Theory of Constraints Handbook.

James F. Cox III.

Preface.

Beginning in the early 1980s with the OPT software, a software package for scheduling manufacturing operations, Dr. Eliyahu M. Goldratt started applying the concepts of the hard sciences1 to problems in organizations. Later, with the publication of The Goal in 1984, Dr. Goldratt launched a series of revolutionary concepts aimed at bringing about improvement in the global performance of organizations by focusing on a few leverage points of the system. These revolutionary ideas of Theory of Constraints go to the very core of how things work in the real world. They focus on Constraints as a centerpiece in the definition and management of production work flow in manufacturing, administrative processes, project management and the like. Holistic thinking is emphasized throughout, shifting the focus on work direction and measurement from local efficiencies to Throughput of the entire system, buffering the system to protect it from the statistical fluctuation caused by unexpected problems (Murphy), Parkinson's Law, etc. This is fortified with clear guidance on placement of buffers in the flow of the system and simple tools for "Buffer Management" as a way of achieving the best focus on priority actions. By taking a systems view and focusing the cause-and-effect relationship of the leverage points to global performance, Goldratt invented new management concepts and applications in production, project management, finance, accounting and performance measurement, distribution and supply chain, marketing, sales, managing people, and strategy and tactics. The concepts are robust with applications appearing in manufacturing, services, engineering, government, education, medicine, prisons, banking, and professional, scientific, and technical services and other service industries.

Perhaps Dr. Goldratt's most important contributions are the Thinking Processes which employ structure and language to lay out true cause and effect in defining problems and laying out conflict dilemmas and their solutions. They have been taught and used effectively in all levels of education from pre-kindergarten through PhD research. On a grand scale they provide a suite of complementary problem-solving and decision-making tools based on using the scientific foundation of cause-and-effect logic, with steps for verification and validation. While they are applied in strategy, development, marketing, sales, production, distribution, finance, and accounting, they are useful for addressing personal problems and have even been used in teaching prisoners how to deal with the issues they face.

Theory of Constraints concepts and tools are aimed at one overriding objective: bringing about a process of ongoing improvement in enterprises. That said, the purpose of this book is to provide "hands on" guidance from the world's top experts on how to implement these TOC capabilities. This guidance is buttressed by clear definition on how they work, why they work, what issues are resolved and what benefits accrue. Leading practitioners provide guidance based on their hands-on implementation experience. Academic authors give a review of the wealth of literature on why to move from the traditional discipline to each TOC discipline and a review of the TOC literature in that discipline. Indeed these ideas are of such a scope that this Handbook required 44 authors to explain them.

James F. Cox III.

John G. Schleier, Jr.

Acknowledgments.

We have a number of people and organizations to acknowledge for their help in bringing this handbook to the public. First and foremost are our wives, Mary Ann and Maribeth; they deserve all of the credit as they managed our daily lives so we could work more than full time on this project. They lived through our ups and downs with us at every step of this journey. Second, we appreciate our children and grandchildren for understanding that we had a major project at hand and hopefully fun would come later.

Dr. Goldratt deserves a lot of praise and appreciation for breaking the ground on topics of this handbook in his drive to teach the world to think logically. For thirty years he has been slaying sacred cows in the various business functions. From the very beginning he had a focus on the goal of teaching people to think like scientists and on redefining the system perspective to mean identifying and managing a few control points in a system and where change makes a significant difference in system performance. From our perspective, his biggest contributions are his Thinking Processes. They offer the potential of teaching children and adults right from wrong, how to sort through their personal and business problems, and how to achieve their dreams by using simple logic. He emphasized the use of the Socratic approach as a powerful methodology for both teaching and gaining buy-in.

The TOC experts (and their supportive families and friends) who authored these chapters must be thanked and applauded. They worked diligently at writing so we, the editors, could understand their shared wisdom. Their depth-of-knowledge is unparalleled. Each worked long hours through many revisions of their chapter to achieve a lasting contribution to the body of knowledge. But let us all understand that tomorrow there will be more and better material in each area as we have embarked on a journey and have not arrived at a destination with this handbook. It is a stake in the ground: what we know now. Let's move forward.

Some professional organizations and individuals should be singled out. The Theory of Constraints International Certification Organization (TOCICO) is the young but rapidly growing certifying body of TOC, holding regional and international conferences focusing on the development of TOC knowledge and certification of professionals in this knowledge. Their TOCICO Dictionary has been a valuable source for definitions of key terms. Second, APICS is one of the leading educational and certification organizations, and the first to explore, and present education in TOC. By providing access to their excellent dictionary for a modest fee, APICS has enabled us to enhance the quality of the handbook. The Ansoff Family Trust permitted the use of the Ansoff's growth matrix. TOC for Education (TOCfE) deserves special recognition for its efforts worldwide to teach children to apply logic and common sense in their life. Kathy Suerken, its director, has been a torch bearer for its cause and these professionals. We also thank the Singapore Prison system for permission to publish their unique and positive experience with TOC. We also thank Eli Goldratt, North River Press, and John Thompson for use of their materials. Wendy Donnelly and Jennifer Tucker provided valuable assistance in documenting references and building the bibliography.

Our education in TOC goes back almost to the very beginning with Dr. Goldratt and Bob Fox of Creative Output speaking at early APICS Conferences and offering academics invitations to attend their workshops. The list of TOC professionals extends through the Avraham Y. Goldratt Institute with Bob Fox, Dale Houle, Eli Schragenheim, Shri Srikanth, Oded Cohen, Alex Klarman, Alex Mashar, Tracey Burton Houle, Dee Jacobs, Debra Smith, John Covington, and many others. Many of the authors in this handbook are past students of Eli Goldratt and AGI and have since become leaders in our field. These individuals have freely shared their knowledge with us over the years. We have asked these individuals to share their knowledge now with you. We honor them for doing such an extraordinary job.

Theory of Constraints Handbook.

SECTION I.

What Is TOC?*CHAPTER 1.

Introduction to TOC-My Perspective *

Here Dr. Goldratt, developer of TOC gives his perspective on what TOC is; its goals and objectives, and the state of its progress in bringing about improvement. Dr. Goldratt discusses the evolution of TOC: how the identification of major system problems led to the development of solutions and significant system improvement only to surface the next system problem. . . . Thus the evolution of TOC followed the natural scientific approach to system improvement. As the developer of Theory of Constraints, he has brought the mind of a scientist to the problems and needs of business, private sector organizations, and individuals. His scientific approach has led to the breaking of several business paradigms and the development of new simplified approaches to managing systems. In the section, his chapter leads forward to the remainder of the book where the depth and scope of the TOC concepts are seen in action.

CHAPTER 1.

Introduction to TOC-My Perspective.

Eliyahu M. Goldratt.

There is a famous story about a gentile who approached the two great Rabbis of the time and asked each, "Can you teach me all of Judaism in the time I can stand on one leg?"

The first Rabbi chased him out of the house, however, the second Rabbi answered: "Don't do unto others what you don't want done to you. That is all of Judaism, the rest is just derivatives. Go and learn."

Can we do the same; can we condense all of TOC into one sentence? I think that it is possible to condense it to a single word-focus.

Focus.

There are many different definitions to the word focus, but a good starting point is a simple definition such as "Focus: doing what should be done."

Focusing on everything is synonymous with not focusing on anything.

In almost any system, there are plenty of actions that will contribute to the performance of the system, so what is the difficulty in focusing? True, we can't take all the beneficial actions because we don't have enough time or enough money or enough resources, but the more we do, the better it is. This naive view was shattered by Pareto1 with his 80-20 rule. What Pareto proved is that 20 percent of the elements contribute 80 percent of the impact. Therefore, when we can't do it all, it is of the utmost importance to properly select what to do; it is of the utmost importance what we choose to focus on.

Copyright 2010 by Eliyahu M. Goldratt.

However, as Pareto himself pointed out, the 80-20 rule is correct only when there are no interdependencies between the elements of the system. The more interdependencies (and the bigger the variability), the more extreme the situation becomes. In organizations, there are numerous interdependencies and relatively high variability; therefore, the number of elements that dictate the performance of the system-the number of constraints-is extremely small. Using Pareto's vocabulary, one might say that in organizations 0.1 percent of the elements dictate 99.9 percent of the result. This realization gives new meaning to the word focus.

Constraints and Non-Constraints

There isn't a more grave mistake than to equate non-constraint with non-important. On the contrary, due to the dependencies, ignoring a non-constraint can impact the constraint to the extent that the performance of the entire system severely deteriorates. What is important to notice is that the prevailing notion that "more is better" is correct only for the constraints, but it is not correct for the vast majority of the system elements-the non-constraints. For the non-constraints, "more is better" is correct only up to a threshold, but above this threshold, more is worse. This threshold is dictated by the interdependencies with the constraints and therefore cannot be determined by examining the non-constraint in isolation. For the non-constraints, local optimum is not equal to the global optima; more on the non-constraints does not necessarily translate to better performance of the system.

An hour lost on the bottleneck is an hour lost on the entire system; an hour gained on a non-bottleneck is a mirage.

We now recognize that the vast majority of the elements of a system are non-constraints. We also recognize that for non-constraints more might not be better but worse. So, what must be the unavoidable result of following the prevailing notion that more is better? The number one reason for not doing what should be done is doing what should not be done.

We don't have a choice but to define focus more narrowly: do what should be done AND don't do what should not be done.

Measurements.

According to cost accounting, when operations produce they absorb cost into the inventory and this cost absorption is interpreted as increasing profit. In other words, the cost-accounting concept encourages any production, even on a non-bottleneck, even if it is above the threshold. It is no wonder then that the first implementations of TOC clashed with cost accounting. It was mandatory to develop an alternative. Almost immediately, Throughput Accounting (TA)-a system based on simple definitions of Throughput (T), Inventory (I), and Operating Expense (OE)-was proposed alongside the explanation of the difference2 between the Cost World and the Throughput World.

Tell me how you measure me and I will tell you how I will behave.

The Goal and The Race

Rapidly, the realization of the crucial impact of bottlenecks gave rise to a collection of actions that were previously deemed inefficient and now were recognized as the most important actions to be taken. "What should be done" now took on new meaning.

A novel about manufacturing? We don't even know what shelf to put it on. It will never work.

No less important was the recognition that it is impractical to monitor each non-bottleneck separately and therefore constructing and implementing a system to prevent the overproduction of non-bottlenecks was essential (Drum-Buffer-Rope [DBR] and Buffer Management [BM]). The understanding of "What should not be done" was even more tantalizing.

This body of knowledge was captured in detail in The Goal (Goldratt and Cox, 1984) and conceptually explained in The Race (Goldratt and Fox, 1986).

Other Environments.

The clear logic, the simplicity, and the rapid results that TOC provided in production caused other environments to try to implement the same. Unfortunately, some of them were so different that even the constraint was different in nature. The constraint in project environments is not bottlenecks but the critical path (or, more accurately, the critical chain). The constraint in distribution has nothing to do with bottlenecks. It is either cash (wholesalers) or the number of clients that enter the shop (retail). The term bottleneck started to be misleading; it had to be replaced with the broader term constraint. That was the time (1987) when the term Theory of Constraints3 was coined and a precise verbalization of the focusing process was offered-the five focusing steps.

When you are good with a hammer everything looks like a nail.

That was not enough. Applications for proper guidance of the non-constraints in distribution4 (blocking the tendency to push the merchandise downstream [replenishment to daily consumption]) and in project environments (blocking the tendency to buffer the individual tasks [Critical Chain Project Management]5) had to be developed in full.

The Thinking Processes6.

Only when environments other than production had been dealt with using TOC did the paradigm shift dictated by the narrower definition of focus fully surface. To focus properly, the following questions had to be answered: How do we identify the constraint? What are the decisions that will lead to better exploitation? How do we determine the proper way to subordinate the non-constraints to the above decision? And how do we reveal more effective ways to elevate the constraint? It became apparent that even the best available practices were not delivering the required answers, and relying on intuition was not enough.

Reality is exceedingly simple and harmonious with itself.

The standard ways to identify the needed actions, the standard ways to focus the improvements, were obviously not adequate. They usually started with a list of problems, of gaps between the existing situation and the desired situation. The gaps were quantified and, following the Pareto principle, items at the top of the list were taken as the targets for improvement.

This approach leads, at best, to just marginal improvements, since at the base of the approach is the erroneous assumption that the gaps are not interdependent. When the interdependencies are taken into account, it becomes apparent that the gaps are nothing but effects, undesirable effects (UDEs) of a much deeper cause. Trying to deal directly with the UDEs does not lead to the recognition of what actions should be taken. Actually, it leads to many actions that should not be taken. There was a crying need to provide a logical, detailed structure to identify the core problem, to zoom in on the ways to remove it, and to do so without creating new UDEs. From 1989 to 1992, the Thinking Processes of TOC were successfully developed and polished.

The Market Constraint.