As the name “Theory of Constraints” implies, this approach to management suggests that every business—indeed, every system—has at least one constraint that keeps it from achieving more of its goal. If the goal of a for-profit enterprise is to make more money tomorrow than it is making today (that is, growth), then we know the system has at least one constraint or the organization’s profits would be approaching infinity.

 

At a more practical level, however—coming down from the stratosphere of hypothetical infinite profits—the best way to assure ongoing improvement in an organization is to understand the system’s constraint or constraints. Then change that brings improvement can be focused on that very small number of factors that assure progress toward the goal.

 

Unlike Six Sigma, as a contra-example, which seeks improvement everywhere in the system, ToC (the Theory of Constraints) seeks to focus the organization’s most precious resources of management attention, time, energy and money on those things that are most likely to affect the system’s constraint(s). ToC does this through what are known as the Five Focusing Steps:

  1. Identify the constraint
  2. Exploit the constraint
  3. Subordinate everything else to constraint
  4. Elevate the constraint
  5. Go back to step 1 – don’t let inertia set in

 

ToC also creates focus by simplifying the calculations. Here are the dominant numbers used in ToC analytics:

  • Throughput
  • Truly Variable Cost
  • Operating Expenses
  • Investment

 

When we work with ToC, we always prioritize our efforts in this way around these metrics:

  • First priority: anything that increases Throughput
  • Second priority: anything that reduces Investment (especially, inventories)
  • Third priority: anything that reduces Operating Expenses

 

These priorities are quite the opposite of most enterprise operations. Most executives and managers are constantly searching for ideas about how to “cut operating expenses.” In doing so, they also all too often, cut away at the system’s protective capacity that helps guard Throughput from the damaging effects of “Murphy.”

 

Furthermore, we encourage executives and managers to consider this: suppose you have a $100 million (revenue) operation. Its operations look something like this:

 

Statement of Operations

 

 

Revenues

 

$100,000,000

Less Truly Variable Costs

 

60,000,000

Throughput

 

$40,000,000

 

 

 

Less Operating Expenses:

 

 

  Labor

$10,000,000

 

  Other

$25,000,000

$35,000,000

Profit

 

$5,000,000

 

Suppose they would like to add $5 million dollars in profit to their bottom line over the next three years. Given today’s business environment, where most companies are already trying to minimize labor and operating expenses, is it likely that they can squeeze another $5 million out of raw materials, labor or other operating expenses?

 

Probably not.

 

Besides, if they could, they couldn’t do it again in the next three years to grow their bottom line.

 

But, think of this: If they can increase Throughput by increasing revenues by 12.5 percent, doing so will add the desired $5 million to the bottom line provided it can be done without changing the ratio of TVCs to revenues and they can hold the line on operating expenses. Plus, if they have discovered the way to increase revenues, chances are they can do it again in the years following this initiative.

 

Since trying to drive operating expenses down always has a limit and even small reductions may be damaging to the company’s long-term goals, we always, always focus on increasing Throughput using ToC tools.

 

-------------------------------------------------------------------------

 

We hope you found this article enlightening. We would be delighted to hear your comments. Please leave them below, or feel free to contact us directly, if you prefer.