Theory of Constraints (TOC) in brief

I've summarized the key outcomes of TOC here to further show how they relate to AX functionality. This post was again inspired by our Operations Management course, particularly, by refreshing through The Goal.

These are the key outcomes from The Goal:

• Main goal of any commercial organization (manufacturing plant in the book) is to make money.
• Goal of making money translates into three key financial measurements: net profit, ROI, and net cash. But these measurements, while being useful for high-level monitoring of organization's progress in achieving the goal, can not be directly applied to driving operational efficiency.
• So that, same goal of making money is also translated into three key operational measurements: throughput, inventory, and operational costs.

Throughput – the rate at which the system generates money through sales (not production).

Inventory – all the money that that the system has invested in purchasing things which it intends to sell.

Operational expense – all the money the system spends in order to turn inventory into throughput.

The mainstream quest in the book was about struggling with bottlenecks (or constraints in general) while pursuing the main goal expressed as increasing throughput while simultaneously reducing both inventory and operating expense (not just improving one measurement in isolation).

Bottleneck was defined as any resource whose capacity is equal to or less than the demand placed upon it (by maximum possible throughput).

Eventually, the universal thinking process framework was formulated in the book - as fundamental ability of manager to answer the questions:

1. What to change? (identify core problems that cause bottlenecks/constraints) It's important to have a "coordinate system" here as a tool - in case of operational analysis it was comprised of those three key measures - throughput, inventory and operational expenses, bundled with the goal to incease throughput while simulteneously reducing inventory and operational expenses.
2. What to change to? (construct and check solutions that solve negative effects without creating new ones)
3. How to cause the change? (smoothly, without creating resistance, but opposite, enthusiasm)

There were some practical options implemented through the whole story such as marking materials and parts and cutting size of a batch. Reducing batch size caused reducing the time it took to process a batch (lead time). In that way, they got increased throughput, reduced inventory, and smoother work flow through the plant.

Much effort was undertaken to increase the capacity of the plant by increasing the capacity of the bottlenecks, particularly by:

• Making sure bottleneck’s time is not wasted:

1. Increasing resource utilization (time it’s active). For example, they put dedicated operators in bottleneck's area to oversee the resource's continious operation and provide timely setup.
2. Putting quality inspection in front of bottleneck (for incoming parts).
3. Ensuring process controls on bottlenecks parts are very good, so these parts don’t become defective in later processing.
4. Making bottlenecks work only on what will contribute to throughput today (not .. months from now).
5. Optimize bottleneck’s loading (e.g. by incoming materials pre-packaging for bottleneck).

• Offloading – taking some load off the bottlenecks by using other resources (non-bottlenecks)

1. Ensuring all parts really need to be processed by bottleneck (any processing alternatives ahead of bottleneck?).
2. Using other machines to do the same process (e.g. old ones).
3. Outsourcing parts processing.

There also were described some negative effects caused by:

• Prioritizing parts to be processed (parts for bottlenecks were processed first - even for 'fictitious' orders after order backlog was cleared). That finally caused increased inventory at bottlenecks and lack of parts at final assembly. So, priority tags were removed eventually for the sake of principle: 'first come - first served' with material requirements planned backwards - from orders through bottlenecks.
• Reduced amount of spare capacity on the non-bottlenecks (after they broke their machines’ bottleneck constraints with faster material flow and took more orders) caused longer lead time for the products and orders, uneven material flow through the floor and the plant working overtime. This problem was fixed by no longer accepting orders with short lead time and increasing buffer inventory in front of the bottlenecks and assembly.

Overall, the ideas described in the book are fairly simple, but provide good foundation for problem solving skills development in operations management and beyond.

© Andrey Maslov