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The Theory of Constraints (TOC) will change the way you think, February 12,
2006
By Avinash Sharma "MBA, M.S., Knowledge Worker"
Eliyahu Goldratt's "The Goal" is an entertaining novel and at the same time a thought
provoking business book. The story is about a plant manager, Alex Rogo, whose plant and
marriage are going downhill. He finds himself in the unenviable position of having ninety
days in which to save his plant. A fortuitous meeting with an old acquaintance, Jonah,
introduces him to the Theory of Constrains (TOC). He uses this new way of thinking to ...
TOC postulates that for an organization to have an ongoing process of improvement, it needs
to answer three fundamental questions:
1. What to change?
2. To what to change?
3. How to cause the change?
The goal is to make (more) money, which is done by the following:
1. Increase Throughput
2. Reduce Inventory
3. Reduce Operating Expense
Goldratt defines throughput (T) as the rate at which the system generates money through
sales. He also defines inventory (I) as everything the system invests in that it intends to sell.
Operating expense (OE) is defined as all the money the system spends in order to convert
inventory into throughput.
The author does an excellent job explaining his concepts, especially how to work with
constraints and bottlenecks (processes in a chain of processes, such that their limited capacity
reduces the capacity of the whole chain). He makes the reader empathize with Alex Rogo and
his family and team. Don't be surprised if you find yourself cheering for Alex to succeed.
The importance and benefits of focusing on the activities that are constraints are clearly
described with several examples in "The Goal". One example from the book is the one in
which Alex takes his son and a group of Boy Scouts out on a hiking expedition. Here Alex
faces a constraint in the form of the slowest boy, Herbie. Alex gets to apply two of the
principles Jonah talked to him about - "dependent events" (events in which the output of one
event influences the input to another event) and "statistical fluctuations" (common cause
variations in output quantity or quality). He realizes that in a chain of dependent processes,
statistical fluctuations can occur at any step. These result in time lags between the processes
that accumulate and grow in size further down the chain. This leads to the performance of the
system becoming worse than the average capacity of the constraint.
It is interesting to note that TOC practitioners often refer to TOC concepts in terms of
references from this book. For example, a constraint is often called a Herbie.
The Goldratt Institute (goldratt dot com) has illustrated TOC Analysis in the form of five
steps used as a foundation upon which solutions are built:
1. Identify the constraint
2. Decide how to exploit the constraint
3. Subordinate and synchronize everything else to the above decisions
4. Elevate the performance of the constraint
5. If, in any of the above steps the constraint has shifted, go back to Step 1
Although this book is excellent in the context of Operations, the "Goal" to "make (more)
money by..." is limited in its focus. It is concerned with the cost centers internal to a business.
Business performance in today's increasingly competitive market depends on a variety of
factors that exist outside the business. These include competitors, external opportunities,
customers and the non-customers. Executives need to focus on these in order to see the bigger
picture.
This book is necessary reading at the best MBA programs. In addition to being a review, this
write-up was intended to serve as a summary of the core concepts of this book and TOC. If
you are reading this as part of your coursework, please feel free to share the link with your
fellow students.