An Introduction to the Theory of Constraints (TOC)

Decision Making – Focus on the Goal

Almost every manager is aware of Pareto’s law, the important few – the trivial many, often thought of as the 80/20 rule. 80% of results are generated by 20% of the actions. To improve your effectiveness, you only need to focus on the 20%, and you’ll get almost all of the results (80%). This simple truism is generally true, but not in systems with strong dependencies among entities. In these systems, the rule is closer to 99/1. 99% are relatively trivial, and only 1% are important.

This is the world of organizations.

The TOC is the science of making decisions in that world.

It starts with articulating the Goal. The purpose of the organization.

Throughout the literature, the goal of the enterprise is stated as making more money now and in the future. This is rooted in the idea of ownership and the rights of owners to set the direction of the enterprises in which they have an interest. Who gets to establish the purpose of any system? Its owners. For publicly held companies, it is clear that the motivation of its owners (stockholders) is profit. Therefore, the enterprise must be directed toward that end.

That’s not to say that the pursuit of increasing profit is separate from anything else. The goal is to make money in the future as well. To fulfill this aspect of the goal, we recognize our boundary conditions – necessary conditions that must be met to achieve the goal. You can’t mistreat your workers for long; it will sacrifice the future. You can’t disobey environmental regulations for long, or your profit will be impacted by fines, negative market response, etc.

This goal (making money) is not universal. Charities, governments, churches, and schools are (generally) not directed toward making more money now and in the future. Maybe your private company is not directed toward that goal. That’s fine. TOC is not about the goal; it’s about pointing the organization toward achieving the goal. What matters is that the goal is clearly stated and that a measurement is in place to determine whether you are getting closer to it. If you’re a non-profit, the goal is not measured in money, but money is a necessary condition to achieve that goal.

The objective of using TOC is to improve your capabilities and move you closer to achieving your goal. More money now and in the future, fewer people without homes now and in the future, more students better prepared to enter the workforce now and in the future, etc. Your efforts as a manager and leader are to move the organization closer to its goal, now and in the future.

Marking the distinction between THE goal and the necessary conditions is the first step toward focusing. As a matter of focus, the necessary conditions are those factors that are monitored but not improved unless there is a violation.

The goal is your “true north,” and the chosen strategy to achieve it. The necessary conditions are the boundaries. The distinction between the two is clear when you satisfy that necessary condition. For example, cash flow. If you have enough, it is not a matter that requires full attention. If you don’t have enough, nothing else matters, not even the goal!

A Chain is Only as Strong as its Weakest Link

Achieving the Goal is a process subject to dependencies and variation. To make money, one must have a product, a customer to buy it, a system to deliver it, and a way to get paid. How many people does it take to disrupt that process? Just one. There’s your dependency. We know Murphy lives, so there’s your variation.

Making money – achieving your goal is like managing a chain, where each link (action) and resource (strength) is connected to another. We all know that the strength of the chain is determined by its weakest link. Organizations are like chains. There is always a weakest link. The challenge is identifying that link, then moving the organization to strengthen it. Since the strength of the chain is always determined by the weakest link, there will always be one. If that is strengthened, there will still be a weakest link.

The weakest link is the Constraint. It determines your profit, your return on investment, and your performance in your market. If you don’t know where it is, you are shooting in the dark. A serious pursuit of the Goal implies a serious pursuit of breaking the Constraint. Directing your attention and resources to improving other areas may improve the local situation but will not improve the global situation.

Since the Constraint only exists in the context of its goal, actively breaking the organization’s constraint or moving it to a ‘better’ location moves the organization closer to achieving its goal (more and more).

A Bottleneck is Not the Constraint

Often, we see our progress blocked by scarcity, not enough resources to meet demand. It may seem like the constraint bounces around the organization without rhyme or reason. This is evidence that you do not have an internal resource constraint, but rather that your organization does not know where the constraint lies and thus cannot react to it. Bottlenecks are temporary; the real constraint is difficult to move. It’s expensive. Scarce.

Engines of Disharmony / the Core Conflict

In the early development of the TOC, the Constraint was considered a physical thing, such as a machine or a capability. This evolved into viewing the Constraint as a set of rules or policies that govern the use of physical resources. This realization led to the search for a method to identify these ‘erroneous’ policies, and the Thinking Processes were developed.

Over time, TOC practitioners found that erroneous (sub-optimal) policies are developed as a reaction to resolve a conflict in the system. I.e., short-term action vs. long-term action, or satisfying customers vs. satisfying shareholders. Typically, the resolutions are compromises among necessary conditions, sacrificing a bit of each to find an acceptable solution. As organizations become more complex, these compromises become the fabric of how the organization is run, and the compromises also become more complex.

These conflicts, in which a necessary condition is sacrificed, are related to one another and can be traced to a single core conflict. Many problems stem from this unresolved conflict. This conflict and the resulting compromises become the Engines of Disharmony, creating friction in the organization and blocking progress.

This core conflict becomes the true Constraint. Identifying and resolving it is the holy grail of a TOC-based strategy.

Strategic Implications of the Theory of Constraints

The strength of any chain is determined by its weakest link. No chain is infinitely strong; therefore, the strength of even the strongest chain is still determined by its weakest link.

Your organization will always be constrained.

Strategists should not be chasing the weakest link; they must decide where that link will be. Your strategy and tactics are to move the Constraint to a location where it propels your organization closer to its Goal now and in the future. You will anticipate the movement of the Constraint and build supporting structures to sustain that location, ideally before it moves.

Breaking Constraints

Is the constraint internal to the organization or external? Is it market size (demand) or an internal capability that prevents you from meeting all the demand?

Viable Vision [1] strategies are built on developing a decisive competitive capability (edge) or improving an area of operation, then exploiting this new capability to gain market share. For example, if there is excess production capacity (the desired Constraint) or underserved market(s), a strategy would focus on customer-facing activities, such as increased sales activity (the current bottleneck) in a specific market segment or new products (a Constraint, but not the one that is wanted) that create more demand in segments where there is opportunity.

The strategy could be directed toward achieving a specific objective, such as dominating a market or introducing a new technology. The execution of the strategy would be based on moving the Constraint from one area of the company, such as sales capacity, to another area of the company, say, product development.

Understanding the current constraint versus the desired location helps decision makers choose the best alternatives, moving the organization in a practical way, closer and closer to its goal.

The Applications of the Theory of Constraints

The applications or solutions of the Theory of Constraints are:

• The 5 Focusing Steps

• Drum Buffer Rope, a production scheduling technique

• TOC measurement systems (Throughput, Inventory, Operating Expense), management financial decision-making

• Critical Chain Project Management, project scheduling and execution

• Demand-Pull Replenishment (the Distribution Solution)

• TOC in Sales & Marketing

• The Thinking Processes, analyzing, creating solutions, and implementation for complex systems

From a strategic standpoint, we don’t really need to know the details of these solutions, only their rough contours and effects.

I want to note that as we (in the TOC community) came to understand these applications better over time, we also came to understand the TOC better. The TOC wasn’t created or even named until a few years after the Drum Buffer Rope solution was developed. Over the years, we struggled to grasp the essence of TOC, and that has probably contributed to its lack of recognition as a tool for strategists.

5 Focusing Steps

The Focusing Steps of TOC are a checklist of sorts.

• IDENTIFY the system’s constraint.

• Decide how to EXPLOIT the constraint. Maximize its use.

• SUBORDINATE everything else to the decisions made to your exploitation decisions. Ensure the 99% does not get in the way of the 1%.

• If, in the prior steps, the constraint has not been broken, ELEVATE the system’s constraint.

• Go Back to step #1.

This may seem a bit tactical – like you’re chasing your constraint in infinite loops. When you first apply the TOC, you’ll find yourself in that mode. As you mature in your use of the TOC, you’ll find yourself using these steps in a more conceptual manner as you develop your strategy, choosing the Constraint rather than chasing it.

Even so, it implies a sequence for attacking the Constraint. Know where it is. Don’t waste it. Ensure no other resources are preventing its full use. Then get more, break the Constraint. Find the new one.

Strategically, the focusing steps help you sort out the types and sequence of actions you’ll take. Theory of Constraints and Strategy covers their strategic use.

Drum Buffer Rope

The main idea of drum-buffer-rope (DBR) is to identify the constraint in a sub-system – production – and then follow the focusing steps. This is what happened in the book The Goal.

During this process, the characters redefined operational efficiency, demonstrated the impracticality of monitoring everything during execution, and introduced the concept of Time Buffers.

What the DBR scheduling method does (compared with other models of production management) is significantly improve operational efficiency, reduce production lead times, and improve delivery reliability.

TOC Measurement Systems (Throughput, Inventory, Operating Expense)

Also introduced in The Goal, T, I, & OE were used as simplified financial metrics for decision-making. The system accomplishes the elimination of distortions in decision-making caused by cost allocation methods. These metrics improve alignment in decisions, resulting in better resource allocation throughout the organization.

Critical Chain Project Management

The method for planning, scheduling, and executing projects is a local solution (for projects or portfolios of projects) that identifies the constraint as the longest chain of resources and tasks, with the Goal being the delivery of the project. The methodology further refines the use of time buffers in processes with greater uncertainty and variation.

CCPM dramatically reduces the time to deliver projects and improves productivity and delivery reliability.

Demand-Pull Replenishment

Sometimes called the “Distribution Solution” of the TOC, this solution combines time-buffering management with a demand-based replenishment mechanism to improve availability while reducing inventory investment. Often delivering a 50% improvement over traditional methods, it mitigates the bullwhip effect in supply chains.

As with the other solutions, the supply chain is treated as a subsystem, with the Constraint being shelf space and the Goal being sales (of SKUs).

TOC in Sales and Marketing

This application is probably the most strategic because it considers customer needs across dimensions beyond delivery reliability. When the Constraint is in the market, internal capabilities take a back seat. The application is broken into:

• The Un-refusable Offer (sometimes called the Mafia Offer)

• The Layers of Resistance (sells the offer)

An Un-refusable Offer (URO) is one that is so compelling, has so much value, and is so good that customers cannot say no when presented with the offer. This offer would be created by having a deep understanding of the customer and the industry, and by identifying the core problems.

The unique feature of a URO is that it is a complete solution that addresses the customers‘ core problem as it relates to doing business within their industry. It is not a restatement of the unique value proposition, although it certainly fits that definition. Creating a URO typically requires that the supplier of the offer do something different (e.g., make operational improvements) to address the customers’ core problem.

The Layers of Resistance is a framework for selling the offer and is often used on its own to build buy-in for a new idea or solution. The Layers are:

• We don’t agree on the problem being addressed

• We don’t agree on the direction of the solution

• We don’t agree the solution solves the problem

• We see that the solution, if implemented, causes negative effects

• We see obstacles blocking a realistic implementation of the proposed solution

• Fear of the unknown

The steps are to be accomplished in sequence to gain agreement or buy in to the proposed solution.

What is perceived as resistance becomes a tool for managing organizational change (or selling a solution) by systematically addressing objections and obtaining buy-in.

The Questions on Technology are thematically similar.

• What is the power (capability) of the new technology?

• What limitation does it diminish?

• What are the old rules that supported the limitation?

• What are the new rules that should be used now with the new capability?

• What technology changes are required to support?

• How to cause the change?

The TOC (constraint-busting) has been applied to the sales process itself, breaking the constraint on sales staff interaction with the customer and enabling massive increases in sales productivity. This approach challenges a fundamental assumption in sales process engineering, namely that sales should be the sole responsibility of autonomous agents.

What TOC does for sales and marketing is to identify ‘blue ocean’ strategies to uncover new market opportunities and rethink the way the solution is sold to the customer, from articulating value to communicating it to customers and markets.

The Thinking Processes (TP)

The objective of the TP is to reliably answer the question of where to focus. It makes clear distinctions between causes and effects, exposes hidden assumptions, and identifies the relationships among them. It is typically used when developing a deep understanding of a system with an eye toward improving it.

The TP is a set of tools that answer the 3 questions of change.

• What to change? Defining the core problem – the elements that are the causes of the undesirable effects (symptoms).

• What to change to? Defining the changes to be introduced to eliminate the current undesirable effects without creating new ones.

• How to cause the change? Mapping the actions from the current state to the future state without creating new problems.

The TP consists of the Current Reality Tree and Evaporating Cloud, which address the first question. The Future Reality Tree and Prerequisite Trees address the second, and the Transition Tree addresses the third.

A special category of the TP is devoted to the most recent development, the Strategy & Tactics Tree. It is most frequently used to answer the 3rd question or in situations where the first 2 questions are not necessarily analyzed in depth.

These capabilities are the typical starting point for TOC-based strategy. Anyone can break a single constraint or implement a single solution. The strategy dictates how to create, capitalize on, and maintain that decisive competitive edge.

Bibliography

Goldratt, Eliyahu & Jeff Cox, (1984), The Goal; Excellence in Manufacturing, North River Press

Goldratt, Eliyahu, (2011), Theory of Constraints Handbook Chapter 1 Introduction to TOC, McGraw Hill

Goldratt, Eliyahu, (2012), The Gestalt of TOC Part 1, YouTube

Goldratt, Eliyahu, (2017), Engines of Disharmony, YouTube https://youtu.be/nnejDyoR_Fg

Cox III, James F., Lynn H. Boyd, Timothy T. Sullivan, Richard A. Reid, and Brad Cartier, 2012, The Theory of Constraints International Certification Organization Dictionary, Second Edition, https://www.tocico.org/resource/resmgr/dictionary/tocico_dictionary_2nd_editio.pdf

Roff-Marsh, Justin, 2015, The Machine: A Radical Approach to the Design of the Sales Function (Book 1), Independently Published

Goldratt, Eliyahu, (2008), The Ever-Flourishing Company – Part One https://www.youtube.com/watch?v=fv7SCRNZggk

Goldratt, Eliyahu, (2008), The Ever-Flourishing Company – Part Two, https://www.youtube.com/watch?v=ij71X6cxv-I&t=158s

Barnard, Alan, (2016), Applying Theory of Constraints to developing Business Strategy

[1] Viable Vision is a strategy aimed at converting a firm into an ever-flourishing one.