The Idiot’s Guide to Theory of Constraints (TOC) – Part I


The late Dr. Eliyahu M. Goldratt was a genius, a visionary, an unbelievably prolific business guru…and a scary man.

Sadly, he passed away this past June of 2011, and I don’t mean to call him scary out of disrespect, honestly, it was a trait I think made him more effective.  He was exceptionally intimidating despite a short stature and seemed to always get his way, I mean, look at that mug, would you contradict this man?  He once opened a keynote speech by saying, “business consulting is just a hobby of mine, my real occupation is as a soldier, my real job is to kill people.”  No joke.

At about the turn of the century, MRT conducted a few conferences focused on the Theory of Constraints (TOC), the ideological foundation on which Dr. Goldratt built his business consulting empire.  Upon meeting Dr. Goldratt, you immediately got the sensation that he was something like a rockstar.

He traveled with an entourage, insisted on smoking his pipe onstage and in places where smoking was forbidden, and his voice was deep and commanding and he liked to shout a lot.  After making a specific point in a presentation, he would yell in a shrill voice at the audience, “Do you understand?  Yes or no!?!?”  Like a group of meek schoolchildren, a room full of professional engineers and managers would answer back sheeply.  Dr. Goldratt had TOTAL COMMAND of his audience.  Some were enamored of his conviction, yet some would be offended by his “arrogance”.

These are the things people seldom write or reveal about him.

Don’t get me wrong, although it was his personality and gruff style that turned some people away from TOC, his work in spreading its very logical message has made very deep inroads into the manufacturing business, whether you were aware of it or not.  His groundbreaking business novel, The Goal, should be required reading for everyone, business person or not, as the lessons it teaches are universally applicable to life and all of its processes.

In January of 2000, I wrote the following piece for my email newsletter, The Critical Path.  Entitled “The Idiot’s Guide to TOC,” I followed the popular “dummies” format and provided a quick primer on the subject, please bear in mind this is over a decade old and may have some stale references inside.  I offer this here as my tribute to Dr. Goldratt, who definitely made a profound influence on me.

Here’s part I, I will post part II in a later post.

THE IDIOT’S GUIDE TO TOC

Part I – Digesting the Framework

Chevy adjusts his papers and looks into the camera. “And now for a commentary from our industrial field reporter, Ms. Emily Litella.”

“Thank you Chet. Ahem. What’s all this fuss I keep hearing about this ‘Theory of Complaints?’ There’s no theory. When I don’t like something, I just speak right up. Why the other day I was at the market and this little snot behind the register just…”

“Excuse me, Emily.” Chevy interrupted.

“Yes, Chet?”

“I believe that’s Theory of Constraints…not complaints, you nimwit.”

“Oh,” said Emily apologetically. “That’s very different…never mind.”

* * *

You’ve heard of this TOC thing, but have no clue what anyone’s talking about or why people discuss it with the fervor of a millenium doomsday theorist. Well, this article is for you, the TOC disenfranchised. Now, I’m not a “Jonah”, I haven’t read all of the books, so if you notice any grave inaccuracies, please feel free to bring them to my attention (I’ll even post them on this website). This is not a cop-out, just a caveat. So if you’re too lazy, er, I mean “busy,” to read The Goal, this article should provide you with a good primer. Consider it a “cliff-notes” exercise.

TELL ME IN SIMPLE TERMS – WHAT IS TOC?

“Perfection is the goal, but excellence will be tolerated.” So states one of those posters hung up on the wall opposite your cube, put there by the HR staff to motivate you. This aphorism also reflects the goal of TOC – simply a process for ongoing improvement. I know what you’re thinking – what makes TOC different? The true difference between TOC and the many other management philosophies is that it is firmly grounded in scientific logic.

The most basic tenet of science is the relationship between cause and effect. Eli Goldratt, fundamentally a physicist, is perhaps the most tenacious champion of applying this type of analysis to what some call the “soft” sciences – those things subject to human behaviour, such as all business activity, which we can all agree vehemently defy the predictable nature of physical science. TOC is his school of thought on explaining why things happen and strategically making changes for system-level improvement.

To embrace TOC, first you must believe that an infinite level of production is theoretically possible in your company, then you go about finding and fixing the cause and effect relationships that prevent this from happening. This sounds a lot like the Toyota Production System, aka “lean”. Aficionados of both systems are very open about the complementary nature of the two schools, which are similar, but not congruent.

Some people give TOC a hard time because of semantics. They think because it contains the word ‘theory’, it is impractical. But what if we applied this reasoning to Einstein? In truth, there is far more physical evidence of successful TOC implementation than time travel, yet relativity is regarded almost like gospel truth, so we need to get over the language, which can be a real problem with the ‘soft’ stuff, but more on that later.

TOC – THE FRAMEWORK

Theory of Constraints consists of a central philosophy, and several sub-schools of thought which contain the tools and methods for achieving its goals of quantum improvement, or what the Toyota Production System would call “perfection.” The philosophy is simple as stated above: to use a scientific method to define your “perfect state” (the goal – most likely making money), to expose the causes preventing it from happening (i.e. constraints), to understand the effects of these causes, and then to employ disciplined methods for alleviating them. Wash, rinse, repeat.

Here’s a breakdown of the structure of the philosophy and its sub-schools:

I. Philosophy

* Statistical fluctuation & interdependent events
* Three improvement areas (T, I, OE)
* Five Focusing Steps

II. Production

* Drum-Buffer-Rope

III. Product Development/Project Management

* Critical Chain – single projects
* TOC Multi-Project Management

IV. The Thinking Processes

* Evaporative Clouds
* Reality Trees
* Prerequisite and Transition Trees

In this next segment, we provide an overview of just the first section above, which will give you a good entry-level understanding for learning the rest on your own from the many resources publicly available (next month’s Part II will cover that).

I. THE PHILOSOPHY

STATISTICAL FLUCTUATION & INTERDEPENDENT EVENTS

Here’s where the science starts to come in and separates TOC from other initiatives.

To understand TOC, you must first comprehend that the activities of any company, be they production or development, contain two basic phenomena: 1) statistical fluctuation and 2) interdependent events (again linking to cause and effect). What does that mean? Basically, anything you do will have variable results, such as in production, how many parts can be fabricated in an hour? You don’t know for certain, but you do know within a range. Hence, statistical fluctuation. This might be affected by the availability of components from inventory, you may have too many sitting there and piling up, or worse – not enough, which causes delay. Hence, interdependent events (followers of MRT should be very acclimated to the concepts of interdependency in product development).

THREE IMPROVEMENT AREAS

Dr. Goldratt lists what he considers the only three areas where you can affect your ability to reach your goal, that is, anything you try to improve must be linked somehow to one of these three things. They are 1) Throughput (T = the rate at which a system generates money through sales) – increase it; 2) Inventory (I) – reduce it; and 3) Operating Expense (OE) – minimize it. I and OE are finite, the best you can do is zero and all they do is increase your margin, whereas T has unlimited potential, so of course it is the primary focus of TOC activities. The obvious assumption in all of this is that there is more customer demand than you can meet, not always the case, but this is addressed specifically in Goldratt’s later works, such as the book “It’s not Luck.”

FIVE FOCUSING STEPS

This is the basic action plan for implementing TOC:

1) Identify the Constraint
2) Exploit the Constraint
3) Subordinate everything else
4) Elevate the system’s constraint
5) Avoid Inertia – go back to step 1

You may be confused by the word “exploit” above. Basically when you find a bottleneck in your system, you want to minimize that bottleneck’s effect on overall throughput. For example, if powder coat baking is the thing that’s holding up everything else, then you schedule the powder coat oven to run as close to 24/7 as it’s operating manual will allow. Then you “subordinate” other things, such as the constraint’s interdependent events, i.e., you do NOT run the other things at maximum utilization, a practice which can provide gains in I and OE.

However, this is contrary to how many companies measure and therefore reward for efficiency. Your company’s CFO probably wants EVERY piece of equipment to run 24/7, otherwise, they contend, you are not maximizing the high investment in these machines. This is why Goldratt considers “efficiency” an enemy. Because with traditional measurements, individual point optimizations will appear “inefficient” and heads may roll as a result, even though the overall throughput of the system will improve. In the language of “lean,” doing things the TOC way will reduce “muda” (Japanese for ‘waste’). We all need less ‘muda’ in our lives.

Perhaps the most important thing to understand about TOC is that it challenges the so-called “conventional wisdom” of operational rules. It takes a very open mind to awake to the folly of dominant logic. Not every incumbent idea makes sense, but from politics we learn that incumbency is a very powerful position that is difficult to overcome. Courage is perhaps the ingredient rarely mentioned when taking on the mantle of TOC, Lean/TPS or similar divergent causes. Beware.

* * *

By now you should have a solid basic understanding of TOC principles. There’s a lot more to it, but if you digest the above, the rest is easier to swallow. However, it’s one thing to know about it, it’s another to do something with it. As GI Joe would say, “knowing is half the battle.”

What’s a UDE? What are these “trees” all about? Drum-buffer-rope? Didn’t I see that in a Kirk Douglas movie? In next month’s issue, we’ll feature a guide to the TOC books and other learning resources, a short glossary to the TOC lexicon, and a list of websites for deeper investigation on your own.

For those who can’t wait, you can start by visiting the following websites:

To read part II of this article, click here.

Advertisements

2 thoughts on “The Idiot’s Guide to Theory of Constraints (TOC) – Part I

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s