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Theory of Constraints Handbook by James Cox III and John Schleier (McGraw-Hill Professional) The definitive guide to the theory of constraints In this authoritative volume, the world's top Theory of Constraints (TOC) experts reveal how to implement the ground-breaking management and improvement methodology developed by Dr. Eliyahu M. Goldratt. Theory of Constraints Handbook offers an in-depth examination of this revolutionary concept of bringing about global organization performance improvement by focusing on a few leverage points of the system. Clear explanations supplemented by examples and case studies define how the theory works, why it works, what issues are resolved, and what benefits accrue, and demonstrate how TOC can be applied to different industries and situations.

Theory of Constraints Handbook covers:

• Critical Chain Project Management for realizing major improvements in delivering projects on time, to specification, and within budget
• Drum-Buffer-Rope (DBR), Buffer Management, and distribution for maximizing throughput and minimizing flow time
• Performance measures for applying Throughput Accounting to improve organizational performance
• Strategy, marketing, and sales techniques designed to increase sales closing rates and Throughput
• Thinking Processes for simple and complex environments
• TOC methods to ensure that services actions support escalating demand for services while retaining financial viability
• Integrating the TOC Thinking Processes, the Strategy and Tactic Tree, TOC measurements, the Five Focusing Steps of TOC, and Six Sigma as a system of tools for sustainable improvement

Beginning in the early 1980s with the OPT software, a software package for scheduling manufacturing operations, Dr. Eliyahu M. Goldratt started applying the concepts of the hard sciences' to problems in organizations. Later, with the publication of The Goal in 1984, Dr. Goldratt launched a series of revolutionary concepts aimed at bringing about improvement in the global performance of organizations by focusing on a few leverage points of the system. These revolutionary ideas of Theory of Constraints go to the very core of how things work in the real world. They focus on Constraints as a centerpiece in the definition and management of production work flow in manufacturing, administrative processes, project management and the like. Holistic thinking is emphasized throughout, shifting the focus on work direction and measurement from local efficiencies to Throughput of the entire system, buffering the system to protect it from the statistical fluctuation caused by unexpected problems (Murphy), Parkinson's Law, etc. This is fortified with clear guidance on placement of buffers in the flow of the system and simple tools for "Buffer Management" as a way of achieving the best focus on priority actions. By taking a systems view and focusing the cause-and-effect relationship of the leverage points to global performance, Goldratt invented new management concepts and applications in production, project management, finance, accounting and performance measurement, distribution and supply chain, marketing, sales, managing people, and strategy and tactics. The concepts are robust with applications appearing in manufacturing, services, engineering, government, education, medicine, prisons, banking, and professional, scientific, and technical services and other service industries.

Perhaps Dr. Goldratt's most important contributions are the Thinking Processes which employ structure and language to lay out true cause and effect in defining problems and laying out conflict dilemmas and their solutions. They have been taught and used effectively in all levels of education from pre-kindergarten through PhD research. On a grand scale they provide a suite of complementary problem-solving and decision-making tools based on using the scientific foundation of cause-and-effect logic, with steps for verification and validation. While they are applied in strategy, development, marketing, sales, production, distribution, finance, and accounting, they are useful for addressing personal problems and have even been used in teaching prisoners how to deal with the issues they face.

Theory of Constraints concepts and tools are aimed at one overriding objective: bringing about a process of ongoing improvement in enterprises. That said, the purpose of this book is to provide "hands on" guidance from the world's top experts on how to implement these TOC capabilities. This guidance is buttressed by clear definition on how they work, why they work, what issues are resolved and what benefits accrue. Leading practitioners provide guidance based on their hands-on implementation experience. Academic authors give a review of the wealth of literature on why to move from the traditional discipline to each TOC discipline and a review of the TOC literature in that discipline. Indeed these ideas are of such a scope that this Handbook required 44 authors to explain them.

There is a famous story about a gentile who approached the two great Rabbis of the time and asked each, "Can you teach me all of Judaism in the time I can stand on one leg?"

The first Rabbi chased him out of the house, however, the second Rabbi answered: "Don't do unto others what you don't want done to you. That is all of Judaism, the rest is just derivatives. Go and learn."

Can we do the same; can we condense all of TOC into one sentence? I think that it is possible to condense it to a single word—focus.

Focus

There are many different definitions to the word focus, but a good starting point is a simple definition such as "Focus: doing what should be done."

In almost any system, there are plenty of actions that will contribute to the performance of the system, so what is the difficulty in focusing? True, we can't take all the beneficial actions because we don't have enough time or enough money or enough resources, but the more we do, the better it is. This naive view was shattered by Pareto with his 80-20 rule. What Pareto proved is that 20 percent of the elements contribute 80 percent of the impact. Therefore, when we can't do it all, it is of the utmost importance to properly select what to do; it is of the utmost importance what we choose to focus on.
However, as Pareto himself pointed out, the 80-20 rule is correct only when there are no interdependencies between the elements of the system. The more interdependencies (and the bigger the variability), the more extreme the situation becomes. In organizations, there are numerous interdependencies and relatively high variability; therefore, the number of elements that dictate the performance of the system—the number of constraints—is extremely small. Using Pareto's vocabulary, one might say that in organizations 0.1 percent of the elements dictate 99.9 percent of the result. This realization gives new meaning to the word focus.

Constraints and Non-Constraints

There isn't a more grave mistake than to equate non-constraint with important.

On the contrary, due to the dependencies ignoring a non-constraint can impact the constraint to the extent that the performance of the entire system severely deteriorate What is important to notice is that the prevailing notion that "more is better" is correct only for the constraints, but it is not correct for the vast majority of the system elements—the non-constraints. For the non-constraints, "more is better" is correct only up to a threshold, but above this threshold, more is worse. This threshold is dictated by the interdependencies with the constraints and therefore cannot be determined by examining the non-constraint in isolation. For the non-constraints, local optimum is not equal to the global optima; more on the non-constraints does not necessarily translate to better performance of the system.

We now recognize that the vast majority of the elements of a system are non-constraints. We also recognize that for non-constraints more might not be better but worse. So, what must be the unavoidable result of following the prevailing notion that more is better? The number one reason for not doing what should be done is doing what should not be done.

We don't have a choice but to define focus more narrowly: do what should be done AND don't do what should not be done.

Measurements

According to cost accounting, when operations produce they absorb cost into the inventory and this cost absorption is interpreted as increasing profit. In other words, the cost-accounting concept encourages any production, even on a non-bottleneck, even if it i5 above the threshold. It is no wonder then that the first implementations of TOC clashed with cost accounting. It was mandatory to develop an alternative. Almost immediately, Throughput Accounting (TA)—a system based on simple definitions of Throughput (T), Inventory (I), and Operating Expense (OE)—was proposed alongside the explanation of the difference2 between the Cost World and the Throughput World.

The Goal and The Race

Rapidly, the realization of the crucial impact of bottlenecks gave rise to a collection of actions that were previously deemed inefficient and now were recognized as the most important actions to be taken. "What should be done" now took on new meaning.

No less important was the recognition that it is impractical to monitor each non-bottleneck separately and therefore constructing and implementing a system to prevent the overproduction of non-bottlenecks was essential (Drum-Buffer-Rope [DBR] and Buffer Management [BM]). The understanding of "What should not be done" was even more tantalizing.

This body of knowledge was captured in detail in The Goal (Goldratt and Cox, 1984) and conceptually explained in The Race (Goldratt and Fox, 1986).

Other Environments

The clear logic, the simplicity, and the rapid results that TOC provided in production caused other environments to try to implement the same. Unfortunately, some of them were so different that even the constraint was different in nature. The constraint in project environments is not bottlenecks but the critical path (or, more accurately, the critical chain). The constraint in distribution has nothing to do with bottlenecks. It is either cash (wholesalers) or the number of clients that enter the shop (retail). The term bottleneck started to be misleading; it had to be replaced with the broader term constraint. That was the time (1987) when the term Theory of Constraints3 was coined and a precise verbalization of the focusing process was offered—the five focusing steps.

That was not enough. Applications for proper guidance of the non-constraints in distribution' (blocking the tendency to push the merchandise downstream [replenishment to daily consumption]) and in project environments (blocking the tendency to buffer the individual tasks [Critical Chain Project Management]5) had to be developed in full.

The Thinking Processes

Only when environments other than production had been dealt with using TOC did the paradigm shift dictated by the narrower definition of focus fully surface. To focus properly, the following questions had to be answered: How do we identify the constraint? What are the decisions that will lead to better exploitation? How do we determine the proper way to subordinate the non-constraints to the above decision? And how do we reveal more effective ways to elevate the constraint? It became apparent that even the best available practices were not delivering the required answers, and relying on intuition was not enough.

The standard ways to identify the needed actions, the standard ways to focus the improvements, were obviously not adequate. They usually started with a list of problems, of gaps between the existing situation and the desired situation. The gaps were quantified and, following the Pareto principle, items at the top of the list were taken as the targets for improvement.

This approach leads, at best, to just marginal improvements, since at the base of the approach is the erroneous assumption that the gaps are not interdependent. When the interdependencies are taken into account, it becomes apparent that the gaps are nothing but effects, undesirable effects (UDEs) of a much deeper cause. Trying to deal directly with the UDEs does not lead to the recognition of what actions should be taken. Actually, it leads to many actions that should not be taken. There was a crying need to provide a logical, detailed structure to identify the core problem, to zoom in on the ways to remove it, and to do so without creating new UDEs. From 1989 to 1992, the Thinking Processes of TOC were successfully developed and polished'.

The Market Constraint

When TOC is implemented in operations, the improvements are substantial to the extent that the constraint moves into the market. Very early on, it was noticed that the improved performance of operations opened new opportunities to gain more sales. That situation was described in The Goal (Goldratt and Cox, 1984). But it took several years, and many successful implementations, until it dawned on me that the improvements in operations not only open new opportunities but actually provide the company with a decisive competitive edge. When the constraint of a company is in the market and at the same time the company has a decisive competitive edge, the obvious interpretation of focus is to concentrate on capitalizing on the existing competitive edge, rather than being distracted with ongoing refinement in operations. To provide the bridge from the focus on operations to the required focus on strategy, The Goal (1992) was extended.

To gain the required focus, a clear verbalization of the resulting competitive edge was needed. That wasn't a triviality. What obscured the picture was the fact that the same improvements in operations gave rise to not one but many vastly different competitive edges (depending on the company's products and the nature of their clients). In It's Not Luck (Goldratt, 1994), some examples of competitive edges were described, alongside the introduction of the Thinking Processes.

Capitalize and Sustain

Surprisingly, most companies that implemented TOC in operations did not move on to capitalize on the resulting competitive edge. In other words, they became totally unfocused, being satisfied with the results of improved operations and blind to the much bigger gains that were now readily available—the profit increase when much more sales are won and serviced with already exposed excess capacity. What was missing was a whole body of knowledge.

Rarely does a company have a decisive competitive edge. No wonder that most sales people are not trained to conduct a sales meeting when they do have a decisive competitive edge. The nature of such sales meetings is different from conventional meetings. Rather than concentrating on the company's products, the meeting should revolve around the client environment, exposing its significant need that currently isn't satisfied by the vendors. Since there are many clients' environments, deciphering the causes and effects that govern each of them, constructing the sale cycle in accordance, and finding the way to take the sales people through the required paradigm shift took several years.

But with the first successful cases it became apparent that we had to deal with another challenge. Capitalizing effectively on a decisive competitive edge causes the sales to increase sharply. The resulting jump in sales can easily cause the constraint to swing back into operations—bottlenecks swiftly reappear. If this bounce-back is not properly controlled, it can demolish the competitive edge. To continue to focus, it became essential to know how to sustain the increase in sales and how to synchronize between sales and operations so that the rate of incoming orders will not collapse but continue to grow. It wasn't difficult to figure out the simple mechanisms that provide such synchronization, but it was difficult to face the fact that to actually implement them the TOC implementation had to be done holistically. At that stage, I underestimated the difficulty of moving from a functional implementation into a holistic implementation and I naively assumed that showing that TOC covers all aspects of the organization would be sufficient. The Satellite Program (Goldratt, 1999), the summary of the TOC knowledge in eight sessions' of 3 hours each, was recorded with that purpose in mind.

Ever Flourishing

A Process of Ongoing Improvement (POOGI) was the subtitle of the revised edition of The Goal (Goldratt and Cox, 1986) and the motto of TOC. Early on, it was noticed that the conventional definition of POOGI (performance goes up as time advances) contains two conceptually different curves—the red curve, where the rate of improvement grows leading to exponential growth, and the green curve, where the rate of improve returns. The drive to move companies to capitalize on the resulting competitive edge that stems from the improvement in operations caused us to guide companies to strive for the red curve and to condemn the green curve.

Only when reality demonstrated the absolute necessity of sustaining rapid growth did it dawn on me that the green curve is as essential as the red curve. Actually, we are dealing with two types of performances: financial growth and stability. Companies should strive to ensure that their financial performance will grow by at least a few percent per year, which is equivalent to demanding the red-curve growth. But, to ensure that such growth will be sustained, companies must ensure that the growth will not degrade their stability. It became more and more evident that achieving the red curve mandates the attainment of the green curve and vice versa.

To "make more money now as well as in the future" (the objective stated in The Goal) it is essential to choose carefully the actions that will not only bring growth in the near future but also increase (rather than endanger) the company's stability for the longer horizon. To fully capture this essential realization, the objective was rephrased to: "become an ever-flourishing company." Likewise, the paths to reach an ever-flourishing stage had to be laid out in detail. Focus, doing what should be done and not doing what shouldn't be done, forced us to, again, re-examine and severely alter the conventional wisdom.

At that stage (2002), the knowledge already existed, in sufficient details, to construct the paths for five different types of industries: make-to-order, make-to-stock, project based, equipment manufacturers, and retailers/wholesalers. This knowledge was so vast that it took many years to educate new experts. Even more troublesome was the fact that the transfer of even the relevant section of the knowledge needed for improving a specific company raised numerous misunderstandings. A comprehensive tool for clearly transferring a vast body of knowledge was mandatory.

Strategy and Tactic Trees

The Strategy and Tactic tree (S&T) is probably the most powerful tool of the Thinking Processes. Formally, it replaces the prerequisite tree. Practically, it is the organizer of all the knowledge gained by the previous tools. It is the logical structure that enables focusing. Starting from the company's strategic objective, it logically derives what actions (and in which sequence) must be taken and which actions should not be taken.

The S&T trees brought clarity to the implementations. They enhanced communication through the management levels and synchronization between the various departments. The time to reach results was considerably shortened and the transition, from one stage of implementation to the next, became relatively smooth. No less important, they enabled introducing this knowledge (the detailed implementation plan for the five environments)9 into the public domain. That was accomplished through a series of (recorded) Web seminars in 2008-2009 (Goldratt, 2008; 2009)w.

New Frontiers

Currently several important new frontiers are screaming for answers. And I suspect that this will always be the cast as long as we continue to be good scientists. My opinion about it has not changed in the last 25 years. So, maybe the best way to summarize this introduction is by quoting word by word, from my introduction to The Goal:

The secret of being a good scientist, I believe, lies not in our brain power. We have enough. We simply need to look at reality and think logically and precisely about what we see. The key ingredient is to have the courage to face inconsistencies between what we see and deduce and the way things are done. This challenging of basic assumptions is essential to breakthroughs. Almost everyone who has worked in a plant is at least uneasy about the use of cost accounting efficiencies to control our actions. Yet few have challenged this sacred cow directly. Progress in understanding requires that we challenge basic assumptions about how the world is and why it is that way. If we can better understand our world and the principles that govern it, I suspect all our lives will be better.

About the Author

Eli Goldratt is known by millions of readers worldwide as a scientist, educator, and business guru. His Theory of Constraints (TOC) is taught at business schools and MBA programs around the globe. Government agencies and businesses, large and small, have adopted his methodologies. TOC has been successfully applied in almost every area of human endeavor, from industry to healthcare to education. And while Eli Goldratt is indeed a scientist, an educator, and a business leader, he is first and foremost a philosopher; some say a genius. He is a thinker who provokes others to do the same. Often characterized as unconventional and always stimulating—a slayer of sacred cows—Dr. Goldratt exhorts his readers to examine and reassess their lives and business practices by cultivating a different perspective and a clear new vision.

 

 

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