Have you ever been in a position where you were held back by situations or constraints that didn’t let you utilize your full potential? Did you ever try to figure out that bottleneck?
It is not just an individual that faces the above problem with a particular task. For example, when a group of people works on a project, many bottlenecks will affect the overall performance, meeting deadlines, or staying within the budget.
Theory of Constraints helps project teams identify the bottlenecks and deal with those. Let us understand the idea in detail.
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What is the Theory of Constraints (TOC)?
The theory of constraints (TOC) is a methodology for identifying the limitations or bottlenecks that limit a system, project, or management to achieve its goals. Once identified, the theory aims to improve the constraints systematically till the restrictions are no longer relevant.
The concept was first introduced in 1984 by Eliyahu M Goldratt, an Israeli business management consultant in his book “The Goal.” The book is a management-oriented novel and was co-authored by Jeff Cox. The theory of constraint later developed into one of the significant management practices over the years.
The TOC believes that for every system, there are multiple interlinked activities or processes. Of these, there is always at least one activity that happens to be the most critical constraint affecting the outcome. Therefore, the goal is to identify this weak link and eliminate or improve it to streamline the overall system and its processes.
How does the theory of constraints work?
The main goal of any business or project is to increase profits. And constraints are the obstacles that limit your earnings. The TOC uses different set tools and methods to identify, manage and improve these constraints to achieve your goals. We will now discuss the main three tools:
1. Five focusing steps
“The Five Focusing Steps” is a methodology to identify and eliminate the constraints in the system. These five steps to utilize the theory of constraints are:
Identify
The first step is to identify the first constraint or the weakest link. It can be an overwhelmed worker with too many tasks or an employee on the bench sitting idle. The limitation can originate from a policy or any other activity that enforces restrictions on the work to be done.
Exploit
Once you have identified your constraint, you need to exploit it. You do that by using existing resources to make some improvements. The goal is to use the restrictions in the best way without needing any additional investments.
Subordinate
After improving the constraint, you must ensure that all activities (non-constraints) are aligned to support the condition. If not, make the necessary adjustments to the non-constraints. These adjustments eliminate the constraint.
Elevate
Sometimes, you will not be able to remove the constraint. In such cases, you elevate the constraint by bringing in extra resources (machinery, tools, staff) or making additional investments. Make sure ROI justifies these extras.
Repeat
After you have successfully eliminated the first constraint, now it’s time to find the others. The five focusing steps are a cyclic process. The aim is to avoid inertia and stick to continuous improvement.
2. Thinking processes
The following tool in TOC is the “Thinking Process,” which is a problem-solving methodology. A cause and effect tool identifies the root cause by finding undesirable effects (UDEs) symptoms. You do that by answering three crucial questions:
- What needs to be changed?
- What should be the outcome after the change?
- What actions will cause the change?
You answer by drawing necessary diagrams, flowcharts, tables, decision trees, and other data to analyze the effects logically. You need not use the same set of questions. Instead, you can alter them depending on the problem and the type of your project.
3. Throughput accounting
The theory of constraints follows a different accounting approach than the traditional one called throughput accounting. It treats accounting as counting destructive behaviors where cutting costs is less important than selling goods (throughput). This approach is because companies often manufacture unnecessary items – items that never get sold or become obsolete and end up piling in storage.
Throughput accounting has three interdependent core aspects. First, the goal is to increase throughput and reduce investments and operating expenses.
- Throughput – Throughput is the rate at which the company receives money through sales. These sales can be products or services.
- Investment – Investment is the money spent for physical items like machinery, equipment, product inventory, facilities, raw materials, finished goods, and even obsolete items in the warehouses.
- Operating Expense – Operating expenses are the cost incurred for the processes to create throughput. These include salaries for the staff, taxes, maintenance, labor, and other operational expenditure.
To measure the above aspects, throughput accounting uses four measurements:
- Net Profit = throughput – operating expenses
- Return on Investment (ROI) = net profit / investment
- Productivity = throughput / operating expenses
- Investment Turns = throughput / investment
How can the theory of constraints help businesses?
The TOC is not just useful for manufacturing goods but can be applied to running businesses too. Because it is a management methodology and enterprises run on different projects that always have one or more constraints that hinder success.
For a business, constraints can be various factors like impractical deadlines, an under-skilled workforce, or any HR, marketing, IT, sales, accounting, and finance problems.
To find and remove the constraints, you need to apply the five focusing steps in your business. First, you can identify the root cause or the factor resulting in constraint condition through auditing. Then, to improve it, you may need to expand your team size, upskill your existing members, and so on.
The constraint may not always be within a particular project as an issue. Instead, it may be some company policy or a rule keeping the employees from giving their best. In such cases, you will have to make some changes to the regulations and policies.
Benefits
The theory of constraints not just identifies issues and solves them. It has other benefits too:
- It increases the capacity, productivity, and quality of the projects. This increase results in customer satisfaction.
- The whole process of finding and removing constraints establishes a culture of employee engagement and problem-solving.
- By eliminating bottlenecks, TOC removes wastes, reduces lead times, and increases production and workflow. These improvements affect both products and services.
- You can apply it in various aspects of a business, including project management, manufacturing, production, service, sales, marketing, distribution, and supply chain.
- TOC improves communication between departments as they will have to come together to identify the constraints.
- Sometimes, a constraint may be an older company process or technology that has become obsolete. Such conditions require the management to prioritize up-gradation.
What are some real-life successful Theory of Constraint Examples?
The theory of constraints is more than just a theory. It is a practical approach for various businesses to achieve success. Let’s see some of the theory of constraint examples that companies implemented.
Bajaj Electricals
Bajaj Electricals is a well-known company that is into both B2B and B2C. As the supply chain is the central part of business, 100% delays used to be the norm. Once they implemented TOC, B2C sales jumped significantly, and they reduced B2B project lead time.
Dr. Reddy’s Laboratories (DRL)
Dr. Reddy’s Laboratories was facing high backorders and low supplier ratings. However, after implementing TOC to fix the supply chain, their ratings for both supply chain and quality increased, but finance and project management improved. They even won the best supplier award in the US in 2013.
Morphy Richards
Known for its small household appliances, Morphy Richards initially struggled to establish itself in the Indian market. However, all changed when they implemented TOC. They refined their excess inventory system and distribution that skyrocketed their growth in the market.
How can the theory of constraints be applied to a Startup? How useful is it for project management?
By now, you know how valuable the theory of constraints is for companies both big and small. And yes, it can be applied to a startup, too. Moreover, the applicability of the Theory of Constraints is not just limited to businesses that manufacture physical products. Companies can use the same principles to manage their projects and services.
TOC focuses on continuous improvement that is essential for a startup’s growth. A significant aspect of this theory is its method of eliminating the constraint by using existing resources. As startups usually lack funds for additional investments, these practices bring them immense benefits.
TOC is quite useful when applied for project management. It helps the team focus on the goal, and the managers identify the bottleneck tasks, necessary tasks, and wastages. It streamlines the processes and increases project performance.
The ToC is also useful as part of the Sprint Retrospective if you are using the Scrum framework for your agile teams. By identifying the most critical process bottleneck or constraint, the retrospective can provide a focus for the improvement efforts of the Scrum team.
Conclusion
In any system, the processes and activities are interlinked that collectively make up the system. Because of this, if there is even one constraint, it hinders the system from achieving its goal. To find it (or them), improve it, and perform your goal. But don’t stop there. Repeat the cycle while focusing on continuous improvement.
