According to goldratts theory of constraints, what is the goal of the firm?

The following article reviews the Theory of Constraints (TOC), first published in The Goal by Eliyahu M. Goldratt and Jeff Cox in 1984, and compares it with Lean Thinking, as described by James P. Womack and Daniel T. Jones in Lean Thinking in 1996.

What is the Theory of Constraints?

The Theory of Constraints is an organizational change method that is focussed on profit improvement. The essential concept of TOC is that every organization must have at least one constraint. A constraint is any factor that limits the organization from getting more of whatever it strives for, which is usually profit. The Goal focuses on constraints as bottleneck processes in a job-shop manufacturing organization. However, many non-manufacturing constraints exist, such as market demand, or a sales department’s ability to translate market demand into orders.

The Theory of Constraints defines a set of tools that change agents can use to manage constraints, thereby increasing profits. Most businesses can be viewed as a linked set of processes that transform inputs into saleable outputs. TOC conceptually models this system as a chain, and advocates the familiar adage that a “chain is only as strong as its weakest link.” Goldratt defines a five-step process that a change agent can use to strengthen the weakest link, or links. In The Goal, Goldratt proves that most organizations have very few true constraints. Since the focus only needs to be on the constraints, implementing TOC can result in substantial improvement without tying up a great deal of resources, with results after three months of effort.

The Five Steps of the Theory of Constraints

1. Identify the System Constraint. The part of a system that constitutes its weakest link can be either physical or a policy.
2. Decide How to Exploit the Constraint. Goldratt instructs the change agent to obtain as much capability as possible from a constraining component, without undergoing expensive changes or upgrades. An example is to reduce or eliminate the downtime of bottleneck operations.
3. Subordinate Everything Else. The non-constraint components of the system must be adjusted to a “setting” that will enable the constraint to operate at maximum effectiveness. Once this has been done, the overall system is evaluated to determine if the constraint has shifted to another component. If the constraint has been eliminated, the change agent jumps to step five.
4. Elevate the Constraint. “Elevating” the constraint refers to taking whatever action is necessary to eliminate the constraint. This step is only considered if steps two and three have not been successful. Major changes to the existing system are considered at this step.
5. Return to Step One, But Beware of “Inertia”

Goldratt cautions practitioners about becoming complacent. TOC is an on-going process, and the inertia that can build up after a change occurs can actually serve to prevent continuous improvement.

Goldratt also provides a foundation for achieving change through TOC by defining a set of three essential measurements that drive the change process. He correctly realized that conventional accounting systems do not support TOC, or lean-based efforts. Goldratt proposes replacing all traditional measures derived from the “product cost” accounting paradigm. The following measures are the only way to increase profit through TOC:

• Throughput: The rate at which the entire organization generates money through sales for a product or service. Throughput represents all the money coming into an organization.
• Inventory: All the money the organization invests in things it intends to sell. Inventory represents all the money tied-up inside an organization. Goldratt’s definition includes facilities, equipment, obsolete items, as well as raw material, work in process, and finished goods.
• Operating Expense: Operating Expense is all the money an organization spends turning Inventory into Throughput. It represents the money going-out of the organization. Examples include direct labour, utilities, consumable supplies, and depreciation of assets.

All three of these measures are interdependent. This means that a change in one will result in a change in one or more of the other two. Therefore, to improve your organization using TOC, you as the change agent would adhere to the following formula:

Maximize Throughput while Minimizing Inventory and Operating Expense

These measures are the key to relating local decisions to the performance of the entire system. Goldratt advocates that all improvement opportunities should be prioritized by their effect on the three measures, especially Throughput, for which the only limit on how high it can be increased is market size.

How Does Lean Thinking Compare to the Theory of Constraints?

Lean thinking is an organizational change method that is also implemented with the objective of increasing profit. Lean thinking originated in Japan, and is best exemplified by the Toyota Production System. Constraints placed on the Japanese manufacturing industry after the second world war lead Taiichi Ohno of Toyota to pioneer a new type of production system that was so different, and so much better, than mass production, as to warrant a new type manufacturing. Lean production is a method of organizing production using half the effort, space, inventory, and product development time compared with mass production. It also achieves fewer defects, and larger product variety. These improvements should result in increased sales, which is the key to re-deploying freed-up resources. Lean thinking codified and expanded upon the Toyota Production System to include non-manufacturing organizations, as well as product development efforts.

The objective of lean thinking, as with TOC, is to increase profit. This is achieved by focusing on reducing costs using the following simple equation:

Profit = Selling Price – Cost

Toyota realized that selling price is dictated by the market and cannot be increased. Therefore, the only way to increase profit is to decrease cost. Note that although Goldratt attempts to move away from cost reduction by focussing on throughput improvement, the net effect is the same: profit increases because cost decreases.

Lean thinking achieves the objective of cost reduction by employing a system-view of an organization that is centered on the notion of customer-defined value. Lean efforts are aimed at eliminating all the steps in the production of a good or service that do not add value to the final customer.

The Five Steps of Lean Thinking

1. Specify Value from the Perspective of the Customer
2. Identify the Value Streams
3. Flow
4. Pull
5. Perfection

Where TOC starts by identifying constraints, Lean thinking instructs the change agent to rethink the notion of value first. By walking the value stream, from finished goods to raw materials and repeatedly asking: “Are my customers willing to pay for this?”, the lean change agent identifies opportunities for eliminating waste from the system. Further, value stream mapping is a very useful tool for determining which areas of the system to improve first. As well, the future state map keeps the organization focused on moving towards a common goal.

Both Lean Thinking and TOC agree that the organization must first find the change, then determine if a sensei is required. The Goal relies on a sensei-like individual named Jonah who provides assistance at key points in the book. However, Goldratt warns against relying on a sensei, and advocates that the change agent should learn enough to become a sensei. In parallel, successful lean implementation efforts have relied on learning through trial and error, and the resulting creation of in-house lean “experts.” However, the caveat to this approach is that it will invariably take longer to achieve results. A good sensei will catalyze the change effort and keep the momentum building. TOC advertises a three-month improvement lead-time, which may be next to impossible without assistance from a sensei. It would be interesting to hear how long it took TOC change agents to become “Jonahs.”

The following table summarizes the comparison between Lean Thinking and the Theory of Constraints.

Box Summary: Theory of Constraints versus Lean Thinking

 Theory of ConstraintsLean ThinkingGoalIncrease Profit by increasing ThroughputIncrease Profit by adding value from customers’ perspectiveMeasures• Throughput • Inventory • Operating Expense• Cost • Lead Time • Value-Added PercentageWhat to Change?Constraints: the “weakest links” in the systemEliminate Waste and Add Value considering the entire systemHow to Implement the Change:Five-Step, Continuous Process emphasizing acting locallyFive-Step, Continuous Process emphasizing thinking globallyTimeBoth can achieve immediate results, but require a long term (about five year) effort to sustain the results

Combining Lean Thinking with the Theory of Constraints

Can the Theory of Constraints be used as a catalyst for lean implementation?

This author says yes! TOC methods fit nicely into the lean thinking five-step change framework, between steps two and three. Using TOC can help lean change agents to improve performance in processes where it is infeasible to eliminate bottlenecks. Specifically, after creating the ideal future value stream map, how do you achieve it? As you divide your value stream into loops and determine improvement objectives for each, as described in Learning to See, incorporating TOC methods can give the following benefits:

Determining Where to Begin

TOC advocates beginning with the constraint that most limits Throughput. This should create substantial improvements to the value stream in a short time, which is beneficial for igniting the required employee momentum and support.

Sustaining Momentum

Achieving your future state may require designing new equipment that has not currently been developed. Until these processes can be eliminated, and if they are constraints, TOC can be used to continue the implementation momentum. Then, you can develop continuous flow that operates based on Takt, a pull system to control production, and implement production leveling.

Performance measures that support lean implementation

Replacing traditional financial metrics of asset utilization and burden absorption with Goldratt’s Throughput, Inventory, and Operating Expense measures will help management see the benefits of Lean Thinking.

That’s it for an introduction to the Theory of Constraints and its comparison to Lean Thinking. We will summarize helpful insights and append them to this essay.

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Bibliography

Dettmer, William H. Goldratt’s Theory of Constraints A Systems Approach to Continuous Improvement. Milwaukee, Wisc.: ASQ Quality Press, 1997.

Goldratt, Eliyahu M. and Cox, Jeff. The Goal. Great Barrington, Mass.: The North River Press, 1992.

Goldratt, Eliyahu M. What is this thing called Theory of Constraints and how should it be implemented? Great Barrington, Mass.: The North River Press, 1990.

Noreen, Eric, Debra Smith, and James T. Mackey. The Theory of Constraints and its Implications for Management Accounting. Great Barrington, Mass.: The North River Press, 1995.

Rother, Mike and John Shook. Learning to See. Brookline, Mass.: The Lean Enterprise Institute, 1998.

Womack, James P. and Daniel T. Jones. Lean Thinking. New York: Simon and Schuster, 1996.

Community Responses

Time. TOC, and Lean
While both TOC and lean manufacturing focus on reduction of cost (lean manufacturing emphasizes reduction of waste), there could be an alternate perspective in terms of time (time-to-market) – reducing lead times (improving responsiveness of the organization to changes in the environment). The inherent assumption here is that the market is not really the constraint (since a company can profit more by reducing time to market and also selling more products – increasing throughput).

The origins of time-based competition’ (Stalk, George Jr., Time: The Next Source of Competitive Advantage,” Harvard Business Review, Jul-Aug 1998) can be seen in the JIT system developed by Japanese automobile manufacturers in response to the post-war markets (need for multiple models with varying demands). From a TOC perspective, the objective of increasing throughput can be realized through reducing manufacturing lead times.

In the recent times, companies have tried to make their entire value chains more responsive, starting from faster product development lifecycles (examples include Toyota’s multiple-project management for designing new cars faster), faster procurement and better logistics tracking (through the efficient use of IT), efficient delivery/distribution systems, and also prompt service. (Firms realize that the responsiveness in upstream activities such as manufacturing can be partially obscured by sluggish downstream activities.)

The advantages of using time as a weapon of competitive advantage (as exhibited by the apparel industry in the US) are:

• Reduced costs by reducing inventory and operating expenses
• Reduced risk of product failure by shortening product lifecycles
• Better customer satisfaction by responding quickly to changing customer preferences

–Venkat Sreeram, Associate, High Technology Practice, Triniti Corporation, India.

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TOC and Lean Thinking
The first step to understanding world class business concepts is to recognize where the varied philosophies agree and where they differ from traditional mass production concepts. Lean and TOC are the best examples, but many others are out there (Demand Flow Technology, Velocity, etc.,) To engage in sustainable real world implementations it eventually becomes beneficial to embrace one specific philosophy, but it does not require rejecting the others. The real breakthrough is teaching others to reject the concepts of traditional mass production which have become intuitive to us all. To undermine one or the other undermines the potential for a revolutionary breakthrough toward either.

A key to fully understanding TOC is that it is not just a system of eliminating constraints (bottlenecks) but more a system of managing constraints. A truly enlightened organization will know exactly where it wants the constraints to be. Constraints are a reality, the question is whether you want them to be internal, where you can control them or external (i.e. the market). A company that is in control of its own destiny can use its constraints like a valve to control and continually promote the flow of value.
John L. Werling, Business Developer, Institute for Economic Transformation, Duquesne University.

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The problem is the VARIATION!
In my opinion the two theories are completely complementary: only when you eliminate bottlenecks you will be able to build a really pull system, but what to do immediately to reduce your cost (or inventory and operating expense… it’s the same!) without penalizing your Customers and Shareholders (increasing throughput or optimizing value stream …it’s again the same!). To do that, today, you need some right storage because your variation is not zero! So your buffers are more than 1 (TOC) and it seems to you that lean is different…. one piece flow!!

When you will standardize all the processes and, using every Continuous Improvement tool you want, you will have variation = 0, then all your buffers will can be equal to 1 (one piece flow) and so lean and TOC will be the same!

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