What Is It?
Most of the common methodologies for making management decisions are based on the cost principle, that is, calculating the material and time costs of production stages or business processes and minimizing these costs at each site. One such innovative approach is the Theory of Constraints (TOC), which is based on two main principles. In other words, the TOC is a critical management philosophy, which aims to understand limiting factors through analysis (Sekhar & Rajagopalan, 2012). The first principle is that the optimization of each individual component of the system or subsystem does not lead to the optimization of the system as a whole since the achievement of local optima does not necessarily lead to a global optimum. The second principle is that the behavior of most complex systems is due to a small number of causal factors, and undesirable aspects of the system’s behavior can be eliminated by influencing them, as shown in historical reviews and bibliometric analyses (Ikeziri, Souza, Gupta, & de Camargo Fiorini, 2018). In other words, specificity is key in the utilization of essential TOC principles since the weakest link in the process flow is a primary limiter.
With regard to production or business operations, this means that the desire to increase efficiency by achieving the highest possible efficiency of each production area or business process can lead to zero or even the opposite results for the entire company since the throughput of a business or production as a whole is determined by its throughput bottlenecks or system limitations. The correct method for TOC optimization is to find and eliminate the most bottleneck or plan the production process based on its throughput.
What Factors Are Considered?
There are a number of factors considered when implementing the TOC, and the vast majority of these aspects are dependent on whether the integration is taking place in management, production, or other endeavors. However, there are also fundamental factors, which need consideration and in-depth assessment in order to ensure proper identification of bottlenecks. In general, the potential sources of bottlenecks are raw material availabilities, technical workforce, equipment capacities, and market-based limitations, which means that there are both internal and external influences at play (Sekhar & Rajagopalan, 2012). The practice of financial and management consulting has shown that often such an approach leads to serious mistakes, such as an increase in the efficiency of a particular site only leads to the accumulation of inventories or work in progress, and not to the expected increase in profits, such as critical chain project management tools (Izmailov, Korneva, & Kozhemiakin, 2016). The root of the problem is that the application of the cost principle does not sufficiently take into account the relationship between the various components and may lead to an incorrect assessment of the impact of site optimization on production or the business as a whole.
Such a state of affairs prompts managers to take a closer look at innovations in the field of organization of production, which take this factor into account more deeply. Therefore, factors can be input-based, such as raw materials or human resource-related. In addition, the technological or technical elements might be the source of hindrance, such as equipment-related output capacities. Lastly, the market itself can be a source of limitations, which is a prime example of an external limiter.
How Does It Help Operations?
The TOC is highly helpful in regard to operations since it is closely tied to operational activities. Correct application of TOC results in improved lead times, shorter lead times, lower inventory levels, and higher sales. A logical consequence is a cumulative improvement in the financial results of the business as a whole. Thus, the theory of constraints is an effective tool for saving valuable resources and increasing productivity. When introducing the theory of constraints into management practice, two different tasks arise, such as identifying and eliminating the “weak link” and building a management accounting and planning system using the principles of TOC. Identifying and eliminating constraints is not an easy task, requiring significant efforts on the part of both top managers and middle and lower managers, and the entire staff of the company. It all depends on the specifics of production or business, but in practice, this task is facilitated by the observation of experienced employees since, often, the bottlenecks are already known to be the direct executors of the work. In other cases, when they are hidden, serious analysis is required to identify them.
As a result of a rational approach to the bottleneck, an enterprise can find opportunities to make a profit without even removing the constraint itself. Undoubtedly, it is important to use the principles of TOC management, while the implementation of management accounting and planning for real enterprises requires the development of a series of standard forms and linking them with accounting and tax accounting. At the same time, TOC does not completely ignore the importance of local optimization, that is, if one directs efforts on it to the right place and does them at the right time, one can get outstanding results.
References
Ikeziri, L. M., Souza, F. B. de, Gupta, M. C., & de Camargo Fiorini, P. (2018). Theory of constraints: Review and bibliometric analysis. International Journal of Production Research, 57(15-16), 5068-5102. doi:10.1080/00207543.2018.1518602
Izmailov, A., Korneva, D., & Kozhemiakin, A. (2016). Effective project management with the theory of constraints. Procedia – Social and Behavioral Sciences, 229, 96–103. doi:10.1016/j.sbspro.2016.07.118
Sekhar, L. R., & Rajagopalan, A. (2012). Management accounting. Oxford, England: Oxford University Press.