25 Overview of Theory of Constraints

The theory of constraints involves techniques for improving processes that have to be learned independently of the material we address in subsequent lectures. This theory should be applied to business processes before beginning the process improvement methods that are discussed in the following lectures. If the student understands the theory of constraints and if this theory is being applied to the business processes the student is concerned with then this lecture can be skipped. If not, this overview introduces the theory and gives the student some feeling for the necessity for learning and using this theory.

Theory of constraints deals with aspects of control often neglected or wrongly presented in standard texts. I suspect the likely reason is that theory of constraints as applied to business organizations was made popular outside of business schools by a physicist, Eliyahu M. Goldratt. Theory of constraints is described by Goldratt via his books The Goal, The Race, Critical Chain & other process oriented management books. These books are “business novels” and enjoyable reads as well as being excellent self-training books. Theory of constraints is appropriate to processes associated with manufacturing operations, back and front office service operations and projects. I distinguish between back and front office service operations because although theory of constraints applies to front office service operations it shouldn’t be the main focus when dealing directly with customers. This is because it is better to be effective with customers than to be highly efficient at the expense of some effectiveness.

Theory of constraints is based on the fact that the throughput of a process can be no greater than the throughput of the slowest step in the process, i.e. the constraint. It is a simple and seemingly obvious concept but having seen many offices with desk after desk stacked with paper work waiting to be processed and many factories with work in process stacked around machine after machine I can tell you that it isn’t obvious to many managers in spite of the fact that violating this theory leads to inefficient operations and excessive costs.

A basic work process, applicable to any organization, is shown in figure 12.

Figure 12 A basic work process has suppliers, inputs, outputs and customers.

This chain is often called SIPOC after the initials of each element in the chain. Manufacturing, project and back office service processes are typically many step processes, each with suppliers, inputs, outputs, & customers. A simple example with ten steps is shown figure 13. Each circle with an S is a SIPOC chain in which the preceding S is the supplier of inputs to the S and the following S is the customer for its outputs. Note that a process can have more than one supplier, as S4 is supplied by S3 and S8 in this figure. Similarly a process can have more than one customer. A more complex, but typical process might have loop backs where material or paperwork not meeting standards is sent back to an earlier process for rework.

Figure 13 Typical business processes integrate many individual SIPOC processes.

If we assume that each of the steps shown in figure 13 has a different through put then the theory of constraints states that the through put of the overall process cannot be any larger than the through put of the slowest step. If the manager in charge of an overall process like that illustrated in figure 13, with each step having a different through put, expects the workers to stay busy you can imagine what results. Work in process (WIP) builds up in from of all steps that are slower than the previous step. This excess WIP can lead to several problems, including:

·       In manufacturing operations and in some project operations the WIP leads to excess inventory costs.

·       Associated with excess WIP is excess cycle time, i.e. the time from the first step to the final step in the overall process.

·       If a worker at one of the non-constraining step begins to make errors in paperwork or if a machine at a non-constraining step begins to produce defective parts then excess costs result from the extra rework required on all the defective material produced before the problem is detected at some subsequent step

·       Eventually expediters and/or overtime are added to ensure that time critical work is located and processed at the expense of other less critical work, leading to excess labor costs.

A second, and again often overlooked, result of the theory of constraints is that there are no additional costs incurred if workers at non-constraining steps are idle as long as there is material available for the worker or machine at the next step. This means that if such workers are cross trained then they can do other productive work when there is a buffer of output work after their step. The value of workers doing other work justifies paying premium wages to workers that are cross trained and the cost of cross training.

Most important is that workers at non-constraining processes have time to spend on process improvement and, since total productivity is not reduced, there is no additional cost for the process improvement labor. This is one reason theory of constraints should be applied to work processes before initiating other process improvement activities.

Figure 14 illustrates how to control processes with a constraining step.

Figure 14 Adding buffer inventories and controlling work material release controls work in process for processes with constraining steps.

In the example shown in figure 14 step 3 is assumed to be the constraining step. Buffer inventory is maintained in front of step 3, indicated by the small rectangle, so that it can never be idle due to lack of input. The size of the buffer in front of step 3 is controlled by the rate of work material released to the input of step 1, indicated by the dotted line from the input of step 1 to the buffer inventory at the input to step 3. It is also correct practice to add a buffer in front of step 4 and regulate the input to step 5 to control the size of this second buffer. The reason for the second buffer is to ensure that step 4 does not become the constraining step due to material not being available from step 8. Note that this process control approach applies to any type of business that involves material, i.e. paper, electronic media or parts, moving from step to step to accomplish an overall work objective.

A personal experience is a good illustration of the problems caused by not applying the theory of constraints. I was asked to consult for a factory that was in danger of being shut down and the work moved out of the country because the corporate office was not satisfied with the factory’s performance. A quick tour showed that there was excess WIP nearly everywhere. In fact a special material handling system had been installed just to deal with the partially finished goods throughout the factory. A few questions revealed that the constraining process was the final process before the products were boxed and shipped.

I held a Saturday training system for the managers. I asked them what the cycle time was for their products. They answered that it was about 35 days from first material release to shipping products made with that material. I then asked what the cycle time would be if material moved from process to process with no waiting time in front of each process. They thought awhile and answered that it would be 7 days. A few more leading questions and I could see light bulbs coming on in a few minds and excited expressions on faces. Incidentally, the first person that comprehended what they had been doing wrong was a woman doing administrative work in the front office. By Monday they had plans worked out to change their methods and were starting to implement the plans.

I called the general manager a couple of months later and asked if the cycle time had changed. They had two products going through the same production line. He said the cycle time for one product had been reduced to the ideal 7 days by applying theory of constraints. They began releasing material into the line at the rate of the final constraining process and maintained buffer work in process only in front of the constraining process. Unfortunately, he was not allowed to control the release of material for the second product and its cycle time was still about 35 days. Corporate marketing people controlled the release of material for the second product and they released it according to their sales instead of the factory capabilities. I never learned if the general manager was able to convince corporate management that marketing’s control of material release for the second product was the cause of the factory’s excess cycle time, excess WIP and associated excess costs.

This short introduction to the Theory of Constraints illustrates the principle. Managers of manufacturing or back office service operations should study Theory of Constraints, just in time (JIT) inventory control and Lean techniques and understand the value of small lot size in controlling the cost of poor quality. Project managers should study critical path scheduling as well as the theory of constraints. I recommend project managers read Goldratt’s book Critical Chain, which addresses scheduling for projects.

Exercise

Like lecture 23 this lecture is only an introduction and no exercises are required unless the student isn’t familiar with the theory of constraints and using it already. If the student isn’t knowledgeable in these techniques and isn’t already using them then additional self-study is necessary to learn how to put them into practice for real business processes, which tend to be more complex than the simple example used here to illustrate the principles involved. I recommend reading Goldratt’s books because they are fun reads as well as excellent for self-training.

If you find that the pace of blog posts isn’t compatible with the pace you  would like to maintain in studying this material you can buy the book “The Manager’s Guide for Effective Leadership” in hard copy or for Kindle at:

http://www.amazon.com/Managers-Guide-Effective-Leadership-Organizations/dp/1449000673/ref=sr_1_2?ie=UTF8&qid=1346946310&sr=8-2&keywords=Joe+Jenney

or hard copy or for nook at:

http://www.barnesandnoble.com/s/Joe-Jenney?keyword=Joe+Jenney&store=book

or hard copy or E-book at:

http://bookstore.authorhouse.com/Products/SKU-000269270/The-Managers-Guide-for-Effective-Leadership.aspx