Methodologies 3

The Five Steps of the Theory of Constraints

• Identify the System Constraint => This will be a result out of process diagnostics measuring the realistic through-put of key processes.
• Decide How to Exploit the Constraint => Obtain as much capability as possible from the constraining process . An example is to reduce or eliminate the downtime of bottleneck operations.
• Subordinate Everything Else => The non-constraint processes of the system must enable the constraint to operate at maximum effectiveness. Once this has been done, the overall system is evaluated to determine if the constraint has shifted to another process.
• Eliminate the Constraint => This step is only considered if steps two and three have not been successful. Major changes to the existing system are considered at this step.

TOC is an on-going process, and the foundation for achieving sustainable change through TOC is by defining a set of three essential measurements that drive the change process. Conventional accounting systems do not always provide the right support for TOC, or lean-based efforts. We recommend to steer away from traditional measures derived from the "product cost" accounting methods. The following measures should be monitored closely while working on profit improvements through TOC:

Throughput
The rate at which a process generates money through sales of a product or service.

Inventory
Inventory represents all the money tied up inside an organisation. This includes facilities, equipment, obsolete items, as well as raw material, work in process, and finished goods.

Operating Expense
Operating Expense is all the money an organisation spends turning Inventory into Throughput. It represents the money going out of the organisation. Examples include direct labour, utilities, consumable supplies, and depreciation of assets. All three of these measures are interdependent. This means that a change in one will result in a change in one or more of the other two. Therefore, to improve your organisation most effectively using TOC, the following formula applies: