems

Drum – The CCR. Its production rate sets the production rate for the entire plant, downstream & upstream.

Buffer – Placed in front of the drum (upstream) to keep it busy for a specified time. Purpose: No throughput disruption.

Rope – Actions taken to tie the rate at which material is released into the plant (at the first operation) to the production rate of the drum (CCR). Purpose: Ensure WIP inventory doesn’t exceed the level needed for the buffer.

Ways to prevent wasting CCR time

Always maintain a buffer in front of the CCR.
Put quality control in front of CCR to prevent CCR from working on defective units.
Make sure CCR works on parts that will immediately become throughput (not inventory).