Theory of Constraints
Theory of Constraints - Eliyahu Goldratt describes the Theory of Constraints in his book, The Goal, a model that challenges many traditional accounting and business practices. He makes the case that we often do not know what our true business goal is.
One goal every business shares is the need to be profitable. A particular business will have other goals as well. These goals must be well thought out, clearly stated, and communicated to everyone in the organization.
Goldratt's procedures focus on three metrics:
- 1. Throughput (the rate at which the system produces income),
- 2. Inventory ( all the money the system invests in things to sell as well as all money tied up in the system), and
- 3. Operating expense (money spent turning inventory into throughput).
The constraints that prevent achieving the goals are primarily system restraints. Therefore we must determine what to change, what to change to, and how to cause change.
Goldratt describes five sequential steps to remove constraints and progress toward a goal:
- 1. Identify the system constraint.
- 2. Decide how to exploit the constraint.
- 3. Subordinate everything else.
- 4. Elevate the constraint.
- 5. Go back to step one.
Also see Tom Pyzdek's article