More Information: https://flevy.com/browse/flevypro/theory-of-constraints-1883 The Theory of Constraints (TOC) is a methodology for identifying the most important limiting factor — i.e. constraint — and systematically improving it. It was developed by Dr. Eliyahu Goldratt, introduced in 1984 book, The Goal. TOC differs from traditional management views, in that traditional methods seek to make improvements throughout the organization. They divide the organization into smaller, more manageable pieces. The objective, thus, is to maximize the performance of each part, resulting in global improvement. On the other hand, TOC takes a more focused approach. Instead of improving everywhere, the TOC approach seeks only to improve the few variables (or constraints) that have the largest impact on the organization’s performance. By trying to improve everything everywhere, the risk is that nothing will be improved that really counts. TOC follows the adage “a chain is no stronger than its weakest link.” An interesting phenomenon about chains is that strengthening any link except the weakest one does not improve the strength of the whole chain. Strengthening the weakest link produces an immediate increase in the strength of the whole chain, but only up to the level of the next weakest link. There are 3 types of constraints that exist in an organization: Capacity Constraint. This constraint occurs when a resource which cannot provide timely capacity as demanded by the system. Market Constraint. This is when the amount of customers’ orders is not sufficient to sustain the required growth of the system. Time Constraint. This occurs when the response time of the system to the requirement of the market is too long to the extent that it jeopardizes the system’s ability to meet its current commitment to its customers as well as the ability of winning new business.

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The “Theory of Constraints:” What’s Limiting
Your Organization?
Mark Bridges Jan 11 · 5 min read
Note: This article originally published by my colleague David Tang.
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The Theory of Constraints (TOC) is a methodology for identifying the most important
limiting factor — i.e. constraint — and systematically improving it. It was developed by
Dr. Eliyahu Goldratt, introduced in 1984 book, The Goal.
TOC differs from traditional management views, in that traditional methods seek to
make improvements throughout the organization. They divide the organization into
smaller, more manageable pieces. The objective, thus, is to maximize the performance of
each part, resulting in global improvement.
On the other hand, TOC takes a more focused approach. Instead of improving
everywhere, the TOC approach seeks only to improve the few variables (or constraints)
that have the largest impact on the organization’s performance. By trying to improve
everything everywhere, the risk is that nothing will be improved that really counts. TOC
follows the adage “a chain is no stronger than its weakest link.” An interesting
phenomenon about chains is that strengthening any link except the weakest one does
not improve the strength of the whole chain. Strengthening the weakest link produces
an immediate increase in the strength of the whole chain, but only up to the level of the
next weakest link.
There are 3 types of constraints that exist in an organization:
Capacity Constraint. This constraint occurs when a resource which cannot provide
timely capacity as demanded by the system.
Market Constraint. This is when the amount of customers orders is not sufficient
to sustain the required growth of the system.
Time Constraint. This occurs when the response time of the system to the
requirement of the market is too long to the extent that it jeopardizes the system’s
ability to meet its current commitment to its customers as well as the ability of
winning new business.
POOGI Approach
TOC practitioners follow a 5-step approach known as Process of ongoing Improvement
(POOGI). The 5 steps are as follows:
1. Identify the Constraint.

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First, identify the system;s constraint. Remember, strengthening any link of a chain
(apart from the weakest) is a waste of time and energy. It is impossible to manage a
constraint until you find out what it is. The good thing is it is surprisingly easy to find,
once you know how to look.
2. Exploit the Constraint.
We can exploit the constraint by leveraging various Lean Management tools. Lean
Management is a management philosophy based on the Toyota Production System
(TPS). The objective of Lean Thinking is to eliminate everything that does not add value
(i.e. “waste”) from the customer’s perspective. The general approach to Lean is learn-by-
doing and to foster a culture of continuous improvement.
Examples of Lean tools include Value Stream Mapping (VSM), 5S, Kanban, Kaizen, Poka
Yoke, Gemba Walk, Hoshin Kanri, Plan-Do-Check-Act (PDCA), Root Cause Analysis
(RCA), Heijunka, etc. You can learn more about Lean Management frameworks and
tools here.
3. Subordinate Everything to the Constraint.
Next, subordinate everything else to the constraint(s). By definition, any non-constraint
has more capacity to produce than the constraint itself. Left unchecked, this results in
bloated WIP inventory, elongated lead times, and frequent expediting/firefighting.
Therefore, it is critical to avoid producing more than the constraint can handle. In a
manufacturing environment, this is accomplished by choking the release of raw material
in line with the capacity of the constraint.
4. Elevate the Constraint.
Once the capacity of the system is exhausted, it must be expanded by investing in
additional equipment, investing in additional land, hiring people, etc.
Instinctually, we tend to gloss over the first 3 steps and jump straight to elevation.
Implementing the first 3 steps properly typically exposes a minimum of 30% hidden
capacity within the first few months. This capacity is available free of cost, without any
investment.

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5. Prevent Inertia from Becoming the Constraint.
Lastly, in step 5, prevent inertia from becoming the constraint. Once elevated, the weak
link may not remain weakest. Consider elevating other resources to retain the old
constraint, depending on where you wish to have the constraint in the long-term.
A new constraint demands a whole new way of managing the system. Therefore, we
return to Step 1, and thus begins our journey of continuous improvement.
Rules of Thumb about Constraints
Here are general principles about TOC:
You will always have a constraint, so choose wisely (perhaps the most capital
intensive, or energy consuming, or largest batch, or longest touch time, etc.).
If you identify the wrong constraint, it is easily rectified and causes no permanent
damage. The POOGI process autocorrects for errors made over time.
The constraint may appear to shift suddenly based on product mix. However, this is
often due to batching practices, rather than actual shifting of the constraint.
Most systems typically have one single resource constraint, such as a machine or
department.
Permanent constraints typically include sales/marketing and R&D.
The constraint should eventually be stabilized. Frequently, shifting constraints cause
havoc on policies, procedures, and people.
You can download an editable instructional PowerPoint about the Theory of Constraints
framework here on the Flevy documents marketplace.
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Process Improvement involves analyzing and improving existing business processes in
the pursuit of optimized performance. The goals are typically to continuously reduce
costs, minimize errors, eliminate waste, improve productivity, and streamline activities.
As we continue to deal with COVID-19 and its economic aftermath, most organizations
will prioritize Business Process Improvement initiatives. This is true for a few reasons.
First, Process Improvement is one of the most common and effective ways of reducing
costs. As the global economy slows down, Cost Management will jump to the forefront of
most corporate agendas.
Secondly, a downturn typically unveils ineffective and broken business processes.
Organizations that once seemed agile and focused during periods of growth may
become sluggish and inefficient when demand drops off.
Lastly, COVID-19 has expedited Digital Transformation for most organizations. One of
the quickest and most impactful forms of Digital Transformation is Robotic Process
Automation (RPA). Thus, we have included numerous RPA frameworks within this
Stream.
Learn about our Process Improvement Best Practice Frameworks here.
Process Improvement Continuous Improvement Business Strategy Management And Leadership
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