The Theory of Constraints is it a Lasting Passion??

By Robert E. Fox with updates for 2021 by Rudolf Burkhard

TOC – another answer to all our problems – like Lean, Agile, 6-Sigma, EKS (Constraint Focused Strategy)? Will it become common practice or simply disappear? Obviously, only time will tell. So far TOC is still around, 9 years after Eli Goldratt’s death.

What follows is Bob Fox’s article (ca. 1998) with changes I have made to, hopefully, make it suitable for 2021. Apologies to Bob, I hope he is OK with the liberties I took. I believe I did not change the sense of his article and I have added my 2￠ at the end. 

Acceptance vs. Success 

A new management technique is often, at least initially, widely accepted. That does not assure the technique will last for a long time, and certainly, it does not guarantee success. In the early 90ies, Business Week published a timeline covering several decades. Along the timeline were dozens of management techniques that have gone from fad for a ‘day’ to distant memory. 

Accepted methods become an established mode of operation in companies but even they often fail to generate the promised returns -- they often fall dismally short of expectations. Let’s look at a few well-known examples: 

Computers -- A study from the early 70s by McKinsey & Company analysed the financial return earned from investing in computers. They concluded very few (less than 10%) achieved an acceptable return, and the majority realised a negative return. 

Materials Requirements Planning (MRP) gained favour in the early 70s. By the 90ies MRP was in widespread use. MRPs promise was lower inventories, improved delivery performance, and reduced costs. At the time several respected experts referred to MRP as a $10 billion mistake. They pointed to the Japanese who had much greater success with much less investment through the use of the, mostly manual, Kanban system.

Personal Computers – In the late 80ies – early 90ies Lester Thurow, President of MIT and a noted economist, reported that it was both very disturbing and puzzling, that despite huge investments, no improvement in white-collar productivity could be detected.

Total Quality Management (TQM) -- Few techniques received more instant widespread publicity than the Quality movement. When "Why Japan Works" aired in primetime one Sunday evening, the whole World instantly knew quality is key to Japan’s success. We learned Dr Deming was the man behind it all. Despite rapid and widespread adoption, one of the big consulting firms reported that only about 5% of the companies that adopted TQM were happy with their results. 

Bob Fox said he would be the last to claim computers, MRP, PCs and TQM are not important or valuable tools. But, based on the analysis of highly respected organizations and individuals, clearly, something was not right (is something still not right?). 

Was the problem of little success a lack of top management understanding, support, and persistence? That is tough to swallow. Top management obviously believed enough to invest a lot of money and effort required to implement them. Also, it is difficult to accept managers are not interested in a significant return on their investment or in improving their company’s profitability. 

Must a company adopt such techniques just to stay competitive? The answer may be that a company would be much worse off if these approaches are not implemented. 

Possibly the problem is it just takes longer than expected for the investment to pay off - a plausible answer. After all, each involves a cultural change for the organization, and cultural changes do not happen overnight. 

Another part of the perceived lack of success may be with what we mean by success. Everyone so gloomy about the lack of success from these techniques looked at them in the same way. Did the investment cause a real increase in profits? Did the increased profits result in a satisfactory return on investment?

If we accept at least some of the explanations for a lack of success, then we probably must admit it might not be possible to use the techniques for a dramatic and quick jump in our company’s profit. The best to hope for is to maintain current profit levels and hope for better long-term gains. It is a school of thought! 

A Brief History of the Theory of Constraints (TOC) 

The roots of The Theory of Constraints go back to a finite scheduling program (similar to APS (Advanced Planning Systems) based on a proprietary algorithm called OPT. OPT stood for Optimized Production Timetables and later for Optimized Production Technology. It was developed by Dr Eli Goldratt with three Israeli partners. They brought it to the US in late 1979 after forming Creative Output, Inc. During the next seven years as the software evolved, the OPT management philosophy and rules were developed. 

Creative Output’s history was a roller coaster ride. It ended on a down note by a major dispute between Eli and his partners and the bankruptcy of the company. The rights to the OPT software were sold to the English firm Scheduling Technologies Group (STG). 

In late 1986, Eli and Bob Fox co-founded the Goldratt Institute and over the next 10 years developed what we know as TOC. 

The OPT software principles and philosophy are TOC’s roots. The history of TOC and its OPT ancestor is chequered and strewn with controversy and confusion. Confusion started with OPT. Was it a software system or a management philosophy? The answer is BOTH. 

The OPT management philosophy challenged commonly held management principles. The philosophy created its own controversy. The controversy around OPT software often held centre stage. 

1. A series of articles Bob Fox wrote entitled "OPT, MRP or JIT—What’s Best?" The articles challenged the supremacy of the MRP approach to scheduling and created a major stir in the APICS[1] community. 
2. A highly publicized suit against Creative Output by M&M Mars. The suit attempted to expose the proprietary algorithm in the "black box" of the OPT software. 
3. The final OPT controversy arose following the publication of "A Town Without Walls” a white paper written by Eli Goldratt and George Plossl. "Not only did this paper directly challenge, and indirectly criticize, the National APICS leadership, it was, in the face of strong opposition, widely distributed at the 1984 APICS International Conference. 

Confusion, controversy, proprietary secrets, success, and finally bankruptcy characterized the Creative Output/OPT story. 

Growing from its OPT roots, TOC initially evolved as a manufacturing management philosophy. “The Goal” and “The Race”, the first two books to describe TOC, generated much interest and enthusiasm among successful implementers. What most people understood as a way of managing manufacturing and dealing with bottlenecks, evolved into a more robust management approach to generate Throughput (sales less totally variable cost) rather than to save costs, and eventually, TOC covered all functions. 

Controversy was never far away. The title of Dr Goldratt’s talk at the 1983 APICS International Conference was entitled "Cost Accounting -- Public Enemy Number 1 of Productivity." Many APICS members applauded this virulent attack on Cost Accounting, however, the financial community was not amused. 

In 1991, as people were becoming aware of and accustomed to TOC, another change! Overnight, TOC became a group of Thinking Processes. Attendees at Jonah Courses, came prepared to learn about bottlenecks and drum-buffer-rope scheduling, instead were introduced to cause-effect trees, evaporating clouds, and several other techniques, all still rudimentary. They were told that they would learn how to think with these techniques. Attendees were confused, some quite irritated, and some totally rebelled. Two Fortune 500 companies, which had experienced great success and had a lot of interest in the Throughput World aspects of TOC, walked away. 

Eventually, the Thinking Processes were refined and polished into useful, teachable tools. 

In 1998 TOC was like its ancestor OPT, a two-headed creature -- a Throughput oriented management philosophy and a series of Thinking Tools. What Follows is Bob Fox’s speculation on the future of the TOC/Throughput World management approach – a philosophy to manage making Throughput generation a company’s top priority.

The Future of the TOC/ Throughput World Approach (the view in 1998)

Some of the 1998 management techniques, like MRP and ABC (Activity Based Costing), were developed in the USA. They evolved rapidly as companies attempted to implement and capitalize on them. Other techniques, like TQM and TPS (Lean), developed in another country (Japan). When they were introduced to the West, they were already robust and tested. 

Few management techniques have had as varied and as controversial a path as TOC. In 1998, some 18 years after the OPT software was first introduced, the usefulness and credibility of TOC seemed to be entering the initial acceptance stage. 

APICS has finally embraced TOC as a valid and important approach. An APICS Special Interest Group (SIG) was formed and had just completed its third highly successful conference, each one larger and meatier than the prior one. Competition in the marketplace now exists, and the Goldratt Institute was no longer the sole developer and provider of TOC Throughput World and Thinking Process know-how. A sure sign of acceptance is that several software firms now purport to have systems that implemented TOC drum-buffer-rope (DBR) scheduling. In 1998 a company called Maxager even introduced a constraint-based costing system and a data collection system to capture the key shop floor data for advanced Throughput World users. The number of books being written on the subject continues to grow. The number of companies implementing or expressing an interest in TOC was also increasing. Regarding acceptance, Bob Fox thought it was a relatively safe prediction that we would see a rising of TOC. 

But as we have seen with many well-regarded techniques, while widely accepted, have fallen short of expected success, at least in terms of the company’s short-term expectations. Bob Fox went out on a limb here. He predicted that those companies that take a comprehensive, total business approach to TOC/Throughput World implementation would show dramatic bottom-line improvements in their first year and even better results in the second and third. Those that focus implementation narrowly (on just manufacturing) would proclaim great improvements, but Bob Fox suspected that, if rigorous studies like those described above were to be conducted, then financial returns would be disappointing.

As many of us now know, either from our experience or watching other implementations, Bob Fox was correct.

The reason for Bob Fox’s optimism was the inherent leverage from generating more Throughput dwarfs any benefits possible from the likes of reducing inventory or operating expense (re-engineering or operations rationalisation). Generating more Throughput is not just somewhat better than the other approaches; it is an order of magnitude better. TOC certainly has not monopolised ideas on how to generate more Throughput. It is, however, a well-organized collection of tools and techniques to do so and to change the culture of an organization out of the Cost World into a Throughput World focus. 

The value of these ideas, whether under the banner of TOC or some other acronym, has been validated by Japanese successes. 

Bob Fox’s pessimism about TOC benefits, stems from his view many implementations will be local, local to manufacturing for instance. He based his view on the recognition that manufacturing cannot, by itself, generate larger amounts of Throughput. Marketing, Sales Product Engineering and Finance must collaborate with manufacturing and view their company as a system to generate more and more Throughput. For this to happen, top management must lead their organization in the development and implementation of a Throughput based Operating Strategy (TOS) understood and embraced by their entire organization. 

Was Bob Fox correct? Time has told us. He was correct that those few that began their journey early and in a comprehensive fashion have clearly reaped a rich harvest. He was correct that most would make just a local improvement (e.g., in manufacturing) and he was correct that such improvements do not deliver an order of magnitude of improvement. In fact, disappointment and a lack of a strategy to make these improvements sustainable have held companies and TOC success back.

Eli Goldratt often talked about the fallacy of making local improvements. If every function (for instance manufacturing) improves itself then 2 things can happen (whatever the improvement philosophy or method is):

1. Manufacturing capability increases and cost (in absolute €) decreases. However, the bottom-line effect is minimal. Cost is down a bit but since sales have not increased profit barely has changed.
2. Actions to optimise manufacturing have an impact on the other areas of the business. By improving manufacturing, it is easy to cause problems and higher cost elsewhere. Too often the net company-wide impact is thus practically nothing or way too little (practically invisible).
3. Many times, an improvement will show good local and even company-wide (bottom-line) positive results. Almost just as often these improvements disappear – they are not sustainable. The pressures of common practice very often reverse improvements and the company is back where it started, ready to do it again. Sustainability is key and often forgotten!
4. 4.     Eli Goldratt once said management attention is the ultimate constraint. I never agreed with Eli and still do not. It is a management behaviour to not give the proper level of management attention to those things that are relevant to achieve a potent or more potent organisation. Management behaviour can (easily) be changed, so why do managers not do so? After all, focus on the few right places or the most relevant places is the most powerful action they can take.

My conclusion: The jury is still out. However, you can find more and more software support for operations the TOC way including our Alkyone-Consulting software products. One of these is TOC implemented in SAP ERP products (all the currently in use products). You can find software for production, distribution, project and inventory management. You can also find software that provides support for the cause-effect thinking processes.

https://www.youtube.com/watch?v=0DrMN8AN2HQ (Video by Rami Goldratt)

[1] APICS = American Production and Inventory Control Society