What Is the Theory of Constraints?

Constraint theory is a management philosophy and principle for companies to identify and eliminate constraints (ie constraints) that exist in the process of achieving goals. Israeli physicist and business management consultant Godratt developed on the basis of the best production technology he pioneered. It is considered that in a business chain, the beat of the bottleneck node determines the beat of the entire chain, that is, any multi-stage production system. If the output of one stage depends on the output of the previous stage or stages, then the output rate The lowest stage determines the production capacity of the entire system. Constraints are the links that hinder companies from effectively expanding output capacity and reducing inventory and operating costs. ^[1]

The theory of restraint (TOC) was first developed in the 1980s by Israeli physicists and business management masters Jews

Constraint theory has a set of thinking methods and continuous improvement procedures, which are expressed as follows:

(1) Find out what constraints exist in the system.

If enterprises want to increase effective output, they will generally consider and propose countermeasures in the following aspects:

Raw materials, that is, increasing the input of raw materials in the production process.

Capacity, that is, the lack of a certain type of production resource that causes market demand to be unsatisfactory, we must consider increasing resources.

If the market has excess capacity due to insufficient market demand, consider developing market demand.

Policies, identify various policies and regulations that constrain the effective output within and outside the enterprise.

(2) Make the most of the bottleneck, that is, increase the utilization of the bottleneck.

This is a concrete method to solve the various problems raised in the first step, thereby achieving an increase in effective output. For example, some internal production resources are restricted. A series of measures must be taken to ensure that this link always produces efficiently. For the constraint of low utilization of a certain device, the specific solution is as follows:

Set the time buffer. Mostly used for single-piece small batch production types. That is, a buffer time is set before the completion time of the bottleneck equipment before the process and the start time of the bottleneck equipment to ensure that the start time of the bottleneck equipment is not affected by the productivity fluctuations and failures of the previous processes. The setting of the buffer time is related to the amplitude of the fluctuation of the previous non-bottleneck process and the probability of failure, and the ability of the enterprise to troubleshoot and restore normal production.

Work in process buffer. Mostly used for batch types, the principles and methods for determining the position and quantity are the same as for single-piece small batch production.

Set up a quality inspection link in front of the bottleneck equipment.

Count the waste rate of bottleneck equipment.

Find out the cause of waste and eliminate it.

Research and improve the methods of rework or rework.

(3) Subject all other activities of the enterprise to the measures proposed in the second step.

Many companies do not make this clear when solving bottlenecks in production systems. Pursuing 100% utilization of those non-constrained links will not bring profits to the enterprise but more work in progress. More waiting time and other waste in restraint. Therefore, the enterprise must coordinate the entire production process according to the production cycle of the restraint link.

(4) Break the bottleneck, that is, try to solve the bottleneck found in the first step.

(5) Return to the first step and continue to improve. ^[3]

Constraint theory holds that there is only one real goal of an enterprise, that is, the enterprise can always make money. However, traditional financial evaluation indicators, such as net profit (NP), return on investment (ROI), and cash flow (CF), have deficiencies in decision-making, emphasis on local optimization, and inability to directly guide production. Constraint theory questioned that cost accounting is the root cause of production problems, and proposed a new operating index system:

Operational cost (OE) All expenses in the process of converting inventory into effective output, including all indirect and direct costs.

Effective output (TP) The profit obtained by producing a product within a unit of time and achieving sales is an indicator of the ultimate profitability of an enterprise that can produce and sell a product within a unit of time. In mathematical calculations, the effective output rate is equal to the sales revenue realized per unit time minus the cost of sales incurred to obtain the corresponding revenue. Constraint theory distinguishes between output products and sold products. Products that are produced but not sold are counted as inventory.

Inventory (I) is all temporarily unused resources, including not only raw materials prepared in advance to meet future needs, unsold finished products, work in progress and temporarily unused parts during processing, but also fixed after depreciation. Assets, etc. Inventory occupies funds, consumes manpower and material resources, occupies some sites, etc., thereby generating opportunity costs and management costs required to maintain inventory.

Therefore, the constraint theory holds that in order to achieve the goal of maximizing profits, enterprises must reduce the necessary inventory and operating costs while increasing the production and sales rate. ^[2]

Although the constraint theory has not been produced for a long time, its research and application are rapidly heating up, and it has been extended to different application areas, such as project management, supply chain, and cost control.

Constraint theory is applied to project management, and critical chain is used to replace the critical path in PERT / CPM (program evaluation and review technique / critical path method) to realize project planning and control.

Constraint theory treats any system as an interlocking chain. The weakest link in the chain determines the effective output of the system. Constraint theory extends this application to the supply chain and treats each node enterprise as a link on the chain. Conduct supply chain optimization analysis, design, and implementation. Advanced planning and scheduling (APS) based on more and more theory is an important tool in the supply chain.

Constraint theory questions the source of cost accounting production management problems, proposes new operating indicators, changes cost-oriented accounting to effective output-oriented accounting, and gradually develops into effective output accounting. ^[2]