Theory of Constraints (TOC):
Learning objectives of the article:
Theory of constraints (TOC) is a management approach that emphasizes the importance of managing constraints. A constraint or bottleneck is any thing that prevents you from getting more of what you want. Study of constraints or bottlenecks, keeping their record and taking necessary steps to improve them is also known as bottleneck accounting.
Explanation of the Concept:
Every individual organization faces at least one constraint. So it is not difficult to find examples of constraints. For example, You may not have time to study thoroughly for every subject and to go out with your friends on the weekend, so time is your constraint.
Since a constraint prevents you from getting more of what you want, the theory of constraints (TOC) maintains that effectively managing the constraint is the key to success. As an example, long waiting surgery is a chronic problem in the National Health Service. For example up to 100 referrals from general practitioners can be processed in a day.
100 patients per day
100 patients per day
50 patients per day
|150 patients per day
||15 patients per day
||60 patients per day
||140 patients per day
Processing surgery patients at an NHS facility
This diagram originally appeared in the February 1999 issue of the U.K. Magazine Health Management
The constraint, or bottleneck, in the system is determined by the step that has the smallest capacity–in this case surgery. The total number of patients processed through the entire system cannot exceed 15 per day-the maximum number of patients that can be treated in surgery.
No matter how hard managers, doctors, and nurses try to improve the processing rate elsewhere in the system, they will never succeed in driving down the wait lists until the capacity in the system is increased. In fact, improvement elsewhere in the system-particularly before the constraint-are likely to result in even longer waiting times and more frustrated patients and health care providers. Thus improvements efforts must be focused on the constraint to be effective. A business process such as the process for serving sugary patients, is like a chain. If you want to increase the strength of a chain, what is the most effective way to do this? Should you concentrate your efforts on strengthening the strongest link, all the links, or the weakest link? Clearly, focusing your effort on the weakest link will bring the biggest benefit.
Continuing with this analogy, the procedure to follow to strengthen the chain is clear. First, identify the weakest link, which is the constraint. Second, don’t place a greater strain on the system than the weakest link can handle-if you do, the chain will break. Third concentrate to improve the weakest link. Fourth, if the improvement efforts are successful, eventually the weakest link will improve to the point where it is no longer the weakest link. At this point, the new weakest link must be identified, and improvement efforts must be shifted over to that link. This simple sequential process provides a powerful strategy for continuous improvement.
Theory of constraints (TOC) approach is a perfect complement to other improvement tools such as Total Quality Management (TQM) and Business Process Reengineering. It focuses improvement efforts where they are likely to be most effective.
Real Business Example:
The Constraint is the key:
The Lessons plant of Baxter International makes medical products such as sterile bags. Management of the plant is actually aware of the necessity to actively manage its constraints. For example, when materials are a constraint, management may go to a secondary vendor and purchase material at a higher cost than normal. When a machine is the constraint, a weekend shift is often added on the machine. If a particular machine is chronically the constraint and management has exhausted the possibilities of using it more effectively, then additional capacity is purchased. For example when the constraint was the plastic extruding machines, a new extruding machine was ordered. However even before the machine arrived, management had determined that the constraint would shift to the blenders once the new extruding capacity was added. Therefore a new blender was already planned. By thinking ahead and focusing on the constraints, management is able to increase the plant’s real capacity at the lowest possible cost.
Source: Eric Noreen, Debra Smith, and Jams Mackey, The Theory of Constraints and its Implications for Management Accounting (Montvale, NJ: The IMA Foundation for Applied Research, Inc., 1995)
You may also be interested in other useful articles from “business and quality improvement programs” chapter:
- Just-in-Time (JIT) Manufacturing and Inventory Control System
- Total Quality Management (TQM) System
- Six Sigma
- Business Process Reengineering (BPR)
- Theory of Constraints (TOC)
Other Related Accounting Articles: