Theory of Constraints

Israeli physicist Eliyahu M. Goldratt is a business management expert who works with corporations and governments worldwide. Though this book is a novel, it’s also a business classic and perennial bestseller that provides accessible, practical how-to advice. Goldratt (writing with Jeff Fox) draws on physics, process engineering, cost accounting and ancient Greek philosophy to expound his “theory of constraints.”

Goldratt’s fictional protagonist must meet an impossible goal in an unrealistic time frame or his hometown’s big employer will have to close. He saves the day by discovering the theory of constraints through trial and error. 

The Story: Chaos

Alex Rogo, manager of the Bearington plant of UniCo, arrives at work to find a chaotic scene. An important customer’s order is so late that division vice president Bill Peach is expediting it personally. Goldratt knows what triggers will outrage his business readership: Peach takes Rogo’s parking spot and commandeers his desk – what a bad guy!

When we recognize something as common sense, it must be that, at least intuitively, we knew it all along.Eliyahu M. Goldratt

Peach vents about the plant’s underperformance, threatening to close it unless Rogo turns it around in three months. The plant’s staff repairs the machine, pulls overtime shifts and ships the problem order to the client before midnight.

Pressure

Goldratt builds the tension: Rogo learns that UniCo might sell Peach’s division unless dramatic improvements occur. Orders are late and inventory is rising.

Rogo, the hero, does heroic stuff: He cares about his employees and has positive, optimistic expectations. An unsympathetic – and under-written – near-villain, Rogo’s wife Julie, dislikes the small factory town, and remains unsympathetic to Rogo’s work issues.

If I can find some logical relationship between our daily operations and the overall performance of the company then I’ll have a basis for knowing if something is productive or nonproductive.Eliyahu M. Goldratt

Rogo reaches out to Jonah, his former physics professor, who specializes in organizational science and manufacturing operations.

The Goal

Rogo recognizes that he must determine the plant’s main goal. He sees that cost-effective purchasing matters, but the plant is not in business to purchase. The plant is an employer, but providing jobs is not its goal.

If the goal is to make money, then…an action that moves us toward making money is productive. And an action that takes away from making money is nonproductive.Eliyahu Goldratt

Rogo – finally – understands the goal of the plant, its manufacturing operation and the company at large: Making money.

“Theory of Constraints”

To facilitate production, Rogo’s team identifies bottlenecks and assigns color codes to certain components, prioritizing their production. The plant achieves new shipping records even though fresh bottlenecks develop.

Throughput is most important, then inventory – due to its impact on throughput and only then, at the tail, comes operating expenses.Eliyahu M. Goldratt

Jonah teaches Rogo about the relationships that connect throughput, inventory and operating expense. Throughput is the pace at which the production process makes money by selling its goods. Inventory is how much the factory spends on items it plans to sell. Operating expense is how much it costs for the production system to convert inventory to throughput.

An operation can make money by increasing throughput or decreasing inventory and expenses, but adding to throughput is more effective because it generates larger profits.

Identifying factory bottlenecks or constraints enables Rogo to mount a five-step “Process of Ongoing Improvement”: Define the constraints limiting your system, determine how you can exploit these bottlenecks, make everything else secondary to this decision, build up the constraints in your processes, and – if a constraint stops working during this improvement campaign – return to the first step.

Rogo’s experience demonstrates the importance of having a goal, recruiting the right people for your teams and listening to them. Goldratt reminds you to persevere and try new methods, even if you rock some boats.

Take a holistic approach to operations, he says. Since metrics will influence your actions and priorities, explore how to measure your results to make sure that what you measure aligns with what you want to achieve. 

Success

Following these principles and heeding Jonah’s advice, Rogo turns his failing plant into the gem of the division. To expedite throughput, he ignores company policies governing cost accounting and economical batch sizes. And he redefines the company’s metrics.

If the company uses Rogo’s new calculation methods, the plant will exceed Peach’s stipulated 15% increase in profits. Using the old metrics, it will fall short. The plant’s new approach so impresses customers that one of the company’s most important clients arrives in a helicopter to thank everyone on the shop floor.

Rogo saves the plant; Bill Peach ascends the management ladder and appoints Rogo to succeed him as division vice president.

Rogo fixes his marriage by applying the same logic he applied to improve his factory’s performance. However, husband and wife repair their relationship without explicitly defining their marriage’s goal.

Ford and Ohno

At the close of his novel, Goldratt offers a factual postscript about Henry Ford, as the inventor of the assembly line, and Toyota pioneer Taiichi Ohno. You could skip this section without losing any of the impact or wisdom of the tale.

Ohno invented the Toyota Production System (TPS) to pursue his insight that producing effectively requires a smooth flow of products. His system was known as Just-in-Time or, more recently, as Lean.

Adhering to the flow concept mandates the abolishment of local efficiencies.Eliyahu M. Goldratt

To improve flow, Ford limited inventory. Ohno used time – in the Kanban system – to control flow. Ford and Ohno shared the beliefs that manufacturing must improve flow/lead time and that some mechanism should alert the operation when to produce and when not to produce.

Narrative

Whether you find Goldratt’s guidance meaningful may well depend on your preference for advice rendered as narrative. Most business books today assert that people respond more powerfully to emotional storytelling than they do to facts. If that is true for you, this novel may prove invaluable. Goldratt is a formulaic author, and the pages concerning Rogo’s wife are his weakest. But professor Jonah is a worthy interlocutor, though he sometimes posits advice you were probably already yelling at Rogo. And, while telling his story, Goldratt achieves his goal: providing a sound introduction to Lean principles.

Eliyahu M. Goldratt’s other books include The Goal: A Business Graphic Novel, Theory of Constraints, It’s Not Luc, The Choice and Critical Chain.