A few months ago I came across this terrific article on the Theory of Constraints by Eric Ronney, a specialist in bringing step changes to supply chains and I have been intending to publish it ever since.
The recent focus of Internet marketer Rich Schefren on resolving constraints to improve performance has made this article particularly relevant.
I don't need to say much more at this stage as Eric explains the development of TOC.
TOC: A New Way To Manage That Promises Extraordinary Results
Introduction to the Theory of Constraints - a new way to manage that promises extraordinary results
The Theory of Constraints (TOC) is the foundation idea behind a whole new approach to managing organisations of any kind, be they for-profit businesses or not-for-profit organisations. What is interesting about management based on TOC is the extraordinary results being achieved in very short times, so extraordinary in fact that it seems too good to be true.
This short article attempts explain what the Theory of Constraints is and how it works.
If you are at all interested in achieving truly extraordinary results in your organisation, this article is for you.
Where did TOC come from?
TOC was invented by a guy named Dr. Eli Goldratt more than 25 years ago. Goldratt is a 'guru' type, an intellectual with a brain the size of a planet. He brought TOC to the world's attention by publishing his first book, 'The Goal' in 1984. This has turned into a business best seller and he has published many other books on the subject since.
Today, the Goldratt organisation is spreading the word worldwide and applying TOC to transform business performance.
What do you mean by extraordinary results?
The results achieved by TOC seem to be way beyond what would normally be expected and these results are achieved in a very short time. Here is an assorted list of examples of what has been achieved.
If you think these results are good, listen to this. Goldratt's current offer is called his 'Viable Vision'. This is his explanation in his own words:
"When I do an analysis of a company, I am somewhat satisfied only when I clearly see how it is possible to bring the company to have, in less than 4 years, net profit equal to its current total sales."
Net profit equal to current total sales, in less than 4 years!
Try translating this into the numbers for your own company. Sounds incredible, doesn't it? Unfortunately, I don't have any examples of companies that have taken up his offer. Apparently, those companies are quite secretive about what they're doing - they don't want their competitors to find out. Perhaps that's not surprising!
What is the Theory of Constraints?
The key to understanding TOC is to think about complexity in organisations. How complex is yours? How many people? How many functions and processes? How many products and services? How many suppliers and customers? It is no surprise that even small companies are complex. And it doesn't take a genius to know that complex companies are difficult to manage.
So, how do we go about managing a complex company? We dissect it into smaller parts, into business units, functions and departments. And because each 'division' is smaller than the whole company then by definition, it is easier to manage. A quick look at your organisation chart will confirm that this is what we do.
But complexity is about more than the number of divisions. The real problem in our organisations is that things that happen in one part of the organisation have an impact on one or more places elsewhere. It is the many cause/effect relationships that criss-cross our organisation that make it so complex.
But it is the cause/effect relationships in our organisations that provide the clue to the solution. Consider this question: what is the minimum number of 'things' that we need to manage in order to manage the company? If the answer is '10 things' then this is a difficult company to mange. It has too many degrees of freedom. It's like trying to juggle 10 balls and keep them all in the air at once. If the answer is 'just 1 thing' then this is an easy company to manage: we can easily juggle with one ball.
Bearing this in mind, look at the diagrams representing two companies. Which one do you think is more difficult to manage, company A or company B?
To answer this question, we need to go to the core argument behind TOC. The idea is this:
… The more interdependencies that there are in the company, the fewer degrees of freedom that there must be.
It follows that in any complex company, there are very few 'things' that must be managed in order to manage the performance of the entire company, very few balls to keep in the air. These few things are the leverage points for the company performance or the 'constraints' of the business: hence the name, 'Theory of Constraints'.
In other words, the more complex a company is, the fewer degrees of freedom there must be and the fewer the constraints there must be that must be managed. Goldratt talks about the 'inherent simplicity' of a complex system, a complex business.
In Goldratt's own words…
"The more complex a system is, the more profound is its inherent simplicity."
Think about it - this idea has far reaching ramifications.
You can watch Goldratt explaining this in a video that he's posted on YouTube. There's a link at the bottom of this article.
Why does managing based on TOC produce extraordinary results?
If the performance of any complex business is controlled by just a few elements, the constraints of the business, then clearly the first thing to do is to identify these constraints. We will also need to understand the cause/effect relationships that link these constraints to all other parts of the business that control the business performance. Goldratt and his colleague have developed simple tools to achieve these things.
The great thing about this is, once we have identified the constraints of the business, we know what to focus on. We know exactly what we have to take care of in order to optimise the performance of the company. This is what allows the extraordinary results.
When we know the constraints of the business, all of our management attention can be directed to the few things that make a difference.
If TOC is so great, why isn't it more widely used?
This is a good question and one that has puzzled me for some time. However, I have noticed something when talking to people about TOC - some people just don't get it, they just don't seem at all willing to give up their current beliefs about how to manage businesses. And TOC is so fundamentally different to 'traditional' management approaches that for some people, it's too much of a risk to even consider.
I liken TOC to a completely new product that has been launched onto the market, like the mobile phone or the VCR in the late 70's and early 80's. To begin with, the few people who bought these products were so called 'innovators', the type of people who are inherently interested in new technologies and new products.
I think that TOC is like that. I think that TOC is in its early market phase and it will take some time to penetrate the market because of its 'newness'.
Where can I find out more?
You can see Goldratt explaining his 'Viable Vision' on YouTube here.
Also, I can recommend the following books:
For TOC and manufacturing - 'The Goal' by Goldratt and Cox (ISBN 0-566-08665-4)
'Manufacturing at Warp Speed' by Schragenheim and Dettmer (ISBN 1-57444-293-7)
'Breaking the Constraints to World-Class Performance' by Dettmer (ISBN 0-87389-437-5)
For TOC and project management - 'Critical Chain' by Goldratt
For TOC and companies involved in the IT market - 'Necessary but not Sufficient' by Goldratt, Schragenheim and Ptak (ISBN 0-88427-170-6)
You can check out the Goldratt UK web site for plenty of other stuff.
And if this has interested you at all, why not join the Theory of Constraints Club? It could be the beginning of an interesting and exciting journey!
Eric Ronney & Associates
Bringing step change improvement to consumer supply chains
Thanks Eric. This is an excellent introduction to the theory of constraints.
I remember first reading The Goal in about 1990 when I worked for a 300 employee foundry/presswork manufacturing business because I'd seen an interesting review criticising the way accountants measure performance. I bought The Goal on Saturday morning, read it over the weekend, took it in to my Operations Director on the Monday who stayed up all night to read it so by Tuesday morning we were discussing how we could implement the Theory of Constraints in the business.
The merits of throughput accounting belong to a separate article as here I want to concentrate on the main ideas of the Theory of Constraints.
Eric is the expert while I am just an interested amateur who sees a lot of merits in the theory of constraints thinking applied across any business and not just the supply chain. This is where Rich Schefren's interest came in and with his new report "The Uncertainty Syndrome" he is arguing that far more often the performance of a business is limited by constraints within it rather than its potential.My reading on the Theory of Constraints has not been as extensive as Eric but I do have in my library:
The Haystack Syndrome
It's Not Luck
I did get a bit confused by the Theory of Constraints thinking processes but the ideas are fascinating and while I will eventually review them all, I consider the "The Goal" by Eli Goldratt to be a must read for anyone interested in "systems improvement" and yes any business is a complicated system of inter-related processes.
The Viable Vision video above is nine minutes long Eli Goldratt explains his concern about sharing the vision of net profit in four years will equal current turnover because it sounds impossible.
The tendency is to split a complex system down into easier to understand sub-systems but too often that leads to localised optimisation which is sub-optimal for the whole system because of the cause and effect relationships are hidden.
The theory of constraints takes the opposite approach and looks at the few critical factors that determine system performance for the entire business.
I thought that it would be helpful to add a few more videos of Eli Goldratt.
In this first one Eli Goldratt answers the question What is the Theory of Constraints?
This next video picks up the Theory of Constraints approach to marketing with the creation of a Mafia offer. It is not Elihayu Goldratt this time but Dr Lisa Lang, former marketing director for Dr Goldratt.
A Mafia offer is an offer is an offer that is so good that your customers can't refuse it and your competition can't or won't offer the same thing.
If you have a story to share about the Theory of Constraints then it would be great if you could share it.
If you are based in the UK and you believe that your business could benefit from applying Theory of Constraints thinking then give Eric Ronney a call on 0118 973 7051 or go to his website www.ericronney.co.uk