Theory of Constraints and Supply Chain Management

While the entire world is shouting over the roof on how their SCM cycles have been optimized and how they’d reduce Bullwhip, thinking that it is a magic wand, could be a sheer mistake. In the guest lecture on how Six Sigma could help a SCM cycle work on optimal levels in all three metrics (quality, cost and time). This read touches a bit more on TOC, also popularly known as Theory of Constraints.

Did you know that our daily life is a chain of events, in itself? And for our day to be optimally used, we may have to sort out the weaker events. The point is — Each of those events, will lead onto one or the other event suffering and thus, we can, with a degree of confidence say, our life is constrained.

Constrained by a chain of weak events, we may say!!

A SCM cycle is nigh not different by any stretch of imagination. We’d find even the most fluid cycles to have one or the other weak-point, unless the SCM cycle is working at a high degree of precision and accuracy. Few SCM models today work with such high degree of accuracy anyways, so that drives home the moot point — TOC can and should be applied to solve most SCM models!

So, what is this TOC all about?

With its basic fundamentals on the fact that constraints slow down any system, TOC advocated eliminating these roadblocks/constraints for optimizing the performance of the system. Indeed, any SCM cycle could be included in the umbrella too!

But, that’s not where it stops. As it turns out to be, TOC is not a one-step activity. It is about lifting the performance of a model from let’s say x to 2x, and then improving it to 3x and so on, by identifying and fixing constraints.

TOC from Israel

Dr. Eliyahu Goldratt and a team of three Israelis were responsible for the origination of TOC in the early 80s. As on date, the TOC is considered to be the most effective problem identification and problem solving technique doing the rounds.

The basic fundamental of TOC is this — Every model is a chain of chains, and each chain could have one or multiple weak links. It is these weak links that impede the smooth and efficient working of the model and thus immediate and an analytical fix to these issues could take care of a lot of problems at hand.

Implementing Theory of Constraints in organizations is often fraught with risk. One of the risks in going ahead with TOC is that you may have to run into a situation where working through possible roadblocks in the model itself may be challenging. In that sense, the TOC model comes up with one of its severe minus points, something a lot of people have yet not been able to figure out completely.

For example, you know that the TOC model helps you to identify the weakest link in a model, and helps you fix it. On fixing, when you move ahead, you would be able to find out some more weaker links, which put together impede the working of the model itself. Does this mean you have a numerical model at hand to help you fix the issue at hand?

It is here that experience matters. Implementing TOC, however theoretical and rudimentary it may seem, comes with its slew of challenges. One of the biggest challenges, notwithstanding the previous one mentioned here, is that the team should be able to understand the dynamics of the model even before working on the model with TOC.

The key reason for this is the fact that identifying the underlying dynamics in a working model may be a challenging task for most people. Even experienced Six Sigma practitioners, who work with the standard that is so synonymous with TOC, report a lot of lag in their efforts to help fix the model’s effectiveness using TOC.

Let us consider a practical example for us to know how TOC could be helpful in fixing the operational efficiency problems of a typical SCM model

Courier service case study

A company deals with delivering packages from A place to B place. Now, this courier company specializes in internal shipments, and prides itself in delivering packages to any part of the world within 7 days. Seeing their tall promises, a lot of customers stream in to make use of the courier service, but in next to no time, problems begin to surface.

What could be causing the problems, and how do you go about identifying the weaker links in a traditional SCM model?

A lot of people think that some kind of a statistical approach is needed, but it isn’t really required with TOC at hand. With a certain degree of confidence, you could apply the common sense approach, which is so much advocated by the TOC principle and you could get glowing results out of your SCM project itself.

Anyways, back to the courier case study, one of the best places to start would be to freeze on the exact nature of the problem at hand. Let us for a moment think that these problems really surface with one specific destination or country. It obviously then leads us to the fact that if we fix the delivery problems that plague the services to this country, all would be fine.

But, have we thought of one more variable here? If these problems are arising in this country, how confident are we in saying that these wouldn’t come up in other countries as well? Initial investigations may reveal all is well, but are we absolutely sure that these issues wouldn’t be replicated elsewhere?

Somewhere in the answers to these four questions, you would find that implementing the TOC in your SCM model would make more than just, theoretical sense. So much for Mr. Goldratt, and his powerful problem solving philosophy?

But, when it comes to organizations and them applying TOC, is it all hunky-dory? What we mean to say is — Does TOC see through the end of the tunnel, without having any challenges to deal with?

Negative — The challenges below enumerate why a lot of people fear from implementing TOC in their SCM models.

Key challenges in implementing TOC in SCM

1.     The difference between a problem and a constraint – Clearly, one of the first places where people stumble more often than not is in the fact that they are unable to identify the difference between a problem and a constraint.

2.     Employee involvement needed more than a top-down approach — A lot of company owners think that by sitting in the boardroom and announcing TOC initiatives in a company, will do them good. Not really — You would find that like many other continuous improvement measures, TOC needs rigorous and unflinching employee support as well.

3.     No way for bureaucracy at all — While it must be said that the B word is not one that a lot of companies emphasize on, what with the latest focus on employee relations anyways, theoretically though this is one big hurdle, which any company should look to avoid. Need we say more about the practical impact of this issue?

The way ahead

Here’s how you go about applying TOC in your SCM model, once you have identified this is the best way to go about.

  1. Identify the system’s constraints
  2. Decide how to exploit the constraints
  3. Subordinate everything else to the constraints
  4. Elevate the system’s constraints
  5. After breaking the constraint, repeat the five-step process

TOC Measurements

It is widely believed that measuring the progress and results of any continuous improvement philosophy is probably the most important step. Indeed, the same applies for TOC as well. Here are some pointers on TOC measurements; things you should know for sure.

Typically in most continuous improvement mechanisms, cost is the most sensitive factor. With TOC though, you’d find the word, cost being replaced by throughput.  Let us explore the definitions of some of the breakthrough concepts that drive as engines for TOC.

  1. Throughput: The rate at which the system generates new money through sales.
  2. Inventory: Money the system has invested in things it intends to sell, which would include plant, property, and equipment.
  3. Operating expense: The money spent to convert inventory into throughout.

What you must know is that these coupled with the scientific problem solving approach of TOC, results in excellent results for the company’s management, which really brings about a smile on the faces of any SCM owner.

Now that we have explained the key driving engines of TOC, it is important for us also to understand how and why the throughput world is so important and different than the cost world. Simply put — The cost school of thought aims at merely reducing the cost of an operation, more specifically SCM operation, but the throughput word works on optimizing the operational efficiency, which is believed to bring down the cost.

So, in simple words — TOC works on reducing cost, but not by having it as a prima objective.

Significantly, you’d find that companies who take the cost-cutting route, will have to resort to layoffs as a strategy. We have seen the whole thing unfold in front of our own eyes, haven’t we? Understanding how the cost world works, this is not difficult to understand at all? But hold on — The TOC world scores some brownie points over the cost world, because there is no entity in the world that has incorporated TOC in their models and yet have laid off people at the rate how the Cost World Companies do anyways.

A lot of people view TOC as a substitute to Lean. This is not entirely right, albeit one of the key principles of TOC is reduction of inventories, which concurs with the JIT principles. This is where the point must be made — Most continuous improvement measures, at some point of time, may seem working tangentially for sure.

Anyways with the help of TOC, a company can reduce inventory, which will further help them

1)     Be dynamic with the market requirements

2)    Improve their on-time performance

3)    Decrease unnecessary costs

4)    And increase the overall quality of the product or the service.

And really, for a SCM model, these 4 points hit the model, where it may matter the most, isn’t it?

Types of Constraints

Now that we’ve had more than our share of a sneak peek into the concept of TOC, let us look at the type of constraints. Often, a lot of people say that understanding the type of constraints is critical to understanding TOC in itself.

Capacity Constraints

In a world where market demands overshoot the maximum permissible capacity of production of a company, you tend to see Capacity constraints. These constraints are typically seen in companies that have skewed investment policies towards their production units.

Market Constraints

Now, these constraints are more visible in companies that follow the push production mechanism. You’d find that these constraints come through when the company is in a position to sell more products than what is in demand.

Physical Constraints

These constraints are resources, and the constraints are due to capacity less than or equal to the demand or the need placed on them. This is probably one of the most important type of constraints to identify and fix, because it has been proved that these constraints dictate the pace of the overall system anyways. In simple words, if you are able to fix an hour of physical constraints in a system, it can be directly correlated that you gain one with the system.

Policy Constraints

A lot of companies ignore these constraints, and must I say, at their own peril. These constraints are policies issued by the company, and almost directly or indirectly, they have the potential to impact the manpower working in a company. In simple words, a lot of what you find in these constraints has the potential to hit the company, and hard at that.

Real-world examples of TOC

A lot of companies in our world have implemented Theory of Constraints successfully to sharpen their SCM operations. Names like Proctor and Gamble, General Electric notwithstanding, small companies taking to TOC as a way to optimize their SCM’s efficiency tells us just one thing – TOC is there for any SCM model to be integrated into, and that shouldn’t be much of a challenge at all.

The introduction of the activity based accounting standards have meant that TOC has found a newly acquired significance, as companies have started to make a beeline to integrate TOC concepts into their SCM model. For the uninitiated, the ABC model examines the cost involved in the production completely from a process standpoint, and not so much on the lines of what comes out of the process really.

Transitioning TOC

While the concept appears sound and the benefits too mouth-watering to resist, companies should desist from jumping the gun too soon. It could well turn out to be the case of not knowing how deep the water is, and yet getting ready for a swim. You can hardly escape, should the waters turn out to be choppy anyways.

Some companies do make the classical mistake of thinking that integrating TOC in their models would fetch them results, overnight. Yes — It is a mistake alright, only because of the fact that no continuous improvement measure can promise fast results. And even if they do, the sustenance of the results is another question for the day. What I wish to say here is this — Like all other continuous improvement measures, TOC should also be given the long rope.

Not only does a lot of time do enough justice for a robust concept like TOC, but it also gives enough time for the results to come through.

Summary

Conceptually, Theory of Constraints may sound like being something that can be implemented with ease in companies. Aah yes — It definitely sounds like being the doctor, who is trying to fix a complex SCM model and one that is inefficient. Business owners may like to take to the TOC concepts and tailor them to their SCM models.

The parting note for them is while they are thinking on the right lines, taking to these concepts without worrying about the factors that could impact the successful implementation of TOC, could be a huge risk anyways.

The role of a project champion is definitely important, but contrary to popular belief, the role of employees in the company is probably going to be the most critical here. Of course, this mandates the need for change, and dealing with change is often considered to be a risky affair, but companies who take into count dealing with change, and of course, driving home the moot point — Implementing TOC, with unflinching commitment and dedication, often come out trumps.

If your SCM model thus needs improvement, TOC is the way to go.

This article has been written by C.Vishwanathan, Master Black Belt – Six Sigma and Lean Deployment Specialist. All parts of this article are original, copyrights reserved to the author, and have Master Resell. Any attempt to reproduce any part of the article, without the consent of the author, will be subject to stringent penalties as per the Copyrights Law.