Toc in a Nutshell

Basic Premise:

The basic premise of theory of constraints revolves around the Goal of the firm. As per Goldratt the straightforward idea of the goal of a firm is – “TO MAKE MONEY”. He argues that if the firm makes money – only then – it will prosper and can look at other objectives that might only be means to achieve the goal, but are not the goals themselves.

Thus to measure firm’s performance, two sets of measurements need to be used one from the financial point of view and another from the operational point of view.

Financial View: Three measures constitute the financial view Net Profit, Return on Investment and Cash Flow. All three measurements are to be used together, however, all of these being at a very superficial level cannot be used at operational level and hence the next sets of measurements help provide the required guidance.

Operational View: Three measures that constitute the operational view are Throughput, Inventory and Operating Expenses. From operations standpoint, the goal of the firm is as depicted in the below image.

INCREASE THROUGHPUT WHILE SIMULTANEOUSLY REDUCING INVENTORY AND REDUCING OPERATING EXPENSE

Now to control the above three, the system must be analyzed to find bottlenecks and capacity constrained resources. Identifying this helps to come up with something called a drum, buffer and rope system wherein drum is something that needs to be controlled, a buffer helps in ensuring the flow without any stoppages thereby creating throughput and ropes are the ones that help communicate the correct information at the designated locations. This structure helps in controlling the work-in-process inventory.

In case of capacity constrained resources dual communication and dual buffer might be required thereby need for 2 buffers and same number of ropes for communication. A typical rope, buffer and drum structure would look like as shown below –

Goldratt’s Theory of Constraint:

In addition to above Goldratt’s theory of constraint...