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The Theory of Constraints --Fad or Future?

By Robert E. Fox
TOC -- Another three-letter acronym that promises to be a panacea for every
company? Will it become the management mode of the future or is it just another
passing fancy? Obviously only time will tell, but let me venture a prediction and
share with you the thinking behind my speculation.

Acceptance vs. Success

Oftentimes a new management technique gets widely accepted by companies. Yet its initial
acceptance does not assure that the technique will have a long life, and it certainly does not
guarantee that it will be successful. Several years ago, the cover of Business Week contained
a timeline covering the past several decades. Interspersed along the timeline were literally
dozens of management techniques that have gone from the fad of the day to a distant memory.

Even techniques that are accepted and become an established mode of operation in
companies, often fail to generate the returns promised -- in fact they often fall dismally short of
meeting expectations. Let’s explore just a few well-known examples:
Computers -- I recall reading a study in the early 70s done by the prestigious consulting firm,
McKinsey & Company. They had analyzed the financial return companies had earned by
investing in computers and concluded that very few (less than 10%) had earned an
acceptable return, and the great majority had gotten a negative return.
Materials Requirements Planning (MRP) -- This computer technique began to gain favor in
the early 70s, and is now in widespread use in a great many manufacturing companies in this
country. Its avowed purpose was to lower inventories, improve delivery performance, and
reduce costs. Several years ago a number of respected experts referred to the MRP
movement as a $10 billion mistake, and pointed out that the Japanese had much greater
success with much less investment by using a largely manual system they called "Kanban."
Personal Computers -- Recently, Lester Thurow, the President of MIT and a noted
economist, reported on a study made to measure the productivity gains from the use of
personal computers in industry. He essentially said that it was both very disturbing and
puzzling, but despite huge investments, they could not detect any real improvement in white-
collar productivity.
Total Quality Management (TQM) -- Few techniques received more instant widespread
publicity than the Quality movement. Once the TV show "Why Japan Works" aired in prime
time one Sunday evening, it seemed like the whole country instantly knew that quality was
the key to Japan’s success and that Dr. W. E. Deming was the man who got them started.
Despite a widespread and rapid adoption of TQM by US industries, one of the big six
consulting firms reported recently that only around 5% of the companies who attempted to
adopt TQM were happy with their results.
I would be the last to say that computers, MRP, PCs and TQM are not important or valuable
tools, but based on the analysis of some highly respected organizations and individuals, clearly
something is amiss.

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Maybe the problem is lack of top management’s understanding, support, and persistence, a
common reason given when such programs fail to yield the desired results. That is a hard one
for me to swallow. Top management obviously believed enough in these techniques to invest
the money required to implement them. Also it is hard for me to accept the proposition that top
management is not interested in getting a significant return on their investments and improving
the profitability of their companies.

Maybe companies need to adopt such techniques just to stay up with the competition. Maybe
the answer is that they would be much worse off if they had not implemented these approaches.

Maybe the problem is that it just takes longer than we expected for these investments to pay off,
which might be a plausible answer. After all, each of them involves a real cultural change for the
organization, and cultural changes do not come overnight.

Another part of the dilemma might lie in what we mean by success. All the organizations and
individuals who were so gloomy about the impact of the above techniques were looking at it in
the same way. Did the company’s investment in these techniques cause a real increase in
profits, and did these increased profits provide a more than satisfactory return on the money
invested?

If we accept some of these explanations, then we may have to admit that it might not be
possible to use such techniques too dramatically and quickly increase the profitability of a
company. The best we can hope for is to maintain our current levels of profits and hope for
longer-term gains. It is certainly one school of thought!

A Brief History of the Theory of Constraints (TOC)

The roots of The Theory of Constraints go back to a finite scheduling program based on a
proprietary algorithm called OPT, which originally stood for Optimized Production Timetables
and then was changed to Optimized Production Technology. It was developed by Dr. Eli
Goldratt and three Israeli partners who brought it to the US in late 1979 and formed a company
called Creative Output, Inc. Over the next seven years while the software system was evolving,
another side of OPT was developed -- the OPT management philosophy and rules. Creative
Output’s history was a roller coaster ride that ended on a down note with a major dispute
between Eli and his partners and the essential bankruptcy of the company. The rights to the
OPT software were sold to an English firm called Scheduling Technologies Group (STG). In late
1986, Eli and I co-founded the Goldratt Institute and evolved over a period of ten years what is
known today as TOC.

The principles of the OPT software and philosophy are the roots of TOC. The history of TOC
and its OPT ancestor is a checkered one, strewn with much controversy and confusion. The
confusion started with OPT. Was it a software system or a management philosophy? The
answer is: it was both.

The OPT management philosophy challenged many commonly held management principles
and created its own controversy. However, when it came to controversy, the OPT software held
center stage. First, it was a series of articles I wrote entitled "OPT, MRP or JIT—What’s Best?"
that challenged the supremacy of MRP as a scheduling approach and created a major stir in the
APICS community. Then there was a highly publicized suit against Creative Output by the M&M
Mars Company that spotlighted and attempted to expose the proprietary algorithm, the "black
box" of the software. A final OPT controversy arose following the publication of a white paper
written by Eli Goldratt and George Plossl called "A Town Without Walls." Not only did this paper

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directly challenge, and indirectly criticize, the National APICS leadership, it was widely
distributed at the 1984 APICS International Conference in Las Vegas in the face of strong
opposition. Confusion, controversy, proprietary secrets, success, and finally bankruptcy
characterized the Creative Output/OPT story.

Growing from its OPT roots, TOC evolved first as a manufacturing management philosophy.
The Goal and The Race were the first two books to describe it, and generated widespread
interest among readers, and enthusiasm among successful implementers. What most people
understood as a way of managing manufacturing and dealing with bottlenecks, subsequently
evolved into a more robust management approach dealing with generating Throughput rather
than saving costs, and eventually covered all functions.

Controversy, however, was never far away. Dr. Goldratt’s talk at the 1983 APICS International
Conference in New Orleans was entitled "Cost Accounting -- Public Enemy Number 1 of
Productivity." While many APICS members openly applauded the virulent attack on Cost
Accounting, the financial community was not amused.

Then in 1991, as many people were just becoming aware of and accustomed to TOC, another
change occurred. Overnight, TOC became a group of Thinking Processes. Attendees who came
to the Jonah Course prepared to learn about bottlenecks and drum-buffer-rope scheduling were
introduced to cause-effect trees, evaporating clouds, and several other techniques, which at the
time were in a very rudimentary stage. They were told that they would be taught how to think,
using these techniques. Needless to say, many attendees were confused, some were quite
irritated, and some totally rebelled. Two Fortune 500 companies, who had great success and
interest in the Throughput World aspects of TOC, completely walked away. Eventually, the
Thinking Process techniques were refined and polished into useful, teachable tools.

So TOC today is, like its ancestor OPT, a two-headed creature -- a Throughput oriented
management philosophy and a series of Thinking Tools. What I would like to speculate on is the
future of the TOC/Throughput World approach -- a philosophy of managing, where generating
more Throughput is the number one priority of the company.

The Future of the TOC/

Throughput World Approach

Some of today’s management techniques like MRP and ABC (Activity Based Costing) were
developed in this country and evolved rapidly as companies attempted to implement and
capitalize on them. Other techniques like TQM and JIT went through much of their development
cycle in another country (Japan) and when they were introduced into the US were robust, tested
approaches.

Few management techniques seem to have had as varied and as controversial a path as TOC.
Today, some 18 years after the OPT software was first introduced, the usefulness and credibility
of TOC seems to be entering the initial acceptance stage.

APICS has finally embraced TOC as a valid and important approach. An APICS Special Interest
Group (SIG) was formed about three years ago and has just completed its third highly
successful conference, each one larger and meatier than the prior one. Competition in the
market place now exists, and the Goldratt Institute is no longer the sole developer and provider
of TOC Throughput World and Thinking Process know-how. A sure sign of acceptance is that
several software firms now purport to have systems that do TOC drum-buffer-rope scheduling.
Recently, a company called Maxager even introduced a constraint based costing system and a

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data collection system for capturing the key shop floor data needed for advanced Throughput
World users. The number of books being written on the subject continues to grow, along with
the number of companies implementing or expressing an interest in TOC. In regard to
acceptance, I think it is relatively safe to predict a rising tide for TOC.

But as we have seen, many well-regarded techniques, while widely accepted, have fallen short
on the success side, at least in terms of short-term expectations. Here I am prepared to go way
out on a limb and predict that those companies that take a comprehensive, total business
approach to implementing the TOC/Throughput World approach will show dramatic bottom line
improvements in the first year, and even better results in the second and third. Those that focus
their implementations narrowly in manufacturing will proclaim great improvements, but I suspect
that if rigorous studies like those described above were to be conducted, that the financial
returns would be disappointing.

The reason for my optimism is that the inherent leverage of generating more Throughput dwarfs
any benefits possible from alternatives like reducing inventory or operating expense (re-
engineering). It is not that generating more Throughput is somewhat better than the other
approaches; it is an order of magnitude better. TOC certainly has no monopoly on ideas of how
to generate more Throughput. It is, however, a well-organized collection of tools and techniques
for doing so and for changing the culture of an organization from a Cost World to a Throughput
World focus. The value of these ideas, whether under the banner of TOC or some other
acronym, has been validated by the Japanese success.

On the other hand, my pessimism about the benefits of TOC, if it is largely confined to
manufacturing, is based on the recognition that manufacturing cannot by itself generate larger
amounts of Throughput. Marketing, product engineering and finance must collaborate with
manufacturing to view their company as a system for generating Throughput. In order for this to
happen, top management needs to lead the organization in the development and
implementation of a Throughput based Operating Strategy (TOS) that is understood and
embraced by the entire organization.

Am I right? Only time will tell. However, if I am even partly correct, those that begin the journey
early and in a comprehensive fashion will clearly reap a rich harvest.

The TOC Center, Inc. www.tocc.com