The Theory of Constraints - A Complete Introduction

The Theory of Constraints with all the key concepts is summarized in this video. Eli Goldratt's theory condensed in 5 minutes.
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▶ Chapters
0:00 - Intro
0:38 - The 3 Metrics
1:28 - The Priority of the 3 Metrics
2:32 - The 5 Steps of "The Theory of Constraints"



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▶ Transcript of the video

The Theory of Constraints was theorized by Eli Goldratt in his famous book "The Goal".

Eli Goldratt suggests using only 3 performance measures to manage production and business.
Then, he suggests improving only a few critical processes that really regulate the production flow.

These critical processes are identified as constraints.

By adopting the theory of constraints, instead of measuring dozens of KPIs and launching many improvement initiatives, you will be able to measure only 3 KPIs and launch a few targeted initiatives, that will have a real benefit on your business.

Let's go into detail.



▶ The 3 measures are:

Output
Inventory
Operating expenses

Money is involved in each of these metrics.

In fact, the output should be measured in money and not in units produced.

The inventory is a basic cost of materials and excludes added value during the manufacturing process.

Operating expenses should be taken into account without the distinction of direct and indirect costs which is seen as an unnecessary distinction.

Once these concepts are fixed, the purpose of a company becomes simple.

Increase output and lower inventory level and operating expenses.

Every investment and every improvement proposal should be judged by analyzing the impact on these 3 metrics.





▶ Metrics Priority

In constraints theory, priority is also given on which metrics to improve.

1) Output
2) Inventory
3) Operating expenses

The reason is that the output immediately brings a benefit to the 3 main financial indicators.

Cash Flow
Profit
Return on investment

The other 2 indicators need to be improved judiciously as:

Lowering inventory too much could have a negative impact on output.

In addition, lowering operating costs by laying off people with the necessary skills could also have a negative impact on output.

Having clarified what the goal of the companies must be and how to measure it effectively, let's move on to the improvement cycle based on the theory of constraints.

According to Goldratt, most companies have a limited number of constraints, and removing them could make infinite profits.

To understand well the importance of the constraint on the production flow, deepen the Drum-Buffer-Rope theory.




▶ The 5 Steps of TOC

The cycle of constraints theory is based on 5 steps.

1️⃣ Identify the constraint

2️⃣ Exploit the constraint

The constraint is the point of the flow that regulates the output. It is the most precious point. Therefore, in this step, all actions must be put in place in order not to lose even 1 minute of production on the constraint.

You can put a buffer, you can launch quality kaizen, you can improve maintenance with the TPM.

3️⃣ Subordinate all resources to the constraint

We must all be informed of the importance of the constraint.

The performance of the constraint must be measured well.

All upstream product inventory should be brought to the constraint as quickly as possible.

The SMED should be done at the constraint in order to allow to reduce the processing batches and increase the flow speed.

4️⃣ Elevate the constraint

After completing points 2 and 3, the constraint must be broken with more decisive actions such as the doubling of the machines or overtime.

If the identified constraint is a true constraint, these expenses will be abundantly repaid.

5️⃣ Start again from point 1.

Be careful that inertia does not become the new constraint.





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