Featured Articles

If your business had no constraints how much could you earn?

If your business had no constraints then what would your earnings be? What if there was nothing at all to restrict the flow of money into the business? Clearly your earnings would be infinte. And so, obviously, every business must have a constraint of some kind because we all no it is nonsense for a business to have infinite earnings.

 

In Theory of Constraints, the goal of a business is to make more money, now and in the future. There is an inflow of money into the business from sales and an outflow of money to pay for suppliers and vendors. The difference between these two sums is called Throughput.

In addition every business has ongoing Operating Expenses, which is the money that must be paid out to convert Inventory into Throughput.

 

So, it stands to reason that every business must have a bottleneck or constraint. Something that, more than any other, limits the rate at which Throughput is generated by the business.

 

If the constraint is the rate limiting part of the business in terms of throughput, then what will happen when we focus on other parts of the business? What if we improve other parts of the business through capital investment, or just by getting them to run at optimal efficiency. Will the overall Throughput of our business system increase? Clearly it cannot! It is the constraint which limits the rate of Throughput generation. Only by exploiting the constraint can we improve overall Throughput.

 

In fact, rather than run the rest of the business components, departments, equipment or what have you at optimal efficiency, it is only the constraint which should be run at optimal efficiency. This will maximise Throughput. We are much better off to subordinate the rest of the business to the requirements of the constraint to achieve that overall system optimsation. If that means some part of the business are running at very poor efficiencies then so be it. If they are non-constraints then they don't determine the overall business Throughput any way. And running them only to meet the requirements of the constraint greatly reduces the overall complexity in the business.

Instead of focussing on everything all of the time, TOC shows us that focussing all our efforts on the constraint has the greatest impact to improve overall system performance. And who really cares what efficiency some other department or workstation is running at? In cost accounting this is deemed important but isn't the performance of our overall business system more important? After all, it is only the performance of the whole, not of the individual components, that determines how profitable the business will be.

 

TOC provides a completely different way of looking at businesses to maximise overall system performance in very short time frames. The time frame is short (days and weeks) because we focus our attention on the greatest leverage point in the system; the constraint.

 
[ Back ]

Can you answer this correctly?

Find out if your cost accounting methods are leading you to make the wrong decisions, time and again.

Beware - you may be in for a surprise!

This will challenge some of the things you believe to be "true".

 

Difference between the cost world and the throughput world

Quiz

I answered the above cost accounting question.
 

What is TOC?

TOC is a multifaceted management philosophy. It is a systematic reexamination of some of the most fundamental beliefs in business management, culminating in a new approach to address problems facing us today.

TOC is more than a set of tools or techniques although it certainly contains these. It is more fundamentally a paradigm shift which demands that we think about our problems and solutions, our goals and objectives, policies, procedures and measures, in a different way.

Operating Expense, Inventory and Throughput

In TOC, a business can be considered in terms of just three measures, T, I and OE.

  1. T, or Throughput, which is the rate at which money flows into the organisation from sales.

  2. I, or Investment (or Inventory), which is the amount of money invested or tied up in the system, including equipment and machinery, raw materials, work in process, finished goods and so on.

  3. OE, or Operating Expense, which is the amount of money that must be applied to the business to convert I into T.

Theory of Constraints (TOC) is the name given to a large body of knowledge centred on the concept that any (indeed every) system must have a constraint - a single factor that more than any other limits the ability of the system to achieve its goals.

This idea is not new, indeed it is a very old concept, well understood in the pure sciences (such as physics), where the search for basic, fundamental relationships is the very essence of the science. What is more recent (TOC development started in 1982) is the application of these principles to systems that previously defied such approaches, such as the study of human systems and businesses in particular.

TOC can be applied to determine the constraint of each business system and then modify that system to improve performance at the constraint and overall. TOC principles of cause and effect logic, as well as sufficiency and necessity logic, also allow the location of the constraint to be controlled and can buffer out the negative effects of natural system variability. But TOC is not for the faint hearted. Installing TOC management and measurement systems requires a paradigm shift in thinking from the traditional cost accounting approach.

TOC introduces significant change into an organisation but brings with it powerful tools necessary to answer the following questions: What to Change? What to Change to? How to Cause the Change?

TOC introduces a completely new way of thinking about problems and implements solutions that have a dramatic and immediate impact on the bottom line. TOC changes bring measurable benefits in days and weeks, instead of the usual months and years (if at all). Improvements come so fast because TOC works on the key leverage point in your business; the constraint. To find out more you can Google "Theory of Constraints", "Drum Buffer Rope" and "Critical Chain Project Management".

The best online resource for TOC is the one written by Kelvyn Youngman. 

Open Standards Software

You'll be amazed at the quality of open source and open standards software which you can get for:

  • No software licencing costs (yes, it's free!)
  • No ongoing licence maintenance nor management costs (this can be more than the licence costs!)

From BI to ERP, CRM, Workflow, a complete office suite and much, much more.

...

Readmore