The Theory Of Constraints - Your Ticket To Profitability
Being profitable is the central tenet of any business, whatever be the industry and improving profitability is crucial for sustained success. This scenario is compounded with the challenging business environment of the day where a company that does not improve or adapt will find itself in losses or worse. For companies struggling to get their strategy right, looking towards the Theory of Constraints (TOC) can be a huge benefit.
What is TOC?
TOC was first described in 1984 by Eliyahu Goldratt and it is a management philosophy that states that any system contains an inherent constraint that limits the productivity of the entire system. TOC identifies this limiting factor or constraint and improves or elevates it till it no longer limits the productivity. To do so, it uses a set of three powerful tools, namely:
The Thinking Processes: TOC thinking processes utilise three primary objectives of “What to change?”, “What to change to?”, and “How to make it happen?” to diagnose and strategise processes that can improve the system. It also uses four processes to improve the system, namely Current Reality Tree (CRT), Future Reality Tree (FRT), Negative Branch Reservations (NBR) and Evaporating Cloud or conflict resolution diagram (CRD).
The Five Focusing Steps: These tools help in identifying and eliminating constraints. First, the constraint is identified, then it is exploited to perform at maximum capacity and all other processes are subordinated to it. Lastly, the constraint is elevated and the whole process starts over again.
Throughput Accounting: This is a relatively new management accounting technique that measures performance and guides management decisions. Throughput Accounting only takes into account the varied costs and deducts it from overall sales to determine throughput which is the rate at which the system produces "goal units.” The main goal is to extract maximum profit in a minimum time frame and with restricted resources.
But how would a business benefit from implementing the Theory of Constraints? The businesses that implement this solution successfully usually show the following improvements:
• First and foremost, higher profitability
• Reduced WIP resulting in lower inventory levels and costs
• Smoother product flows that lead to reduced lead times
• Improved capacity due to maximised constraint
When constraints are eliminated, conflicts and friction go down which brings us to another lesser known consequence of implementing TOC in one’s business, which is a more congenial and relatively stress-free environment. Companies implementing TOC usually have happier employees which means better productivity and profitability, making TOC a virtuous cycle.
So if you want your business to experience all these benefits, then reach out to a TOC consultant today!
Author’s note: The author is a subject matter expert on TOC and its applications. She advocates engaging Vector Consulting as the first choice for your TOC needs.