Theory of constraints is a managerial approach that is used to identify the most important constraint, also referred to as limiting factor, and control it to improve a company’s profitability. A constraint also referred to as a bottleneck can be termed as anything that hinders one from achieving the maximum capacity. One perfect example of a constraint is time. You may be employed with deadlines and still have to undertake further studies. These two issues cannot be undertaken at the same time and therefore one has to take priority. This makes the time a limiting factor.
Through a scientific approach, the theory of constraints hypothesizes that every complex business system such as manufacturing has interlocked processes and activities where one is then identified as a constraint. It is therefore critical to ensure that the operations that are constrained are running their maximum achievable capacity. In achieving this goal, one can use inventory buffers. This is whereby one ensures that the process flow through the constraint is not curtailed by any shortfall in the flow of the constrained operation (Victoria & John, 2010).
The theory of constraints entails five major steps. The first step involves identifying the constraint. Through the use of swim lane diagrams, failure modes and effects analysis, and flow charts, one can map out the whole process and even identify what is causing issues. The second step is managing the constraint. This involves making small changes to increase efficiency and eliminate the problem without having to commit to potentially costly changes. The third step involves subordinating and synchronizing to the constraint. After subordinating to the constraint, one then has to evaluate performance. This process involves reviewing the system to ensure that it is performing as expected. The last step involves moving back to step one and identifying another constraint.
Various factors are considered in the theory of constraints. One such factor is profitability. If the constraint is managed to maximize profit, one has to ensure that the constraint is put to a minimum (Michael, Clyde & Roman, 2011). To achieve a company’s intended profits, the constraint has to be identified and evaluated to ensure that it does not hinder a company from achieving its goals. A company should focus on that constraint that would maximize profits at a minimal cost of managing it.
Another factor that should be considered is the return on investment. The return on investment of a constraint varies from one constraint to another. A business entity should focus on identifying constraints that are likely to bring a high return on investment. If the return on investment of a constraint is low, it would be better to neglect the constraint rather than incur losses due to the costs involved.
A successful theory of constraints has various benefits that come with it. One major benefit of the theory of interest is that it helps a company maximize its profitability potential. By managing its constraints, a company can minimize the cost involved in the production process. This in turn maximizes the returns of the company.
Another benefit of the theory of constraints is that it helps a company to improve its capacity. By optimizing the constraint, a company can maximize its production capacity that would have otherwise been unattainable in the presence of the constraint (Michael et al., 2011). Optimizing the constraint enables an entity to run a smooth and faster production thereby reducing lead time. Again, doing away with bottlenecks implies that there will be less work-in-progress hence reduced inventory.
In conclusion, the theory of constraints is one concept that an entity needs to invest in if it has to remain profitable to its investors. It is an important tool that supports continuous improvements through the management of costs to enable the efficient running of an entity.
References
Michael W. M., Clyde P. S., & Roman L. W. (2011). Managerial Accounting: An Introduction to Concepts, Methods, and Uses. Singapore: Cengage Learning
Victoria M. & John D. (2010). 23 – Theory of Constraints Thinking Processes. Canada: McGraw Hill Professional