Theory of constraints (TOC)
The Theory of Constraints (TOC) is a management philosophy developed by Eliyahu M. Goldratt that aims to enhance a business's efficiency and profitability by identifying and addressing its constraints—elements that limit output. Introduced in his 1984 book, *The Goal*, TOC proposes that businesses can optimize their performance by systematically identifying "bottlenecks" and implementing a series of decision-making processes to alleviate these limitations. The approach is built around a continuous improvement cycle that includes five focusing steps: identifying constraints, exploiting them, subordinating other processes to the constraint, elevating the constraint, and then repeating the process.
TOC emphasizes the importance of throughput accounting, which differs from traditional accounting by focusing on the financial impact of constraints rather than merely on inventory levels and costs. This method encourages businesses to minimize excess inventory and wasteful expenditures while maximizing revenue generation. Additionally, TOC is based on three core principles: convergence, which highlights the interconnectedness of business systems; consistency, which addresses the importance of clear communication and assumptions; and respect for employees, recognizing their potential for improvement and contribution to the organization. Overall, TOC is widely utilized in various industries and is integrated into the curriculum of numerous educational institutions, reflecting its significance in contemporary business practices.
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Theory of constraints (TOC)
The theory of constraints (TOC) was developed by the late Eliyahu M. Goldratt (1947–2011), who was involved in many fields, including writing, education, business, philosophy, and science. He developed the theory of constraints to enable businesses to run more smoothly. This theory consists of a series of decision-making and critical-thinking guidelines Goldratt believed all businesses ought to follow. He initially introduced the theory of constraints in his 1984 book The Goal. The purpose of the theory of constraints is to increase a business's income. Goldratt's theory is widely used. It is included in the curriculums of more than two hundred institutions of higher learning to familiarize business students with the concepts.
The constraint in Goldratt's theory refers to any element that may limit, inhibit, or impair the output of a business. In short, these constraints limit the business's ability to make money. Goldratt's belief is that by removing or lessening these constraints, a corporation can increase its productivity. It is a similar concept to removing obstacles from a racecourse to enable the runners to more easily navigate the track. These constraints are sometimes referred to as "bottlenecks." A business must continuously seek out these bottlenecks to refine its processes and improve efficiency.
Background
Business owners and leaders who wish to use Goldratt's theory must apply what Goldratt calls the "thinking processes." There are three steps in the thinking process. First, business owners must identify what needs to be changed. They must then decide to what it should be changed. They must have a specific goal or vision of an end result to better understand the specific changes that need to be made. Lastly, the business leaders must decide how to affect this change.
The theory likens the departments of a business to a chain that comprises the business itself. Some sections of a business can be capable of productivity but are inhibited by faulty links—the weak links of the business chain.
The steps to this process are called the "five focusing steps." The first step is to identify these constraining links. Business owners should look for areas that have an excess of work in progress. Equipment, tools, and electronic systems merit attention because all of these elements, if not working properly or consistently, or if they have redundancies, can negatively influence efficiency. These constraints are not limited to elements within the company. A constraint might well be in the form of a market competitor. The constraint must then be altered and adjusted until it is no longer posing a barrier to productivity and efficiency. In the second step, called the exploit step, the business will make improvements to the constraint by using resources on hand. Depending upon the constraint's effect on business, work can be allocated to other departments or done on different machinery to improve efficiency. If additional assistance is required, the business may want to consider hiring another company to assist with the workload. The third step is the subordinate step. During this step, business leaders make sure that other links are functioning effectively and supporting the weak link. If the problem has not been fixed at this point in the process, managers must then move to the elevate step. During this step, leaders must try other methods to improve the constraint, including spending money if necessary. The last step is to repeat the process with another constraint, as there are always areas that can be improved to maximize efficiency. This is a continuous process of improvement that will enhance a business's financial performance over time.
Overview
Those who apply Goldratt's theory should have the goal of maximizing the generation of revenue and not only creating or providing their product at an increased rate. Business leaders must aim to cut wasteful expenditures and redundant procedures and processes to streamline their business model.
Throughput accounting must also be put into practice, instead of traditional accounting. Throughput accounting requires examining the financial performance of a business in relation to the decisions about system constraints made by the managers or leaders of the company. For instance, unsold products are considered assets. This means that these unsold items can eventually be purchased, but it does not mean anyone will purchase them. Some inventory may become obsolete, while other items may not appeal to customers. Unwanted inventory items are still considered assets, even though they may collect dust on warehouse shelves for years. Goldratt considers a large inventory wasteful because the money spent on inventory that may or may not turn a profit could be better spent in other areas. Thus, inventory should be kept at a minimum.
The three measures of throughput accounting are throughput, investment, and operating expense. Throughput refers to the rate of customer transactions with the business. Investment is how much money is invested in the company's physical assets. This can refer to computer systems, machinery, and buildings. Operating expense is simply how much it costs to run a business. This includes property taxes, building and business permits, structural maintenance and testing, and utilities.
Business owners should also keep in mind the three core principles of the theory of constraints—convergence, consistency, and respect. The convergence principle, also called the principle of inherent simplicity, holds that all business systems are interrelated. The more connected the systems are, the easier they are to fix and improve. Complex systems have fewer bottlenecks. Altering one part of the system will affect the others; when changes are made and one constraint is eliminated, another will appear. This constraint must then be addressed using the five focusing steps. The consistency principle suggests that incorrect assumptions and inconsistencies cause conflict within a business. Lastly, though humans are prone to errors and are inherently flawed, they still deserve respect. No employee wants to perform poorly or be a liability. Business leaders and managers must remember that they seek to improve bottlenecks and problem areas.
Bibliography
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