The Theory of Constraints

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Overview of the Theory of Constraints

Pareto analysis holds that 20 percent of events cause 80 percent of the results. For example, 20 percent of customers generate 80 percent of all profits, or 20 percent of all production issues cause 80 percent of the scrap. The theory of constraints, when reduced down to one guiding concept, states that one percent of all events cause 99 percent of the results. This conclusion is reached by viewing a company as one giant system designed to produce profits, with one bottleneck operation controlling the amount of those profits.

Under the theory of constraints, all management activities are centered on management of the bottleneck operation, or drum. By focusing on making the drum more efficient and ensuring that all other company resources are oriented toward supporting the drum, a company will maximize its profits.

This approach is substantially different from the traditional management technique of local optimization, where all company operations are to be made as efficient as possible, with machines and employees maximizing their work efforts at all times.

The key difference between the two methodologies is the view of efficiency – should it be maximized everywhere, or just at the drum? The constraints-based approach holds that any local optimization of a non-drum resource will simply allow it to produce more than the drum operation can handle, which results in excess inventory.

Example of a Drum Operation

A furniture company discovers that its drum operation is its paint shop. The company cannot produce more than 300 tables per day, because that maximizes the capacity of the paint shop. If the company adds a lathe to produce more table legs, this will only result in the accumulation of an excessive quantity of table legs, rather than the production of a larger number of painted tables. Thus, the investment in efficiencies elsewhere than the drum operation will only increase costs without improving sales or profits.

The preceding example shows that not only should efficiency improvements not be made in areas other than the drum operation, but that it is quite acceptable to not even be efficient in these other areas. It is better to stop work in a non-drum operation and idle its staff than to have it churn out more inventory than can be used by the drum operation.

Inventory Buffers

Given the importance of focusing management attention on maximization of drum efficiencies, the use of buffers becomes extremely important. An inventory buffer should be positioned in front of the drum operation, and is used to provide a sufficient amount of stock to the drum to keep it running at maximum efficiency, even when variations in upstream work centers create short-term reductions in the flow of incoming inventory. The need for a buffer brings up a major operational concept in the theory of constraints, which is that there will be inevitable production failures that will alter the flow of inventory through the facility. Buffers are used to absorb the shock of these production failures, though it is also possible to increase the level of sprint capacity to offset the need for large buffers.

Sprint Capacity

Sprint capacity is excess capacity built into a production operation that allows the facility to create excess inventory in the short term, usually to make of up for sudden shortfalls in inventory levels. Sprint capacity is extremely useful for maintaining a sufficient flow of inventory into the drum operation, since the system can quickly recover from a production shortfall. If there is a great deal of sprint capacity in a production system, then there is less need for a buffer in front of the drum operation, since new inventory stocks can be generated quickly.

The concept of sprint capacity brings up an important point in the theory of constraints – that it is not only useful, but necessary to have excess capacity levels available in a system. This controverts the traditional management approach of eliminating excess capacity in order to reduce the costs associated with maintaining that capacity. Instead, management should be aware of those work centers with high levels of sprint capacity, which require much lower levels of inventory buffer, and primarily focus its attention on areas with low sprint capacity, which require larger buffer stocks.

Podcast

A discussion of throughput concepts is available on Episodes 43 through 47 of the Accounting Best Practices podcast.