Implementing the Theory of Constraints (TOC)

Instructor: Christian George

Christian has a PhD in Business Management and an MA in Accounting & Financial Management

This lesson discusses the implementation of the Theory of Constraints (TOC) methodology, the four basic types of constraints, and how the theory directly correlates to activity-based costing.

What is the Theory of Constraints?

Close your eyes and imagine another beautiful Monday morning at the local factory. All of the machines and manufacturing lines fire up to begin the work order load that you assigned the previous week. As production manager, you notice that the products coming down the line to Machine #5 are coming at different speeds and on an inconsistent basis. You start to worry about how the entire line will keep up production with the problems happening in the process. You think, 'there must be a bottleneck at Machine #4.' If so, how can the bottleneck be removed or corrected in order to produce at optimum efficiency?

Management, production supervisors, and other key employees in an organization must learn how to implement constraint methodology in the production processes of the organization to ensure maximum efficiency. The Theory of Constraints counts on the elimination of constraints, or bottlenecks, allowing the organization to maximize throughput (products sold) and reduce inventory (raw material) and operational expenses (overhead).

Five-Step Focusing Process

The process of determining which type of constraint is present and how to eliminate it begins with the five-step focusing process. Let's go back to our opening problem that the production manager noticed at the local factory and apply the five-step focusing process to determine what the constraint is and how to eliminate it:

  • Identify the constraint: You noticed that the product coming down the production line was arriving at Machine #5 at inconsistent rates. You identify that the employee working at the machine in question is still in training after beginning the job last week.
  • Exploit the constraint: You assign a seasoned production worker to help the new employee at Machine #4.
  • Subordinate every other decision to the constraint: As manager, you ensure that all other employees and managers know that the seasoned worker will be assisting on Machine #4 until the new employee gains sufficient skills and speed to operate alone. This includes schedule changes.
  • Evaluate the constraint: A week goes by at the factory and you evaluate the training and performance of the new employee. He is doing better at the new job and seems to be able to keep up with production flow.
  • Prevent inertia throughout the process: To ensure that the constraint does not happen again, the seasoned worker is assigned as a floating production worker to assist where and when he is needed. This change prevents continued inertia of constraints in the process.

Types of Constraints

There are four basic categories of constraints. The majority of constraints encountered can be properly categorized into one of these four categories.

  • Market constraint: This constraint is dependent on market orders. Even if the process is running perfectly, the lack of orders will act as a constraint on the overall process.
  • Paradigm constraint: This constraint is dependent on human belief systems. Whether the belief is held by the employee or member of management, the belief will affect the overall quality of work and ethic and directly affect the process.
  • Physical constraint: This constraint is dependent on something physical, mainly equipment. If the piece of equipment can only produce a defined number of products, its inherent inefficiency may be the constraint.
  • Policy constraint: This constraint is dependent on organizational policy. This comes through management-imposed guidelines and other organizational procedures that must be changed at the executive level.

Activity-Based Costing

When organizations determine the cost of producing a product, many use the costing method of activity-based costing (ABC). This type of costing individualizes each activity in the manufacturing process and assigns it a cost relative to the output of the desired product. This is conducive to lean manufacturing and allows managers to use the Theory of Constraints and activity-based costing to produce a lean manufacturing process.

For example, the use of Machine #4 costs $5 per man hour. If Product A currently spends two hours at Machine #4, the cost portion of Product A is $10. If it is determined that Machine #4 is the constraint and through the five-step focusing process the constraint is eliminated, Product A should spend less time on Machine #4, reducing its cost portion to the product. The faster Product A is completed, the lower the cost of Product A is. The elimination of the constraint at Machine #4 reduces the time it takes to make Product A, which increases the ability to get the product out the door and revenue in the door.

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