Goldratt's Theory of Constraints (Part 1 of 3)

The Theory of Constraints (TOC) was created by Dr. Eliyahu M. Goldratt in his 1984 book The Goal. The TOC is based on the idea of using scientific principles and logic to guide human-based organizations in their decision-making processes. Ultimately, the goal of the TOC is to help organizations achieve their goals and, more importantly, continue doing so through changing times. Simply put, the TOC is a recipe for change.

The TOC is based on a set of basic principles, or axioms. These principles are applied, using a set of basic processes in a logical method, to a set of specific fields, including:

• Operations
• Finance
• Distribution
• Project Management
• People Management
• Strategy
• Sales
• Marketing

The underlying premise of the TOC is that every organization has, at any given time, at least one stumbling block (or constraint), which limits its performance and hampers the attainment of its goals. In the broadest sense, these constraints can be classified as either “internal constraints” or “market constraints.” In order to successfully improve the performance of the organization, the constraint must be identified and managed according to one of the processes involved in the theory. As with any dynamic situation, over time the constraint may change, either because the initial constraint was successfully managed, or because a changing environment has left the organization with a new constraint. At any rate, the constraint management process is continual.

There are two broad categories of constraints that exist in business environments, "internal constraints" and "market constraints". Additionally, within the category of internal constraints lie the sub categories of "physical constraints and policy constraints". All categories are described further below:

Internal Constraints

• Physical Constraints

Physical constraints can be broken down further into two categories. The first is that of "capacity (or resource) constraints", which includes the labor, machines, and buildings needed to convert purchased material into an end product. The second category is that of "material constraints", which are the raw goods, work-in-process, etc. that are converted to finish product by the resources of the company.

• Policy Constraints

Policy constraints can be divided into the categories of "mindset constraints", "measures constraints", and "methods constraints". Mindset refers to the thought process or culture of the organization. It is mindset that organizes the company’s thinking and assigns priorities to different courses of action. New measures that contradict the prevailing mindset have little chance of being implemented. Measures constraints may be responsible for creating situations that encourage behaviors that have a negative effect on the performance of a business. Bonuses that have an overall negative impact on the bottom-line of a firm would fall into this category. Methods constraints refer to the procedures and techniques that determine how the day-to-day operation of the organization is carried out.

Market Constraints

• Market constraints exist when the demand for a company’s products and services is less than or equal to the capacity of the organization.

Regardless of the type of constraint, the importance of constraints lies in the influence they exert on the performance of any organization.