What are the fundamental concepts of the Theory of Constraints?

By Eli Schragenheim and David Updegrove

Dave's note: Eli Schragenheim and I serve on the Body of Knowledge Committee of the Theory of Constraints International Certification Organization (TOCICO). As part of the 2023 TOCICO Innovation Summit in Hollywood, Florida, we were invited, along with Rob Newbold, CEO of Prochain Solutions, Dr. Jim Cox, retired business school professor, and Dr. Alan Barnard, CEO of Goldratt Research Labs, to share our thoughts on what are the fundamental concepts/tenets/principles of the Theory of Constraints. All of the presentations and the following panel discussion were filled with insight from each presenter's viewpoint.

Below, we share the submission of Eli and myself. We began with the idea that in order to have value, a fundamental concept must diminish a limitation. This idea is based on the second question of Dr. Eli Goldratt's Six Questions for Assessing the Value of a New Technology: "What current limitation or barrier does the new technology eliminate or vastly reduce?" We believe the Six Questions can be expanded beyond new technology alone, to projects, new strategic moves, methodologies, new products, and more. We also suggest that each limitation is created by one or more flawed assumptions.

As a result, we propose that there are three key concepts, two key tools, two beneficial beliefs, and three breakthrough insights that encapsulate all of TOC and its applications. We hope this will be a valuable resource when people ask, "What is the value of the Theory of Constraints?"

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Three key concepts that address the three fears of every manager: complexity, uncertainty, and conflicts:

1. Inherent Simplicity: All systems (for instance, organizations) are inherently simple, despite their apparent complexity.

In systems, a few or even one leverage point (Constraint) controls the performance of the whole system, and a few or even one root cause (Core Conflict) generates the vast majority of problems.

Limitation addressed: Being unable to predict, in a good enough way, the consequences of an action or imposed change. This failing to predict consequences vastly reduces the quality of decisions.

Flawed assumption: Treating our current reality as complex, thus failing to make the efforts to identify the few variables that significantly impact the consequences of any action or change.

Instead: We can find and manage the few points controlling the system

Example of following the flawed assumption: Dividing a complex system into subsystems, assuming, 1) that they are much less complex, and 2) that this can help predict the local impact of any change; further hoping that optimizing local systems will result in good enough prediction of the impact on the whole.

Resulting/affected applications:

o The Five Focusing Steps

o The Four Concepts of Flow

o The Three Questions

2. Inherent Tolerance: Don’t optimize within the noise.

All human-based organizations experience fluctuations. Reacting to all fluctuations ends up amplifying variability. Planning and execution must explicitly account for normal fluctuations with simple mechanisms (without any further actions) and react to only extraordinary ones.

Limitation addressed: We cannot systematically meet all our commitments to the market, including deciding when and what can we commit to the demand.

Flawed assumption #1: In order to optimize the performance of the system we have to measure the performance of every resource, definitely the human resources. Thus, we have to treat our forecasts/predictions as targets upon which the actual performance should be measured.”

Instead: In order to optimize the system, we must concentrate on optimizing its constraint(s).

Flawed assumption #2: An idle resource is a waste.

Instead: Protective capacity at non-constraints is critical to stability.

Example of following the flawed assumptions: Human beings are aware of the noise in systems and include buffers in their behaviors. For instance, if you go to the airport, you consider the traffic and add enough time as a buffer, even though you hate wasting time at the airport. However, the culture of organizations is strongly for optimization. They ignore uncertainty by turning one-number forecasts into targets, where the target is officially what the organization, and the responsible manager, should achieve. The behavioral reaction is to add hidden buffers to the forecasts/targets, and make sure never to surpass the target.

Resulting/affected applications:

o Aggregation of safety in planning (placement of buffers)

o Buffer management

3. Inherent Consistency (Harmony): There are no conflicts (or inconsistencies) in reality.

All conflicts (on inconsistencies) exist only in our minds. One or more invalid assumptions produce any perceived conflict (or inconsistency).

Limitation addressed: Having to compromise between two conflicting actions, where each action is necessary to satisfy a necessary condition for achieving a desired common objective.

By compromising we get significantly less value for the desired objective.

Flawed assumption: We know and accept our perception of “reality.”

Instead: Actually, every perception of reality is based on many (hidden) assumptions. It is possible that challenging just one assumption, meaning creating a situation where that assumption is not valid, opens the way to get much more of the common objective. The perception of a “conflict” should trigger us to reveal our assumptions and then look actively for a valid (realistic) way to challenge them.

Example of following the flawed assumption: The seesaw conflict of holding less inventory to lower investment and carrying costs, versus holding more inventory to ensure availability to the system, allowing generating more value.

Resulting/affected applications:

o The Evaporating Cloud (Conflict resolution diagram)

o The Change Matrix / Procon cloud

Two key tools

4. Inherent Causality: Systems are subject to cause-and-effect dynamics.

To understand and manage a system, apply rigorous cause-and-effect logic, governed by the Categories of Legitimate Reservation.

Limitation addressed: Being unable, even when accepting the inherent simplicity, to answer the three questions:

1. What to change? Diagnosing what limits the current performance. This is more than identifying the physical constraint, this is identifying the key flawed assumption that causes a core problem preventing any effective improvements.

2. What to change to?

3. How to cause the change?

Flawed assumption: Using logic is too cumbersome, subjective, and difficult to quantity, to make it effective in finding answers.

Instead: A few simple, learnable logical tools can greatly enhance analysis and provide answers to important questions.

Example of following the flawed assumption: Attempting to independently solve undesirable effects (symptoms) in the organization without considering root cause(s)

Resulting/affected applications:

o The TOC Thinking Processes

o The Three Questions

5. Inherent Valuation: By dividing expenses into truly variable costs and the cost of capacity, an entire system and each of its parts may be properly valued. The focus is on Throughput.

Limitation addressed: It is very complicated to predict the financial outcomes of a suggested action, trying to evaluate directly its impact on revenues and expenses.

Without a well-accepted procedure to make such decisions, managers would be afraid to use such a complicated analysis.

Flawed assumption: Not distinguishing between linear behavior and truly non-linear.

Instead: Subtracting truly variable expenses from revenues (resulting in Throughput) and considering non-truly variable expenses to be part of Operating Expenses allows us to accurately value the system and each of its parts.

Example of following the flawed assumption: Believing in and utilizing cost-per-unit, which is based on assuming expenses behave in a linear way, thus if the cost-per-unit is $1, then the cost of 25 units is $25.

Resulting/affected applications:

o Throughput Accounting

o Throughput Economics

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Two beneficial beliefs

6. Inherent Goodness: People are good.

The reasons for negative outcomes or events in our systems do not come from peoples’ nature (good or bad) but from their assumptions and circumstances.

Limitation addressed: Failing to achieve a desired objective due to contradictory behavior of other people, which wasn’t anticipated or understood.

Flawed assumption: It is impossible to understand the behavior of other people.

Thus, we cannot find the right way to convince them to behave in a way that would contribute to what we want to achieve.

The above concept of Inherent Consistency (Harmony) also highlights the case where other people act to achieve something that clashes with what we are trying to achieve.

This belief is wider than direct conflict with other people, it highlights our inability (limitation) to understand the motivation, or resistance, of other people to our initiatives.

From a business perspective, there is special importance to understand our clients, the clients of our client, our suppliers, and our employees.

Instead: It is very difficult to use cause and effect logic alone to describe the motivation of another person. It should be possible however, based on some known effects and generic assumptions about human behavior, to reduce the overall impression of complexity. In other words, there are a few critical variables that should be considered, including practical gain, ego, and fear.

Example of following the flawed assumption: Blame and finger-pointing – “I did my part. ‘So-and-so’ is the problem…”

Resulting/affected application:

o The Engines of Harmony

7. Inherent Potential: Never say “I Know.”

The more solid the base, the higher the jump. Any situation can be substantially improved by identifying new opportunities with significant added-value. Thus, added-value potential is unlimited.

Limitations addressed: 1) Being successful makes it difficult, and look very risky, to identify new, big opportunities. 2) Success can lead to recency bias and inertia that limit searching for more opportunities.

Flawed assumptions: 1) “I’ve made great improvements and am successful enough – no need for more, and there is no secure way to achieve more.

Instead: The opportunity is in fact huge and can be achieved safely.

2) If all you have is a hammer, everything looks like a nail.

Instead: New opportunities should always be looked at from a fresh perspective, not assuming the solution a priori.

Examples of following the flawed assumptions: 1) Thinking that since you are better than you used to be, there is no need to continue improving. 2) Thinking that new, big ways to generate more value do not exist. 3) Assuming, without careful examination, that a new opportunity will respond to the solution applied to the last opportunity.

Resulting/affected applications:

o The Evaporating Cloud

o The Three Questions (or, the Five Questions)

o The S&T Trees

o Decisive Competitive Edge (DCE)

o The Six Questions of Technology

Three resulting, breakthrough, insights

1.1 Resulting from Inherent Simplicity is:

Inherent Focus: All systems have one or a very few constraints that determine their overall performance.

We can maximize the performance of any system by identifying its constraint(s), deciding how we can best exploit it/them, subordinating everything else to this decision, and getting more constraint capacity when necessary.

Limitation addressed: Being unable to focus on what is truly constraining performance prevents very significant leaps of improvement.

Flawed assumptions: 1) We have many constraints that shift all the time.

Instead: Improvements in most areas have very minor impact on overall performance.

2) If we can make each part of the system more efficient, the entire system will be more efficient.

Instead: Improvement at the true constraint greatly improves the performance of the entire system

Example of following the flawed assumption: Policies driving local improvements, “peanut butter” spread budget cuts across the entire system.

Resulting/affected application

o The Five Focusing Steps

2.1 Resulting from Inherent Tolerance is:

Inherent Control: Effective priorities for meeting all our planning objectives can be generated from building on the foundation of Buffer Management

? Limitation addressed: Buffers give us only limited protection; we are still exposed to some accumulated fluctuations that disrupt performance.

Our initial buffers are based on guesses. Continuing to guess doesn’t improve the fitness of the buffers to protect performance from the actual level of uncertainty.

Flawed assumptions: 1) When things go wrong it is already too late to react. Too frequent reactions, like expediting, might worsen the overall reliability.

Instead: Measuring buffer penetration often provides “early warning” of the potential impact of disruptions.

2) We must have a lot of past data, going significantly backwards in time, to track the level of fluctuations, of both the demand and the supply/response in order to better estimate the level of the common and expected uncertainty (noise).

Instead: Buffer management reveals the level of noise in the system.

Example of following the flawed assumptions: Adding more and more status reporting and data analysis to our daily work, thinking that more is better.

Resulting/affected applications:

o Planned Load

o Capacity buffers

o Simplified Drum-Buffer-Rope

o Critical Chain Project Management

o TOC Distribution/Replenishment

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3.1 Resulting from Inherent Potential is:

Inherent Value from Innovation: Use the Six Questions for assessing the value of a new technology, but expand them to include evaluating projects, new strategic moves, new products, and more.

Limitation addressed: Developing anything new is very risky

Flawed assumption: It is impossible for potential customers to evaluate future value, which doesn’t exist today. People need to see the product in order to evaluate its value.

Instead: A breakthrough is achieved by analyzing future value, without asking potential users, by using the Six Questions of Technology for many different types of proposals. Each of the six questions is required to gain the most value from any innovation.

Example of following the flawed assumption: Risk funding: Investing in many innovations, expecting that 1 in 10, or even 1 in 20 will yield very high value – enough to cover all the rest and still leave good profit.