Theory of Constraints PDF

Theory of Constraints
Lean Manufacturing Series
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Contents
1.  Introduction
2.  Background and History
3.  Components and Implementation
4.  Knowledge Check

Introduction
•  The Theory of Constraints (TOC) is a systems-oriented
process improvement methodology that is based on the
theory that a system has a single goal, and that systems
are composed of multiple linked activities, one of
which acts as a constraint on the whole system.
•  TOC is a methodology to focus on removing and

exploiting the constraint in order to optimize
throughput.

Background and History
•  The Theory of Constraints was first described by Dr.
Eliyahu M. Goldratt in his novel, The Goal, which was
originally released in 1984. Subsequently, he formally
introduced the theory in his book, Theory of
Constraints, which was originally published in 1990.

Components and Implementation
1.  Constraints
2.  Five Steps Of Theory of Constraints
3.  Drum Buffer Rope
4.  TOC and Lean
5.  Benefits and Issues with TOC
6.  The Goal – Financial Issues
7.  Implementing TOC

Constraints
•  A constraint is anything that limits a system from
achieving its goal or a level of performance desired. A
constraint can be viewed as a structural bottleneck
which determines the maximum capacity of a system.

Constraints
•  Any system can produce only as much as its critically
constrained resource
Constraint
60 units 70 units 40 units 60 units

Per day Per day Per day Per day
Maximum Throughput = 40 units per day

Constraints
•  Constraints can be internal to the company (i.e.
something which they company can easily control or
change) or external (i.e. a constraint for which the
company had no immediate control, but is often
something for which the company can take some action
to resolve in the medium to long term).

Internal Constraints
•  Internal constraints may include:
▫  capacity of particular machines or workstations;
▫  salary levels or work environment within the company which
constrain the company’s ability to hire capable employees;
▫  transportation bottlenecks in the production process;
▫  ability of the production management team to manage certain
production processes;
▫  ability of the production planning team to schedule/allocate
production efficiently;
▫  incorrect assumptions about maximum capacity by relevant
managers.

External Constraints
•  External constraints may include:
▫  availability of sufficient raw materials;
▫  availability of labor or managers in a particular location;
▫  brand awareness of the company’s products;
▫  distribution channels for the company’s products.

Constraints and Variation
•  Extra costs exist when there is a significant variation
between the capacities of different processes within a
company. This is because the processes with higher
capacity will be underutilized, resulting in unnecessary
depreciation, labor or operating expenses associated
with those processes. In addition, in a “push type”
manufacturing company, the unbalanced capacity often
creates an excessive amount of work-in-progress, which
is likely to result in higher financing costs and higher
defects.

•  A key idea behind the Theory of Constraints is that by
identifying and resolving the most significant constraint
in a system, it will allow for all of the other processes
to operate at a higher volume. Consequently,
significant value will accrue to the company insofar as
this will lower the fixed costs per unit (depreciation,
labor, factory overhead) while increasing the company’s
volume of output, thereby leading to higher revenues.

•  Therefore, a company applying the Theory of
Constraints will prioritize solving whatever is the most
significant constraint to the business because solving
that problem is likely to have the biggest positive
impact on the business compared to other possible
improvements. A similar concept can also be applied
within particular departments or processes.

Five Steps Of TOC
1.  Identifying the constraint
2.  Decide how to exploit the constraint
3.  Subordinate everything else to the decision in step 2
4.  Elevate the constraint
5.  Go back to step 1, but avoid inertia

Step 1: Identify the constraint
•  A company or system is like a chain so, if the goal is to
increase the capacity of the chain, strengthening any
link other than the weakest is a waste of time and
effort. In order to identify the constraint, the company
should find a way to measure the capacity of each
process and then track actual throughput against the
capacity to determine where capacity utilization rates
are the highest.
Internal External
•  Material constraints
•  Process constraints §  Insufficient materials
§  Machine time, etc. •  Market constraints
•  Policy constraints §  Insufficient demand
§  No overtime, etc.
Step 2: Exploit the constraint
•  Once the constraint has been identified, the next step
is to identify the key factors that determine the
capacity of that process, and which of those can be
manipulated to increase the capacity of the process.
•  For example, it may be a shortage of machines, the

speed at which machines run, the amount of downtime
due to poor preventative maintenance, a shortage of
certain tools or spare parts, etc.

Step 3: Subordinate everything else
•  At this stage, actually solving the constraint should be
a top priority.
•  This includes overcoming any emotional resistance to

solving the constraint, including any incorrect
assumptions by managers that prevent the constraint
from being solved.
•  Consequently, strong leadership from the company’s

General Director will often be required at this stage so
that any internal resistance to solving the problem can
be overcome.
Step 4: Elevate the constraint
•  The capacity of the constraining process needs to be
increased up to above the next most significant
constraint in the system in order to remove the
bottleneck.
•  Even better would be to elevate the capacity of the

constraining process up to a level which is equal to the
target capacity of the entire system.

Step 5: Go back to step 1
•  The Theory of Constraints is a continuous improvement
process. When one constraint has been broken (the
weakest link of the chain has been strengthened)
another constraint will be created (the new weakest
link).
•  Therefore, it requires the team go back to step 1 to

continue the loop to remove the constraints.

Drum, Buffer, Rope
•  Drum, Buffer, Rope is a method to identify and exploit the
constraints in a production system. It uses Process Mapping as a
main tool to identify the bottleneck and then apply solutions.
•  Drum: This is the constraint itself since it sets the drumbeat
(pace) for the other processes. Also, the drumbeat signals the
upstream operations what to produce and tells the downstream
operations what to expect.
•  Buffer: This is the stockpile of WIP in front of the constraint. It is
a precaution to keep the constrained resource running at the
highest possible capacity since it determines the output of the
entire system. However, to some degree this may conflict with
lean manufacturing principles which consider that buffers are
typically a source of waste so they should always be minimized to
the extent possible.
•  Rope: Limitations placed on production in upstream operations
which are necessary to prevent flooding the constraint with excess
work-in-progress (WIP) which are above its capacity.
Drum, Buffer, Rope
Buffer
60 70 40 60
Rope Constraint
(Drum)

TOC and Lean Manufacturing
•  In general terms, Lean manufacturing focuses on
eliminating waste whereas Theory of Constraints
emphasizes on maximizing throughput. Nonetheless,
the two approaches can be used together.

•  Similarities
▫  Both Lean and TOC aim to optimize the performance of an
entire system, not just one part of the system. Consequently,
both approaches take into consideration the impact that various
processes have on each other and try to improve the smooth
collaboration between different processes.
▫  Both Lean and TOC advocate continuously reevaluating when
there are opportunities for improvement and pro-actively
making those improvements.

•  Differences
▫  Lean Manufacturing aims to eliminate all forms of waste in the
production process, whereas Theory of Constraints is a tool that
focuses on eliminating the waste associated with underutilized
capacity or labor. In other words, Theory of Constraints aims to
spread fixed costs over a higher volume of production by
increasing the volume of output, resulting in lower fixed costs
per unit of output. Meanwhile, Lean Manufacturing is a broad
set of tools that aims to reduce both fixed costs and variable
costs per unit of output.
▫  In some cases, Theory of Constraints advocates the intentional
use of buffer inventories to ensure that a constrained process
never operates below capacity whereas Lean Manufacturing
usually aims for one-piece-flow and the minimization of WIP,
since excess WIP between processes often leads to defects and
other costs.

Product Line Strategy
Engineer Make to Assemble Make to

To Order Order To Order Stock
Production Process Layout
Job Low Volume,

High Variety
Shop
Batch Medium Volume,

Med. Variety
Flow
Mixed-Model
High Volume,
Repetitive Fixed Variety
Dedicated High Volume,

Standard
Repetitive Product

Product Line Strategy
Engineer Make to Assemble Make to

To Order Order To Order Stock
Production Process Layout
Job Low Volume,

High Variety
TOC/DBR
Shop
Batch Medium Volume,

Med. Variety
Flow
Mixed-Model
High Volume,
Repetitive Fixed Variety
Dedicated
Repetitive
JIT/KANBAN High Volume,
Standard
Product

TOC, TQM and JIT
•  All 3 methods attempt to reduce variation and
recognize the interdependencies.
•  Statistical process control is emphasized in the quality
area to help identify ways to reduce variations.
•  Cells are used to reduce the dependencies - U cell
configurations , where one worker is moving with the
processed piece from one machine to another
•  Predetermined schedules, in TOC, reduce both
statistical fluctuation and dependent resources.

Benefits of TOC
•  Increased revenue
▫  Assuming that the market demand exists, by eliminating the
most significant constraint, the company will be able to
generate higher revenues by producing a higher volume.
•  Reduced cost per unit
▫  If many processes or departments within a company have
capacity which isn’t fully being utilized, it means that fixed
costs associated with those processes or departments are not
being used efficiently. There are also other hidden costs
associated with significant constraints – such as management
time spent dealing with the negative consequences of the
constraint, or increased wastage due to overproduction at the
processes upstream of the constraint.

Benefits of TOC
•  On-time delivery
▫  Often the part of the company which is the most significant
constraint is not as controlled or predicable as the other
processes within the company. Consequently, the constraint
itself is often the source of shipment delays. As such, removal
of the most significant constraint can lead to more predicable
lead times and better on-time delivery performance.

Issues with TOC
•  Constraining resource must be maximized
▫  All other operations must be geared toward this goal
  May require sub optimization in other areas
•  Upstream operations must provide only what the constraint
can handle
•  Downstream operations will only receive what the constraint
can put out
•  Constraint must be kept operating at its full capacity
▫  If not, the entire process slows further
•  Advantages
▫  Improves capacity decisions in the short-run
▫  Avoids build up of inventory
▫  Aids in process understanding
▫  Avoids local optimization
▫  Improves communication between departments
Issues with TOC
•  Disadvantages
▫  Negative impact on non-constrained areas
  Diverts attention from other areas that may be the next constraint
  Temptation to reduce capacity
•  Ignores long-run considerations
▫  Introduction of new products
▫  Continuous improvement in non-constrained areas
•  May lead organization away from strategy
•  Not a substitute for other accounting methods

Finding the Goal
•  Before a company can properly focus, a necessary
condition is that they answer the following question:
▫  What is the Goal of a for profit enterprise?
•  Answer: To make more money now and in the future!

•  Some would argue that the goal of their company is to…
▫  To satisfy customers now and in the future!
▫  Provide satisfying jobs now and in the future!
•  The owners can choose the goal, but the other two
become conditions necessary for achieving the goal

The Goal: Measuring Progress
•  Once the Goal is identified, one necessary condition to
success in achieving the goal is to identify which
measurements will be used to judge progress.

The Goal: Measurements
•  Conventional Wisdom
▫  Net profit?
▫  Efficiency?
▫  Utilization?
▫  Return on Investment?
▫  Cash Flow?
•  TOC Wisdom
▫  Throughput
▫  Inventory
▫  Operating Expense

Throughput
•  The rate at which the system generates money through
sales. (Or, the money coming into the organization.)
•  Building inventory is not throughput
•  Only $ generated by the system get counted; e.g., raw
materials and purchased parts are not throughput.
•  T = Selling Price - Materials

Inventory
•  All the money the system has invested in purchasing
things which it intends to sell.
•  Inventory is a liability (not an asset)
•  Raw materials, work in process, finished goods and
scrap are inventory

Operating Expense
•  All the money the system spends in order to turn
inventory into throughput. (Or, the money coming into
the organization.)
•  All employee time (direct, indirect, operating, etc.)
•  Depreciation of a machine
•  Operating supplies

Traditional vs. JIT, TQM and TOC
Traditional Ranking JIT, TQM & TOC
•  Operating expense •  Throughput

•  Throughput •  Inventory or Assets
•  Inventory or Assets •  Operating expense

The Goal: Financial Issues
•  Viewing an organization from the operation expense
world perspective causes one to believe that almost
everything is important – that the organization is
composed of independent variables.
•  But viewing the organization from throughput world
perspective forces the realization that the organization
is a collection of dependent variables and that the
artificial barriers between these variables, or
functions, must be eliminated.
•  Managing the parts of an organization as if they were
isolated kingdoms is not the dominated measurement.

The Goal: Financial Issues
•  In the throughput world, constraints become the main
tools of management and the previous tool, product
cost, can be discarded.

Implementing TOC: Process Stability
•  The following steps will make production more stable
and predicable, therefore allowing for a greater level
of confidence in the impact of removing the most
significant constraint:
▫  Measuring process and machine capacity and output in order to
define the constraint point;
▫  Creating clearly defined production procedures and processes;
▫  Implementing the 5S system at shop floor level;
▫  Synchronizing the production layout to better arrange
workstations so as to minimize transportation bottlenecks.

Implementing TOC: Assumptions
•  In many cases the root cause of the constraint is the
incorrect assumptions of one of several key people,
which in turn results in resistance when trying to
remove the constraint.
•  This can sometimes be solved by getting all key people

to agree on a common goal and getting the resistant
people involved in the process of identifying solutions
for achieving the goal.

Implementing TOC: Recognition
•  When a constraint has been removed and throughout
has been increased as a result, it will be helpful to
communicate the improvement throughout the
organization.
•  Provide significant recognition to the people who were
responsible for solving the problem, such as by
mentioning them in an internal newsletter or providing
recognition in management

Knowledge Check
© 2013 Gemba Academy LLC. All rights reserved.

What book was instrumental in developing the concept of
Theory of Constraints?
o A) The Objective

o B) The Goal
o C) The Strategy
o D) The Constraint

Match each of the five steps of the Theory of Constraints with
its descriptions by dragging the description to the step.
□ 
Step Description
A.  When one constraint has
E been broken another
□ 
Identifying the constraint will be created
constraint B.  The capacity of the
D constraining process needs
□ 
Decide how to exploit to be increased
the constraint C.  Solving the constraint should
C
Subordinate be a top priority.
D.  Identify the key factors that
□ 
everything else to the determine the capacity of
B
decision in step 2 that process, and which can
be manipulated to increase
□ 
Elevate the
the capacity.
constraint E.  Measure the capacity of
A
Go back to step 1, each process and then track
but avoid inertia actual throughput against
the capacity

What is the main tool used in drum, buffer, &
rope to identify the bottleneck?
o A) Kaizen
o B) Throughput
o C) Process Mapping
o D) Kanban

Match the word with its description by dragging
the description to the word.
Word Description
A.  The stockpile of WIP in
□ 
front of the constraint.
B.  Limitations placed on
C
Drum production in upstream
□  A
Buffer
operations which are
necessary to prevent
□ 
flooding the constraint
with excess work-in-
B Rope progress (WIP) which are
above its capacity.
C.  This is the constraint
itself since it sets the
drumbeat (pace) for the
other processes.
What are some of the benefits of the Theory of
Constraints? (Mark all that apply)
A.  Increased revenue
B.  Reduced cost per unit
C.  Constraining resource must be
maximized
D.  On-time delivery

Which of the following will make production
more stable and predictable? (Mark all that apply)
•  A) Measuring process and machine capacity
and output in order to define the constraint
point
•  B) Creating clearly defined production
procedures and processes
•  C) Implementing the 5S system at shop floor
level
•  D) Synchronizing the production layout to
better arrange workstations so as to minimize
transportation bottlenecks

How can you implement TOC in your operation?

Congratulations!!!
•  You have completed the course.
•  Visit Superfactory (www.superfactory.com) for more

information on manufacturing excellence.

© 2007 Superfactory™. All 53
Rights Reserved.

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Theory of Constraints

Lean Manufacturing Series

Gemba Academy provides over 750 online Lean and Six

© 2013 Gemba Academy LLC. All rights reserved.

• Current contact information can be found at: GembaAcademy.com

© 2013 Gemba Academy LLC. All rights reserved. 2

© 2013 Gemba Academy LLC. All rights reserved. 3

• TOC is a methodology to focus on removing and

© 2013 Gemba Academy LLC. All rights reserved. 4

© 2013 Gemba Academy LLC. All rights reserved. 5

© 2013 Gemba Academy LLC. All rights reserved. 6

© 2013 Gemba Academy LLC. All rights reserved. 7

60 units 70 units 40 units 60 units

Maximum Throughput = 40 units per day

© 2013 Gemba Academy LLC. All rights reserved. 8

© 2013 Gemba Academy LLC. All rights reserved. 9

© 2013 Gemba Academy LLC. All rights reserved. 10

© 2013 Gemba Academy LLC. All rights reserved. 11

© 2013 Gemba Academy LLC. All rights reserved. 12

© 2013 Gemba Academy LLC. All rights reserved. 13

© 2013 Gemba Academy LLC. All rights reserved. 14

© 2013 Gemba Academy LLC. All rights reserved. 15

• For example, it may be a shortage of machines, the

© 2013 Gemba Academy LLC. All rights reserved. 17

• This includes overcoming any emotional resistance to

• Consequently, strong leadership from the company’s

• Even better would be to elevate the capacity of the

© 2013 Gemba Academy LLC. All rights reserved. 19

• Therefore, it requires the team go back to step 1 to

© 2013 Gemba Academy LLC. All rights reserved. 20

© 2013 Gemba Academy LLC. All rights reserved. 22

© 2013 Gemba Academy LLC. All rights reserved. 23

© 2013 Gemba Academy LLC. All rights reserved. 24

© 2013 Gemba Academy LLC. All rights reserved. 25

Engineer Make to Assemble Make to

Job Low Volume,

Batch Medium Volume,

Dedicated High Volume,

© 2013 Gemba Academy LLC. All rights reserved. 26

Engineer Make to Assemble Make to

Job Low Volume,

Batch Medium Volume,

© 2013 Gemba Academy LLC. All rights reserved. 27

© 2013 Gemba Academy LLC. All rights reserved. 28

© 2013 Gemba Academy LLC. All rights reserved. 29

© 2013 Gemba Academy LLC. All rights reserved. 30

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• Answer: To make more money now and in the future!

© 2013 Gemba Academy LLC. All rights reserved. 33

© 2013 Gemba Academy LLC. All rights reserved. 34

© 2013 Gemba Academy LLC. All rights reserved. 35

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• Operating expense • Throughput

© 2013 Gemba Academy LLC. All rights reserved. 39

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© 2013 Gemba Academy LLC. All rights reserved. 41

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• This can sometimes be solved by getting all key people

© 2013 Gemba Academy LLC. All rights reserved. 43

© 2013 Gemba Academy LLC. All rights reserved. 44

© 2013 Gemba Academy LLC. All rights reserved.

•  Current contact information can be found at: GembaAcademy.com

•  TOC is a methodology to focus on removing and

•  For example, it may be a shortage of machines, the

•  This includes overcoming any emotional resistance to

•  Consequently, strong leadership from the company’s

•  Even better would be to elevate the capacity of the

•  Therefore, it requires the team go back to step 1 to

•  Answer: To make more money now and in the future!

•  Operating expense •  Throughput

•  This can sometimes be solved by getting all key people

o A) The Objective

•  Visit Superfactory (www.superfactory.com) for more