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Methods and concepts for Value Based Management (VBM)

Theory of Constraints

Did you read "The Goal?" Remember Herbie? The Theory of Constraints of Eliyahu Goldratt is a model that is the practical result of Eli Goldratt's work on "how to think". In a number of books, Goldratt described certain thinking processes and their applications.
Central to the concept of TOC is the acknowledgement of cause and effect. The Thinking Processes of TOC give us a series of steps which combine cause-effect and our experience and intuition to gain knowledge. TOC is a verifiable philosophy. By knowing how to think, we can better understand the world around us; by better understanding we can improve. Organizations are a complex web of people, equipment, methods, materials and measures. This detail complexity is bad enough, then add to it the dynamic complexity of changing customers, suppliers, workforce, regulations, etc. and you have a picture of the challenge faced by today’s management team.
Traditionally, management has divided the organization into smaller, more manageable pieces. The objective is to maximize the performance of each part. After all, global improvement is the sum of the local improvements. Right?

Wrong! TOC claims that a change to most of the variables in an organization will have only a small impact on the global performance – on the bottom line. There are very few variables, perhaps only one, where a significant improvement in local performance causes a significant improvement in global performance. Such a variable is called a constraint. You can compare it to the weakest link in a chain.

The essence of the TOC approach is that If you want more of your goal, you must:

• Identify your constraint
• Focus on the constraint (A company must first know its goal and the necessary conditions for achievement. Then it must identify the constraint(s), that is/are limiting the level of achievement of that goal.)
• Follow it through (The Process Of Ongoing Improvement):

1. Identify the constraint.
2. Exploit it.
3. Subordinate all other operations to the necessity to exploit the constraint.
4. If after #2 and #3 more capacity is needed to meet market demand, elevate the constraint.
5. Go back to #1, but don’t let inertia become the system’s constraint.