Tag Archives: Theory of Constraints

Black queen on chessboard with pawns in the background

The Gestalt of ToC

“Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.” – Isaac Newton

The Theory of Constraints. What sort of management strategy is that? Who calls a management approach a “theory”? And “constraints”; isn’t that the same thing as a “bottleneck”? If you’ve read Eliyahu Goldratt’s book, The Goal, then you know that the theory of constraints is just a dressed-up scheduling system. And a derivative one, at that.

You may have heard or thought these comments yourself.

The Theory of Constraints (ToC) might be these things, but it is more than that. ToC, while being a collection of insights and procedures, is also an approach to understanding and designing systems. From its beginnings as a shop floor scheduling system it evolved to a holistic approach to develop and implement strategies for organizations.

Let’s start with the definition; the Theory of Constraints. Often, the word ‘theory’ used synonymously with unproven. That’s not the meaning here. In the scientific realm, a theory explains how things work, as in, the Theory of Relativity. A theory is only “proven” in terms of its logic and experiments, but it’s useful – until something better is found; it generally works in the real world, not just in the abstract. The Theory of Constraints explains how systems work. All systems have constraints, yet they are often unidentified. Especially in complex systems where it seems the ‘Constraint’ is constantly on the move.

ToC processes apply the approach of the hard sciences to the “soft” social sciences. It attempts to employ scientific rigor to organizational (social) problems and behaviors to better understand how systems behave and solve long-standing problems.

In the hard sciences, the simplest solution is often the correct one. Scientists are trained to use Occam’s Razor; The principle that states that one should not make more assumptions than the minimum needed. It is the underpinning of all scientific theory building. In the same way, ToC searches for the “inherent simplicity” of system behavior; the fewest assumptions or causes, for the most effects.

In scientific inquiry, one observes a certain behavior or effect. Then, asks “why”. “Why did that happen?”. To understand the cause, the scientist creates a hypothesis that explains the effect.  Then, to test the hypothesis, predicts other effects that must also be present if the hypothesis is correct. If the other effect(s) are observed, the hypothesis is strengthened. This doesn’t mean that it is “correct”, but only “strong. Goldratt said (paraphrasing here) “The true test of a good hypothesis is, that when the hypothesis and causal linkages are presented, the audience must say ‘It’s obvious!’”.

In the same way, the Theory of Constraints is a strong theory strengthened by numerous experiments. However, just as any theory changes with new knowledge, so does ToC. This may seem unsettling for those who are looking for a recipe. Goldratt and his fellow developers of ToC never looked for a particular recipe, even though many were found. They were and are looking for something deeper. An understanding.

The germ of ToC could be found in Goldratt’s ideas for scheduling factories.  He used those concepts to build software that scheduled factory production. In the adoption of his ideas, he ran into obstacles, finding policies that were preventing successful implementation. So, he wrote The Goal, to explain the ideas behind the software (the drum-buffer-rope procedure). However, even though these were successful, they were leading to the next constraint, and the next, and the next. The theory of constraints has evolved from scheduling, to cost accounting, to performance management, to sales, to projects, to strategy.

ToC approach to systems recognizes that we do not live in a world of deterministic outcomes, but rather, of probabilities – ranges of outcomes. We recognize that “Murphy” lives (statistical fluctuations) and we make decisions with this in mind. Uncertainty surrounds us. There is a kind of randomness or chaos built into the universe. Therefore, our solutions and decisions must be characterized by the calculation of differing outcomes that are determined by circumstances beyond our control. From the random crash on the highway that makes us late to our meeting to a decision by OPEC ministers on oil production quotas that ripple through the world’s economies. We should not kid ourselves that we are fully in control of our own or our firm’s destinies. ToC provides an approach and tools to cope with that uncertainty.

There are ample documents and books on the procedures of ToC. What is not well documented is how to put them in a strategic framework. Let’s begin with the fundamental assumptions and build from there.

Strategy is Not…

Strategy is not a new idea or a product like the new iPhone or electric cars. Nor is it a list of improvement projects to reduce costs or open new markets. It’s not an aim or mission like winning the war, being the market leader, or solving world hunger.

A strategy is a theory of the organization. A statement of who is the customer (a profile of the market), their need and those that are unmet. It defines the capabilities, products and methods that will meet those needs. A strategy is not necessarily holistic, it can be narrowly or broadly defined, depending on the organization. It could be a strategy of product offerings—soda vs, “healthy” drinks or sedans vs. trucks. It could be strategic, creating a new segment as Apple did with the iPhone and Southwest Airlines did with low-cost no-frills air travel.

Strategy is not a Plan

A strategy differs from a strategic plan in that the strategy focuses on the outcomes, and the plan is how to achieve those outcomes. It helps an organization focus the energy, resources, and time of everyone in the organization in the same direction towards a common goal. It provides focus and impetus to move from idea to action. It is the formalized road map that describes how your organization executes the chosen strategy; the plan is not the end; it is the means to the end. It’s a map.

Strategy is…

Often, the term ‘strategy’ is synonymous with ‘plan’. Porter posits that strategy is a verb; the creation of a unique and valuable position, involving different set of activities. This becomes the guidance for all activities of the organization. Action, supported by solid arguments.

We can boil a reasonable interpretation of the meaning of strategy down to one thing; doing the things that increase value for the entity, however the organization defines ‘value’.

Criteria for a Good Strategy

In view of this, we can conclude that a “good” strategy:

  • Drives the organization closer to its goal. There is enough “meat on the bones” to push the organization into some action towards achievement of the goals of the organization.
  • Provides security for the people in the organization; the strategy should strengthen the firm’s position and security, and thus its people.
  • Provides satisfaction for other stakeholders. Any strategy that violates stakeholder terms cannot be sustained, and thus violates the first criteria.
    • Customers must be satisfied with the product or service.
    • The community should be enhanced, or at least not harmed.
  • Promotes sustainable results; it should build on the organization’s strengths and be self sustaining
  • Is robust – allows growth even in times of volatility in the company’s domain or market

ToC verbalizes these criteria in this way:

  • Build a decisive competitive edge (DCE). Decisive in that the competitive advantage is far better than other firms’ abilities or capacities. Implied is that other firms cannot or will not duplicate this unique facility. It is like the traditional concept of competitive advantage, except that the DCE is based on solving significant customer problems created by the suppliers. For example, brands dictating a minimum order quantity or full truckload shipment policies that dictate large order quantities.
  • And the capability to capitalize on it. A DCE is based on operational excellence (i.e., fast delivery, high quality, low cost, etc.), but that is not enough. One must have or build the policies, systems and processes to leverage these abilities in the marketplace. You don’t have to look far to see the failure of great products done in by poor marketing.
  • On big enough markets. Not to be too obvious here, but we hope that if we go to the trouble of the previous two items, we would have a large enough market to make it worth our while.
  • Without exhausting the company’s resources. We don’t want to “bet the farm” on any strategy, unless we must. We must leverage our existing resources, shifting them to the DCE strategy almost without effort.
  • And without taking real risks. We could substitute the word “real” with “big”. The strategy should ensure stability through volatility; it should remain profitable, even during market turndowns. There should be no sacrificing critical resources (no mass layoffs – low cost sacrifices) or selling off assets. It should ensure asymmetrical rewards (strong profits during growth, limited losses during downturns).

A ToC Strategic Approach

A ‘ToC strategy’ is built around the organizations’ constraint(s). The strategy would explicitly acknowledge the current constraint and contain the elements to either break or elevate that constraint, including the emergence of and breaking new constraints during the execution of the strategy. For example, if the constraint is the market, we would build the strategy around growing sales, navigating the (planned) changing location of the Constraint (i.e., internal capacity, distribution, back to the market, etc.).

Secondly, a ToC strategy built with the idea that the organization’s performance should be constantly rising. That improvement is a way of life for the organization, not bursts of change, but constant change. This gives rise to the concept of the Ever-Flourishing approach.

Third, a ToC strategy relies on innovation. Innovation is in removing a significant limitation to creating value. Value for your firm, value for partners in the supply chain, and value for the end customer.

Problems with Strategy

A successful strategy has at least three problems to solve: choosing the “right” objectives, developing a plan to realize them, and successful execution of that plan.

There is significant amount of research that show many strategic initiatives do not bear the fruit envisioned. Almost half of all strategic initiatives undertaken fail.

There are significant obstacles to strategic success. Planners often have incomplete information. For example, what buyers “truly” desire and their motivations. There are entire industries devoted to just these 2 questions!  Even among the experts, you’ll find that the strategic information is still not perfect, rife with wishes and bias.  I’m reminded of Henry Ford’s quote, “If I had asked people what they wanted, they would have said faster horses.”

Many strategies fall short because it’s difficult to understand what influences system behaviors. The customer, the competitors, even the organization itself are hard to analyze because of the number of variables and their relationships are difficult to identify and quantify.

Planners themselves are subject to bias and wishful thinking. They create strategies using untested assumptions and fill them with geographical and cultural differences. They hold on to the past, when they should be embracing the future. Think of Kodak’s reliance on film, even though they invented digital photography. Or Chevrolet’s introduction of the Nova in Mexico, where Nova literally means no go (No-Va). We are all subject to the “blindness” and bias. Recognizing it is the difficulty.

Further, strategy failures are tied to the lack of a theory of implementation.  To successfully execute an organization’s strategy, it must have a singular focus of the people (every person?) in that organization. A strategy is incomplete unless there are mechanisms to create, monitor, and reward that focus as it is expressed. Critical implementation questions such as, “How do we know if we’re on track?”, “Who is responsible for each element?”, and “When should we intervene or reevaluate the strategy?” must be answered.

Complex systems hide the relationships that matter to a successful strategy. Planners and executives are often domain experts, but sometimes lack the understanding of how the “system” works. For example, how a firm interacts with its competitors or the reasons why their products are chosen over their competitors. There aren’t many people that can provide a detailed operational map of how a firm delivers its strategic choices to the customer. And understanding how these two systems interact? Most planners are relying on intuition, not a rigorous analysis.

A lot of attention is given to the planning aspect of strategy with little attention to how to manage its execution. Often, the skills to successfully implement the strategy are absent from the strategy itself.  It’s hard to know what you do not know, so sometimes strategies fail because of lack of rigor in implementation planning.

Finally, no strategy can succeed with cross functional conflicts in the organization. Any strategy that has one silo “winning” at the expense of another is doomed.  Conflicting standards of performance, compensation, and rewards (informal & formal) will break any strategy.

What ToC Offers to Strategists

ToC offers a framework that overcomes many of the obstacles that break most strategic initiatives. Whether they are “correct” is a matter of judgement. And a set of tools to overcome many of the obstacles to creating and delivering a good strategy.  I will cover this framework and tools in detail in later chapters.

The approach to strategy, with operational excellence as the foundation, then focusing on the problems (undesirable effects) that are inherent in the “standard” way of doing business offers a fresh perspective in arriving at a strategy that will cause success.

With the Thinking Processes (TP), you can analyze and deepen your understanding of complex system behavior, highlighting the cause-and-effect relationships and revealing hidden assumptions. This can go a long way to breaking the complexity obstacle, both in understanding the existing system’s behavior and predicting its future behavior, identifying risks in new strategies. Further, a significant feature of the TP is the ability to identify and resolve cross functional conflicts and establish congruent standards of performance.

To find a “right” strategy and its potential results, ToC recommends a rigorous analysis of the market using the thinking processes of the Current Reality Tree, Evaporating Cloud and Future Reality Tree.

Using the Strategy and Tactics tool provides a theory of implementation and a roadmap to develop the supporting tactics to successfully implement a strategy.

The most important feature of a ToC-based strategy is its focus on the most critical issues—the Constraint(s) and the uncertainty that affects them. The only strategy worth implementing is one that systematically breaks the limitations of higher performance and drives the organization towards its Goal.

Bibliography

Cooper, Marjorie, ToC handbook (2010), Traditional Strategy Models and the Theory of Constraints

Goldratt, Eliyahu, ToC handbook (2010), Introduction to ToC- My Perspective

Spender, J.C., Business Strategy (2014), Oxford Press

Michael E. Porter (2000), What is Strategy, Harvard Business Review

Goldratt, Eliyahu, The Gestalt of TOC (2010), YouTube https://www.youtube.com/watch?v=DQoO8y3En3w

Boston Consulting Group, (2014), Strategic Initiative Management: The PMO Imperative

Goldratt, Eliyahu, (1996), My Saga to Improve Production

Goldratt, Eliyahu, (2011), Building a Blue Ocean Strategy, http://toc.tv

Goldratt, Eliyahu, (2011), Goldratt Satellite Program Marketing – Unrefusable Offers and Market Segmentation

Rumelt, Richard, (2011), McKinsey Quarterly, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-perils-of-bad-strategy

Edinger, Scott, (2012), Three Cs of Implementing Strategy, http://forbes.com

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Decision Making – Focus on the Goal

Almost every manager is aware of Pareto’s law, the important few – the trivial many which is often thought of as the 80/20 rule. 80% of results are generated by 20% of the actions. To improve your effectiveness, one only need to focus on the 20% and you’ll get almost all of the results (80%). This simple truism is generally true, but not true in systems where there is strong dependency relationship between the entities. In these types of systems, the rule is closer to 99/1. 99% are relatively trivial and only 1% are important. 

This is the world of organizations.

The ToC is the science of making decisions in that world. 

It starts with the articulation of the Goal. The purpose of the organization.

Throughout the literature, the goal of the enterprise is stated as to make more money now, and in the future. This is rooted in the idea of ownership and the rights of owners to establish the direction of the enterprises in which they have an interest. Who gets to establish the purpose of any system? Its owners. For companies that are publicly held, it is clear that the motivation of its owners (stockholders) is profit. Therefore, the enterprise must be directed towards that end.

That’s not to say that the pursuit of increasing profit is exclusive of anything else. The goal is to make money in the future as well. In order to fulfill this aspect of the goal, we recognize that are boundary conditions – necessary conditions that must be met in order to achieve the goal. You can’t mistreat your workers for long, it will sacrifice the future. You can’t disobey the environmental regulations for long, or your profit will be impacted through fines, negative market response, etc.

This goal (making money) is not universal. Charities, governments, churches, schools are (generally) not directed to making more money now and in the future. Maybe your private company is not directed towards that goal. That’s fine. ToC is not about the goal; it’s about pointing the organization to achieve the goal. What is important is that the goal is verbalized, and a measurement is in place to determine whether or not you are getting closer to it. If you’re a non-profit, the goal is not measured in money, but money is a necessary condition to achieve that goal.

The objective of using ToC is to improve your capabilities to move you closer to achieving your goal. More money now and in the future, fewer people without homes now and in the future, mores students better prepared to enter the workforce now an in the future, etc. Your efforts as a manager and leader are to move the organization closer to its goal. Now and in the future. 

Marking the distinction between THE goal and necessary conditions is the first step to focusing. As a matter of focus, the necessary conditions are those factors that are monitored, but not improved unless there is some violation. 

The goal is your “true north” or your chosen strategy to achieve that true north. The necessary conditions are the boundaries. The distinction between the two is found when you satisfy that necessary condition. For example, cash flow. If you have enough, it is not a matter that requires full attention. If you don’t enough, nothing else matters, not even the goal! 

A Chain is Only as Strong as its Weakest Link

Achieving the Goal is a process, subject to dependency and variation. In order to make money, one must have a product, a customer to buy, a system to deliver, and then get paid. How many people does it take to disrupt that process?  Just one. There’s your dependency. We know Murphy lives, so there is your variation.

Making money – achieving your goal is like managing a chain, where each link (action) and resource (strength) is connected to another. We all know that the strength of the chain is determined by its weakest link. Organizations are like chains. There is always the weakest link. The challenge is identifying that link, then moving the organization to strengthen that link. Since the strength of the chain is always determined by the weakest link, there will always be one, if that is strengthened, there will still be a weakest link.  

That weakest link is the Constraint. It determines your profit, your return on investment, your performance in your market. If you don’t know where it is, you are shooting in the dark. Serious pursuit of the Goal implies serious pursuit and breaking of the Constraint. Putting your attention and resources to improve in other places may improve the local situation but will not improve the global situation.

Since the Constraint only exists in the context of its goal, actively breaking the organization’s constraint or moving the it to a ‘better’ location moves the organization closer to achieving its goal (more and more).

A Bottleneck is Not the Constraint

Often, we see our progress blocked by scarcity; not enough resources to accommodate demand. It may seem like the constraint bounces around the organization without rhyme or reason. This is the evidence that you do not have an internal resource Constraint, but rather, your organization does not know where the Constraint lies and thus, cannot react to it. Bottlenecks are temporary, the real Constraint is difficult to move. It’s expensive. Scarce. 

Engines of Disharmony / the Core Conflict

In the early development of the ToC, the Constraint was to be considered a physical thing, like a machine or some capability. This evolved into thinking of the Constraint is a set of rules or policies that govern the utilization of physical resources.  This realization gave rise to the search for a method to identify these ‘erroneous’ policies, and the Thinking Processes were developed.

Over time, ToC practitioners found that erroneous (sub-optimal) policies are a developed as a reaction to resolve a conflict in the system. I.e., short term action vs. long term action, or satisfying customers vs. satisfying shareholders. Typically, the resolutions are compromises between necessary conditions, sacrificing a bit of each to find an acceptable solution. As organizations become more and more complex, these compromises become the fabric of how the organization is run, and the compromises also become more complex. 

These conflicts, where there is a sacrifice of a necessary condition, are thus related to each other, and can be traced to a single, core conflict. Many problems can be traced to this unresolved conflict.  This conflict and the resulting compromises become the Engines of Disharmony, creating friction in the organization, blocking progress. 

This core conflict becomes the true Constraint. Identifying and resolving that conflict is the holy grail of a ToC based strategy.

Strategic Implications of the Theory of Constraints

The strength of any chain is determined by its weakest link. No chain is infinitely strong, therefore the strength of even the strongest chain is still determined by its weakest link.

Your organization will always be constrained.

Strategists should not be chasing the weakest link; they must decide where that link will be. Your strategy and tactics are to move the Constraint to a location where it propels your organization closer to its Goal now, and in the future. You will be anticipating the movement of the Constraint and building supporting structures to support the sustainment of the location, hopefully before it moves.

Breaking Constraints

Is the Constraint internal to the organization or external? Is it the market size (demand) or an internal capability that prevents you from satisfying all the demand?

I’ll show later that the Viable Vision[1] strategies are built on developing a decisive competitive capability (edge) or improving an area of operation, then exploiting this new capability to gain market share. For example, if there is excess production capacity (the desired Constraint) or underserved market(s), a strategy would be built focusing on customer facing activities like more sales activity (the current bottleneck) in a certain market segment or new products (a Constraint, but not the one that is wanted) that create more demand for segments where there is opportunity. 

The strategy could be driven to achieving a certain objective, like domination of a market, or introducing a new technology. The execution of the strategy would be based on moving the Constraint from one area of the company, like sales capacity to another area of the company, say, product development. 

Understanding the Constraint today versus the desired location helps decision makers choose the best alternatives, moving the organization in a practical way, closer and closer to its goal.

The Applications of the Theory of Constraints

The applications or solutions of the Theory of Constraints are:

  • The 5 Focusing Steps
  • Drum Buffer Rope, a production scheduling technique
  • ToC measurement systems (Throughput, Inventory, Operating Expense), management financial decision making
  • Critical Chain Project Management, project scheduling and execution
  • Demand-Pull Replenishment (the Distribution Solution)
  • ToC in Sales & Marketing
  • The Thinking Processes, analyzing, creating solutions, and implementation for complex systems

From a strategic standpoint, we don’t really need to know the details of these solutions, only the rough contours and effects of them.

I want to mention that as we (in the ToC community) understood these applications better over time, we also understood the ToC better. The ToC wasn’t created or even named until a few years after the Drum Buffer Rope solution was developed. Over the years, we struggled with the essence of ToC, and that has probably contributed to its lack of recognition as a tool for strategists. 

5 Focusing Steps

The Focusing Steps of ToC.  A checklist of sorts.

  1. IDENTIFY the systems constraint.
  2. Decide how to EXPLOIT the constraint. Maximize its use.
  3. SUBORDINATE everything else to the decisions made to your exploitation decisions. Ensure the 99% does not get in the way of the 1%.
  4. If, in the prior steps, the constraint has not been broken, ELEVATE the system’s constraint.
  5. Go Back to step #1.

This may seem a bit tactical – like you’re chasing your constraint all over in infinite loops. When you first apply the ToC, you’ll find yourself in that mode. As you mature in the use of the ToC, you’ll find using these steps in a more conceptual manner as you develop your strategy, choosing the Constraint rather than chasing it. 

Even so, it does imply a sequence to attacking the Constraint. Know where it is. Don’t waste it. Ensure no other resources are preventing its full use. Then get more, break the Constraint. Find the new one.

Strategically, the focusing steps help you sort the types and sequence of actions you’ll be taking. More on using these in a strategic context later.

Drum Buffer Rope

The main idea of drum buffer rope (DBR) is to find the Constraint in a sub-system – production, then follow the focusing steps. This is what happened in the book, The Goal. 

During this process, the characters redefined operational efficiency and showed the impracticality of monitoring everything during execution and introduces the concept of Time Buffers.

What the DBR scheduling method does (over other models of production management) is significantly improve operational efficiency, reduce production lead times and improve delivery reliability.

ToC Measurement Systems (Throughput, Inventory, Operating Expense) 

Also introduced in The Goal, T, I, & OE were used as simplified financial metrics for decision making. What the system accomplishes is eliminate distortions in decision making over cost allocation methods. The metrics for decision making improve alignment in decisions, resulting in better resource allocation throughout the organization.

Critical Chain Project Management

The method of planning, scheduling, and execution of projects is a local solution (projects or portfolios of projects) that identify the constraint as the longest chain of resources and tasks, with the Goal being the delivery of the project.  The methodology further refines the use of time buffers in processes with greater uncertainty and variation.

What CCPM does is dramatically reduce the time to deliver projects, improve productivity and delivery reliability. 

Demand-Pull Replenishment

Sometimes called the “Distribution Solution” of the ToC, this solution combines time buffering management with a demand-based replenishment mechanism to improve availability with less inventory investment. Often a 50% improvement over traditional methods, it solves the bullwhip effect found in supply chains. 

As with the other solutions, the supply chain is dealt with as a sub-system, with the Constraint being shelf space, and the Goal being sales (of SKUs).

ToC in Sales and Marketing

This application is probably the most strategic in the sense that it considers the needs of the customers in other dimensions besides delivery reliability. When the Constraint is in the market, internal capabilities take a back seat. The application is broken into:

  • The Un-refusable Offer (sometimes called the Mafia Offer) 
  • The Layers of Resistance (sells the offer)

The definition of Un-refusable Offer (URO)is one that is so compelling, has so much value, is so good, that customers cannot say no when presented with the offer. This offer would be created by having a deep understanding the customer, the industry, and identifying the core problems. 

The unique feature of a URO is that it is a complete solution that solves the customers‘ core problem as it relates to doing business within their industry. It is not a restatement of the unique value proposition, although it most certainly fits that definition. Creating a URO typically requires that a supplier of the offer do something different (e.g., make operational improvements) to address the customers’ core problem. 

The Layers of Resistance is a framework for selling the offer and is often used on its own to create buy in to a new idea or solution. The Layers are:

  1. We don’t agree on the problem being addressed
  2. We don’t agree on the direction of the solution
  3. We don’t agree the solution solves the problem
  4. We see that the solution, if implemented, causes negative effects
  5. We see obstacles blocking a realistic implementation of the proposed solution
  6. Fear of the unknown

The steps are to be accomplished in sequence to gain agreement or buy in to the proposed solution. 

What is thought of as resistance becomes a tool for managing organizational change (or selling a solution) to systematically objections and obtain buy-in. 

The Questions on Technology are thematically similar.

  • What is the power (capability) of the new technology?
  • What limitation does it diminish?
  • What are the old rules that supported the limitation?
  • What are the new rules that should be used now with the new capability?
  • What technology changes are required to support?
  • How to cause the change?

The ToC (constraint busting) has been applied to the sales process itself, breaking the Constraint of sales staff interaction with the customer, enabling massive increases in sales productivity.  This approach breaks a fundamental assumption in sales process engineering, that sales should be the sole responsibility of autonomous agents. 

What ToC does for sales and marketing is to identify ‘blue ocean’ strategies to find new market opportunities and re-think the manner in which the solution is sold to the customer; from articulation of value to communicating that value to customers and markets.

The Thinking Processes (TP)

The objective of the TP is to reliably answer the question of where to focus. It makes clear distinctions between causes and effects, exposes hidden assumptions and identifies the relationships among them. Typically used when one is developing a deep understanding of a system with an eye towards improving it. 

The TP is a set of tools answer the 3 questions of change.

  • What to change?  Defining the core problem – the elements that are the causes of the undesirable effects (symptoms). 
  • What to change to? Defining the changes to be introduced to eliminate the current undesirable effects without creating new ones.
  • How to cause the change? Mapping the actions from the current state to the future state without creating new problems.

The TP consists of the Current Reality Tree and Evaporating Cloud, which is devoted to answering the first question. The Future Reality Tree and Prerequisite Trees are used to answer the second, and the Transition Tree is used to answer the third.

A special category of the TP is devoted to the most recent development, the Strategy & Tactics Tree. It is used most frequently to answer the 3rd question or in situations where the first 2 questions are not necessarily deeply analyzed. 

These capabilities are the typical starting point of ToC based strategy. Anyone can break a single constraint or implement a single solution. The strategy dictates how to create, capitalize upon, then maintain that decisive competitive edge.

Bibliography

Goldratt, Eliyahu & Jeff Cox, (1984), The Goal; Excellence in Manufacturing, North River Press 

Goldratt, Eliyahu, (2011), Theory of Constraints Handbook Chapter 1 Introduction to ToC, McGraw Hill 

Goldratt, Eliyahu, (2012), The Gestalt of ToC Part 1, YouTube

Goldratt, Eliyahu, (2017), Engines of Disharmony, YouTube https://youtu.be/nnejDyoR_Fg

Cox III, James F., Lynn H. Boyd, Timothy T. Sullivan, Richard A. Reid, and Brad Cartier, 2012, The Theory of Constraints International Certification Organization Dictionary, Second Edition, https://www.tocico.org/resource/resmgr/dictionary/tocico_dictionary_2nd_editio.pdf

Roff-Marsh, Justin, 2015, The Machine: A Radical Approach to the Design of the Sales Function (Book 1), Independently Published

Goldratt, Eliyahu, (2008), The Every-Flourishing Company – Part One https://www.youtube.com/watch?v=fv7SCRNZggk

Goldratt, Eliyahu, (2008), The Every-Flourishing Company – Part Two, https://www.youtube.com/watch?v=ij71X6cxv-I&t=158s

Barnad, Alan, (2016), Applying Theory of Constraints to developing Business Strategy,


[1] Viable Vision is a strategy with the objective of converting a firm to ever-flourishing. We’ll discuss the different strategy templates associated with the Viable Vision approach in later chapters.

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The Gestalt of ToC

“Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things.” – Isaac Newton

The Theory of Constraints. What sort of management strategy is that? Who calls a management approach a “theory”? And “constraints”; isn’t that the same thing as a “bottleneck”? If you’ve read Eliyahu Goldratt’s book, The Goal, then you know that the theory of constraints is just a dressed-up scheduling system. And a derivative one, at that.

You may have heard or thought these comments yourself.

The Theory of Constraints (ToC) might be these things, but it is more than that. ToC, while being a collection of insights and procedures, is also an approach to understanding and designing systems. From its beginnings as a shop floor scheduling system it evolved to a holistic approach to develop and implement strategies for organizations.

In the coming pages, I’ll summarize ToC, with an emphasis on strategy and the execution of that strategy.

Let’s start with the definition; the Theory of Constraints. Often, the word ‘theory’ used synonymously with unproven. That’s not the meaning here. In the scientific realm, a theory explains how things work, as in, the Theory of Relativity. A theory is only “proven” in terms of its logic and experiments, but it’s useful – until something better is found; it generally works in the real world, not just in the abstract. The Theory of Constraints explains how systems work. All systems have constraints, yet they are often unidentified. Especially in complex systems where it seems the ‘Constraint’ is constantly on the move.

ToC processes apply the approach of the hard sciences to the “soft” social sciences. It attempts to employ scientific rigor to organizational (social) problems and behaviors to better understand how systems behave and solve long-standing problems.

In the hard sciences, the simplest solution is often the correct one. Scientists are trained to use Occam’s Razor; The principle that states that one should not make more assumptions than the minimum needed. It is the underpinning of all scientific theory building. In the same way, ToC searches for the “inherent simplicity” of system behavior; the fewest assumptions or causes, for the most effects.

In scientific inquiry, one observes a certain behavior or effect. Then, asks “why”. “Why did that happen?”. To understand the cause, the scientist creates a hypothesis that explains the effect.  Then, to test the hypothesis, predicts other effects that must also be present if the hypothesis is correct. If the other effect(s) are observed, the hypothesis is strengthened. This doesn’t mean that it is “correct”, but only “strong. Goldratt said (paraphrasing here) “The true test of a good hypothesis is, that when the hypothesis and causal linkages are presented, the audience must say ‘It’s obvious!’”.

In the same way, the Theory of Constraints is a strong theory strengthened by numerous experiments. However, just as any theory changes with new knowledge, so does ToC. This may seem unsettling for those who are looking for a recipe. Goldratt and his fellow developers of ToC never looked for a particular recipe, even though many were found. They were and are looking for something deeper. An understanding.

The germ of ToC could be found in Goldratt’s ideas for scheduling factories.  He used those concepts to build software that scheduled factory production. In the adoption of his ideas, he ran into obstacles, finding policies that were preventing successful implementation. So, he wrote The Goal, to explain the ideas behind the software (the drum-buffer-rope procedure). However, even though these were successful, they were leading to the next constraint, and the next, and the next. The theory of constraints has evolved from scheduling, to cost accounting, to performance management, to sales, to projects, to strategy.

ToC approach to systems recognizes that we do not live in a world of deterministic outcomes, but rather, of probabilities – ranges of outcomes. We recognize that “Murphy” lives (statistical fluctuations) and we make decisions with this in mind. Uncertainty surrounds us. There is a kind of randomness or chaos built into the universe. Therefore, our solutions and decisions must be characterized by the calculation of differing outcomes that are determined by circumstances beyond our control. From the random crash on the highway that makes us late to our meeting to a decision by OPEC ministers on oil production quotas that ripple through the world’s economies. We should not kid ourselves that we are fully in control of our own or our firm’s destinies. ToC provides an approach and tools to cope with that uncertainty.

There are ample documents and books on the procedures of ToC. What is not well documented is how to put them in a strategic framework. Let’s begin with the fundamental assumptions and build from there.

Strategy is Not…

Strategy is not a new idea or a product like the new iPhone or electric cars. Nor is it a list of improvement projects to reduce costs or open new markets. It’s not an aim or mission like winning the war, being the market leader, or solving world hunger.

A strategy is a theory of the organization. A statement of who is the customer (a profile of the market), their need and those that are unmet. It defines the capabilities, products and methods that will meet those needs. A strategy is not necessarily holistic, it can be narrowly or broadly defined, depending on the organization. It could be a strategy of product offerings—soda vs, “healthy” drinks or sedans vs. trucks. It could be strategic, creating a new segment as Apple did with the iPhone and Southwest Airlines did with low-cost no-frills air travel.

Strategy is not a Plan

A strategy differs from a strategic plan in that the strategy focuses on the outcomes, and the plan is how to achieve those outcomes. It helps an organization focus the energy, resources, and time of everyone in the organization in the same direction towards a common goal. It provides focus and impetus to move from idea to action. It is the formalized road map that describes how your organization executes the chosen strategy; the plan is not the end; it is the means to the end. It’s a map.

Strategy is…

Often, the term ‘strategy’ is synonymous with ‘plan’. Porter posits that strategy is a verb; the creation of a unique and valuable position, involving different set of activities. This becomes the guidance for all activities of the organization. Action, supported by solid arguments.

We can boil a reasonable interpretation of the meaning of strategy down to one thing; doing the things that increase value for the entity, however the organization defines ‘value’.

Criteria for a Good Strategy

In view of this, we can conclude that a “good” strategy:

  • Drives the organization closer to its goal. There is enough “meat on the bones” to push the organization into some action towards achievement of the goals of the organization.
  • Provides security for the people in the organization; the strategy should strengthen the firm’s position and security, and thus its people.
  • Provides satisfaction for other stakeholders. Any strategy that violates stakeholder terms cannot be sustained, and thus violates the first criteria.
    • Customers must be satisfied with the product or service.
    • The community should be enhanced, or at least not harmed.
  • Promotes sustainable results; it should build on the organization’s strengths and be self sustaining
  • Is robust – allows growth even in times of volatility in the company’s domain or market

ToC verbalizes these criteria in this way:

  • Build a decisive competitive edge (DCE). Decisive in that the competitive advantage is far better than other firms’ abilities or capacities. Implied is that other firms cannot or will not duplicate this unique facility. It is like the traditional concept of competitive advantage, except that the DCE is based on solving significant customer problems created by the suppliers. For example, brands dictating a minimum order quantity or full truckload shipment policies that dictate large order quantities.
  • And the capability to capitalize on it. A DCE is based on operational excellence (i.e., fast delivery, high quality, low cost, etc.), but that is not enough. One must have or build the policies, systems and processes to leverage these abilities in the marketplace. You don’t have to look far to see the failure of great products done in by poor marketing.
  • On big enough markets. Not to be too obvious here, but we hope that if we go to the trouble of the previous two items, we would have a large enough market to make it worth our while.
  • Without exhausting the company’s resources. We don’t want to “bet the farm” on any strategy, unless we must. We must leverage our existing resources, shifting them to the DCE strategy almost without effort.
  • And without taking real risks. We could substitute the word “real” with “big”. The strategy should ensure stability through volatility; it should remain profitable, even during market turndowns. There should be no sacrificing critical resources (no mass layoffs – low cost sacrifices) or selling off assets. It should ensure asymmetrical rewards (strong profits during growth, limited losses during downturns).

A ToC Strategic Approach

A ‘ToC strategy’ is built around the organizations’ constraint(s). The strategy would explicitly acknowledge the current constraint and contain the elements to either break or elevate that constraint, including the emergence of and breaking new constraints during the execution of the strategy. For example, if the constraint is the market, we would build the strategy around growing sales, navigating the (planned) changing location of the Constraint (i.e., internal capacity, distribution, back to the market, etc.).

Secondly, a ToC strategy built with the idea that the organization’s performance should be constantly rising. That improvement is a way of life for the organization, not bursts of change, but constant change. This gives rise to the concept of the Ever-Flourishing approach.

The Ever-Flourishing Organization

An ever-flourishing organization is one that is constantly growing and improving (always relative to its purpose). The idea is often presented as two lines on a graph where performance is on the y axis, and time on the x axis. ToC practitioners have posited that there are two paths, a red curve, with a rapid, almost exponential growth, and a green curve, with a more linear improvement.

A high growth environment (red curve) is perilous, so stability of profit growth (green curve) is a primary consideration in formulating a strategy.  The goal is the red curve—a situation where the rate of improvement INCREASES, but for an ever-flourishing firm, you need BOTH. The strategy resolves these incongruities.

Problems with Strategy

A successful strategy has at least three problems to solve: choosing the “right” objectives, developing a plan to realize them, and successful execution of that plan.

There is significant amount of research that show many strategic initiatives do not bear the fruit envisioned. Almost half of all strategic initiatives undertaken fail.

There are significant obstacles to strategic success. Planners often have incomplete information. For example, what buyers “truly” desire and their motivations. There are entire industries devoted to just these 2 questions!  Even among the experts, you’ll find that the strategic information is still not perfect, rife with wishes and bias.  I’m reminded of Henry Ford’s quote, “If I had asked people what they wanted, they would have said faster horses.”

Many strategies fall short because it’s difficult to understand what influences system behaviors. The customer, the competitors, even the organization itself are hard to analyze because of the number of variables and their relationships are difficult to identify and quantify.

Planners themselves are subject to bias and wishful thinking. They create strategies using untested assumptions and fill them with geographical and cultural differences. They hold on to the past, when they should be embracing the future. Think of Kodak’s reliance on film, even though they invented digital photography. Or Chevrolet’s introduction of the Nova in Mexico, where Nova literally means no go (No-Va). We are all subject to the “blindness” and bias. Recognizing it is the difficulty.

Further, strategy failures are tied to the lack of a theory of implementation.  To successfully execute an organization’s strategy, it must have a singular focus of the people (every person?) in that organization. A strategy is incomplete unless there are mechanisms to create, monitor, and reward that focus as it is expressed. Critical implementation questions such as, “How do we know if we’re on track?”, “Who is responsible for each element?”, and “When should we intervene or reevaluate the strategy?” must be answered.

Complex systems hide the relationships that matter to a successful strategy. Planners and executives are often domain experts, but sometimes lack the understanding of how the “system” works. For example, how a firm interacts with its competitors or the reasons why their products are chosen over their competitors. There aren’t many people that can provide a detailed operational map of how a firm delivers its strategic choices to the customer. And understanding how these two systems interact? Most planners are relying on intuition, not a rigorous analysis.

The Project Management Institute and others give a lot of attention to the execution side of things. Often, the skills to successfully implement the strategy are absent from the strategy itself.  It’s hard to know what you do not know, so sometimes strategies fail because of lack of rigor in implementation planning.

Finally, no strategy can succeed with cross functional conflicts in the organization. Any strategy that has one silo “winning” at the expense of another is doomed.  Conflicting standards of performance, compensation, and rewards (informal & formal) will break any strategy.

What ToC Offers to Strategists

ToC offers a framework that overcomes many of the obstacles that break most strategic initiatives. Whether they are “correct” is a matter of judgement. And a set of tools to overcome many of the obstacles to creating and delivering a good strategy.  I will cover this framework and tools in detail in later chapters.

The approach to strategy, with operational excellence as the foundation, then focusing on the problems (undesirable effects) that are inherent in the “standard” way of doing business offers a fresh perspective in arriving at a strategy that will cause success.

With the Thinking Processes (TP), you can analyze and deepen your understanding of complex system behavior, highlighting the cause-and-effect relationships and revealing hidden assumptions. This can go a long way to breaking the complexity obstacle, both in understanding the existing system’s behavior and predicting its future behavior, identifying risks in new strategies. Further, a significant feature of the TP is the ability to identify and resolve cross functional conflicts and establish congruent standards of performance.

To find a “right” strategy and its potential results, ToC recommends a rigorous analysis of the market using the thinking processes of the Current Reality Tree, Evaporating Cloud and Future Reality Tree.

Using the Strategy and Tactics tool provides a theory of implementation and a roadmap to develop the supporting tactics to successfully implement a strategy.

The most important feature of a ToC-based strategy is its focus on the most critical issues—the Constraint(s) and the uncertainty that affects them. The only strategy worth implementing is one that breaks the limitations of higher performance and systematically drives the organization towards its goal.

Bibliography

Cooper, Marjorie, ToC handbook (2010), Traditional Strategy Models and the Theory of Constraints

Goldratt, Eliyahu, ToC handbook (2010), Introduction to ToC- My Perspective

Spender, J.C., Business Strategy (2014), Oxford Press

Michael E. Porter (2000), What is Strategy, Harvard Business Review

Goldratt, Eliyahu, The Gestalt of TOC (2010), YouTube https://www.youtube.com/watch?v=DQoO8y3En3w

Boston Consulting Group, (2014), Strategic Initiative Management: The PMO Imperative

Goldratt, Eliyahu, (1996), My Saga to Improve Production

Goldratt, Eliyahu, (2011), Building a Blue Ocean Strategy, http://toc.tv

Goldratt, Eliyahu, (2011), Goldratt Satellite Program Marketing – Unrefusable Offers and Market Segmentation

Rumelt, Richard, (2011), McKinsey Quarterly, https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-perils-of-bad-strategy

Edinger, Scott, (2012), Three Cs of Implementing Strategy, http://forbes.com

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We did a very successful Theory of Constraints Implementation a while back, that incorporated a wide variety of approaches. 

  • Critical Chain Project Management
  • Process Reengineering
  • Supply Chain Management

The results were great.  So we made a presentation telling our story.  Here it is on slide share.
FMC Critical Chain Project Management Implementation

The Article is can be found on the website by clicking on the link below
Pit Crews cut final assembly time in half, giving FMC Technologies “The Racer’s Edge.”

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Today, companies are focused on increasing throughput – the rate at which a company generates money through sales. They want to expand products, customer base, markets, and so on. They want to grow as much as possible, as quickly as possible. They do not want to focus on shrinking their company or labor force. Yet, the most commonly used financial tools tell companies to focus on cutting costs in order to maximize profits, making expenses the focus of companies, not sales generation. This often leads management to make decisions that actually harm a company.

Companies need to use financial tools that move them toward their goal. Throughput Accounting provides managers with a transparent and focused method to make decisions that consistently lead them in the right direction.  Through better managerial decision making, Throughput Accounting improves a company’s ability to make more money now and in the future because it approaches accounting from a cash management basis. It meets the need that companies have to meet management challenges, including outsourcing products, process improvement, and purchasing capital equipment.

Is Traditional Cost Accounting Bad for Decision Making?

It is often difficult to see how decisions made in a local area affect the organization as a whole.  This is particularly true of managers who are not able to see or affect every area of the organization.  The organizational view of most managers is typically limited to their own area of responsibility and those nearby. 

For a business leader in an enterprise, the issue is more troublesome, because he or she must concern themselves with the decision making of multiple managers involved in many aspects of the enterprise.  We know from experience that local managers often make decisions that are counter to the purpose of the enterprise.  A single person periodically making a bad decision is usually not significant, but if there is a systemic error in many managers’ understanding of the enterprise’s functioning, many poor decisions will be made, which could create significant, long lasting damage.

Larger, subdivided enterprises lose their system-wide perspective, and managers are forced to rely on decision rules that are typically based on Traditional Cost Accounting; the bigger the enterprise, the bigger the problem.

Download and read the rest of the Throughput Accounting Whitepaper

I have another relevant paper on the impact of cost accounting and productivity.  It’s a bit old, but I thought that as long as I was on this topic, you’d want to have it, too.

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Last week, I did an interview with Joe Dager of Business 901 on the topic of the integration of Theory of Constraints with Lean and Six Sigma.  We discuss how it all fits together and the biggest problem facing managers who want to implement a continuous improvement program.

Click below for a listen!

You can also download the podcast to your iPod using iTunes by searching for Joe Dager Podcasts.

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You’ve read all of the books on the Theory of Constraints and heard of the terrific successes other achieve with this method.  You may be wondering what a real implementation looks like.  I’ve led nearly 100 implementations and have seen a wide range of companies. 

All implementations of the Theory of Constraints will follow this general pattern: procedure development, education, implementation, [OH MY GOD! LOOK AT THE BOTTOM LINE!], procedure and policy refinement, re-education and re-implementation.  Implementations are fun and staggering in the bottom line results they achieve.  

What can you expect in your implementation?

It’s difficult to give a specific answer to that question, since every organization is different.  In general, the implementation goes like this:

  • Enthusiastic changing of some policies
  • Unbelievably positive improvement
  • Less enthusiastic changing of more policies and procedures
  • Positive improvement
  • The constraint moves to an area not addressed by the initial implementation.
  • Pretty good improvement
  • Results level off
  • Management looks elsewhere to improve

Most theory of constraints implementations in manufacturing are completed in less than 2 years.  The plant is now running like clockwork, costs are down, performance is up.  The constraint is no longer in manufacturing.  The focus of the business and the improvement projects must now shift to external issues.  So, rightfully so, the attention of the organization moves to other areas, not in manufacturing.

However in those 2 years you’ve implemented, your business will change in ways you can’t possibly imagine today.  Your performance will level off at a much higher level of performance you are enjoying today.  How about a 43% annual ROI?  Could you sit there awhile?  I know a company that did.  How about taking your order fulfillment cycle from 3 weeks to 3 hours and stalling there?  I know another company that did that.

The first stage of the implementation will be like housecleaning, with many constraints that you identify and then quickly break.  Each time you break one, results improve.  This period lasts about 90 days.  Eventually, you’ll find a constraint that will be difficult to break.  Might be the market.  Might be the product.  Might be a $2 million machine. 

Then comes the hard work.  Implementing the system to exploit and subordinate will take longer than the quick results you’ve been getting up until now.  If you don’t prepare for it, the implementation can get bogged down here.  This phase may take 30 days; it might take 6 months.  It’s at this time the commitment you’ve gained in the prior steps will pay off.  It’s not really that fun implementing a scheduling process and dealing with people that want to work on product early.  You’ll also encounter the “back to Egypt” crowd here.  (The “back to Egypt” crowd was the Israelites that thought they were better off being slaves in Egypt than being killed at the Red Sea – just before the Red Sea parted.)  They’re the ones who will insist that everything was better before the theory of constraints management concept came around.  They’ll resist changing.  Project deliverables will be missed.  People will be “reassigned” because they won’t change.  It will happen. 

The most difficult obstacle to continuing improvement is inertia.  Your implementation process must move people from working in the business to actively working on the business.  Anything you can do to remove the fear of change will help you achieve your goal.

A typical implementation of the theory of constraints gets positive bottom line results.  If you’re committed to managing the constraints and not letting them manage you, you’ll continue to see positive results on your bottom line.

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Here’s a short clip from my presentation last month.

Many organizations struggle with their continuous improvement (CI) efforts; achieving real bottom line results, whether in cost savings or increased revenues, has proven to be difficult.  In spite of the widespread implementation of Lean and Six Sigma principles, poor results persist.

The TLS process generates 15-20 times better performance than Lean or Six Sigma.  This presentation will show the root causes of poor CI program performance and a systematic framework to create ongoing bottom line results.

You can view the entire presentation by registering here

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