Introducing TOC (Theory of Constraints)
In the first of two articles Concerto Analytics co-founder Stephen Williams talks about the importance of constraints in modelling, understanding and optimising organisational process value chains.
We operate in a world of constraints. Time, resources, rates and finances all impact the flow of output and overall success of a business. Identifying and modelling the key constraints within your business, is the first step to achieving optimum output and efficiency.
For most of us, the Theory of Constraints was first introduced by Dr Goldratt in his ground-breaking book ‘The Goal’, in 1984. By applying his principles, we gain a clearer understanding of the nature of constraints that exist within all business processes. When we seek to ‘optimise’ the most profound (weakest) constraint we can improve the effectiveness of the overall value chain.
A constraint is “the limiting factor that prevents a system from moving closer to achieving its goal” – Theory of Constraints Institute
Imagine the interlinking of a chain – we are only as strong as our ‘weakest link’. With this notion in mind, a business must seek to manage limited resources within their business processes, if these are not managed, then unrealistic scenarios result. The Theory of Constraints is about focusing attention on the areas of the value chain where the greatest impact can be made. By working to optimise the weakest link, overall output success can be achieved.
Managing Limited Resources
Along the value chain of every business, there is a certain capacity limit at each stage of activity. Due to the interconnected nature of internal processes, constraints will naturally arise. Often more than one constraint may exist, but usually, there will be a predominant limitation.
- Time constraints – we are constrained by the number of hours in a working day, to achieve a certain optimum output.
- Rates constraints – an example of this might be – a delivery driver being constrained by the speed limit in whichever area he is working. The driver is limited by the number of tasks he can perform within the area’s speed limit constraint.
- Capacity constraints – what can we physically house / what stock can we realistically accommodate? (stockpile, bin, warehouse)
- Market constraints – have we capped our maximum share of the market? Can we not capture any more of the market?
- Demand constraints – Is demand below our capacity to produce? (This constraint is an external factor, which is more difficult to manage or control)
- Financial constraints – Includes cash flow constraints and the inability to purchase materials at a rate that is required to fulfil all orders. This also concerns the gearing ratio.
- Supply Constraints – If there are restrictions imposed upon supply input then an organisation will be unable to meet all demands.
- Supplier Constraints – Suppliers may not be able to produce an adequate supply of materials. This may appear as a ‘material constraint’, however, unavailability in the market can, in fact, be brought about by several internal issues.
If we do not succeed in honouring the prominent constraints within our value chain, then we are likely to model scenarios that are not realistic or achievable. This may result in negative financial outcomes.
“Constraints represent the leverage-point to make far more improvements with less effort in a relatively shorter time.” Theory of Constraints Institute
By modelling constraints, businesses can improve their processes and more accurately plan for the future. Constraint Modelling can help with this. In Part 2 we will explore how Concerto Analytics helped Telecomm Co successfully improve their productivity by using the Concerto constraint modelling features.
Stephen Willams is co-owner and CEO of Concerto Analytics, a technology company that improves their clients business performance. His blogs cover a wide range of topics from software to organisational business dynamics and relationship management.