Theory of Constraints or the Theory of Constraints (TOC)

Theory of Constraints or the Theory Of Constraints (TOC) is a management philosophy that was initially developed by Eliyahu m. Goldratt and introduced in his book, The Goal. It can be interpreted that the TOC is an approach towards process improvement that focuses on the elements that are constrained to increase output.

It is based on the fact that, like a chain with the weakest link, in some complex system at any given time, often there is one aspect of the system that restrict its ability to achieve more objective. The effort focuses on the problem can increase or maximize the returns of existing initiatives. in order for the system to achieve significant progress, resistance need to be identified and the overall system needs to be regulated. Occasionally restricted process elements are fixed, the weakest links next can be addressed in an iterative approach.

Overview

The TOC is a management philosophy that helps a company in increasing profits by maximizing its production and minimize all the relevant costs or expenses such as costs, direct costs, save costs indirectly, and the cost of capital.

The implementation of the TOC is more focused on managing operations that is constrained as a key in improving the performance of the production system, can eventually have an effect on overall profitability.

According to Hansen and Mowen, types of constraints can be grouped as follows:

Based on its origin

The internal constraint (internal constraint) are factors that limit the company originating from within the company, such as the limitation of the hours of the machine. Internal barriers must be utilized optimally to increase throughput to the maximum possible without increasing inventory and operating expenses.

External constraints (external constraint) are factors that limit the company from outside the company, such as market demand or the quantity of the raw materials available from suppliers. External constraints in the form of the volume of product that can be sold, can be overcome by finding markets, increase market demand or by developing new products.

Based on the properties

Constraints bind (binding constraint) is a constraint on resources have been exploited to the fullest.
Constraint is not binding or sagging (loose constraint) is found in the constraints of limited resources are not fully utilized.

Besides Atkinson added the grouping constraints in three parts, namely:
The constraints of resources (resource constraint). This constraint can be a factor in the ability of the production inputs such as raw materials, labor and time machine.

The constraints of the market (market resource). Constraints that are a minimum and maximum level of sales is possible during the planning period.

Balance Constraints (constraint balanced). Identified as production within the production cycle.
Theory of Constraints (TOC) recognizes that each company's performance is limited by the obstacles-constraints, which then develop an approach to support the objectives, constraints, namely the constant progress of a company (continuous improvement).

This theory focuses on the three sizes, namely:

• Throughput's a measure of where a company makes money through sales.
• Supplies, are all funds issued by the company to transform raw raw material through the throughput. Material preparation in the TOC is all assets owned and potentially available for sale.
• Operating costs, the company issued to convert inventory into throughput. The cost of this operation is going to support and optimize the throughput within the constraints.
• TOC have the argument that a decline in inventories will increase the competitiveness of companies, because with lower inventories, obtain better products, lower prices, and faster responses to the needs of customers

The application of TOC can assist managers in improving profit and also the sale of a product or service quality as well as the fulfillment of the requests in a timely manner so that the company is able to operate efficiently and effectively.

Five steps in the TOC

In implementing the ideas as the solution of a problem, Goldratt developed the 5 (five) consecutive steps so that the repair process more focused and be better for the system. These steps are:

1. Cons rest System Identification (identifying the constraint). Identify the parts of the system where the weakest then see its weakness whether physical weakness or policy.
2. The exploitation of constrain (exploiting the constraint). Determine how to eliminate or manage the constraints and costs the least.
3. The subordination of other sources (subordinating the remaining resources). After finding constrain and has decided how to manage the constrain then it should evaluate whether constrain is still being constrain on the performance of the system or not. If not then go to step five, but if yam aka will be heading to the fourth step.
4. Evaluation of constrain (Elevating the constraint). If this step is made, then the second and third step did not manage to handle constrain. Then there should be a major change in the system, such as reorganization, improvement of capital, or modifications to the substance of the system.
5. Repeat the whole process (repeating the process). If the third and fourth steps have been successfully performed then it will repeat again from the first step. This process will rotate as the cycle. Remain alert that a solution may give rise to new constrain needs to be done.

In addition to paying attention to the five stages applying TOC above, note also the ten basic principles of TOC.

The ten basic program are:

1. Balance it production flow, not production capacity. It is assumed the company has the capacity not in balance with the amount of market demand (demand) because the balance of capacity hinders the achievement of the objectives (goals) of the company.
2. Utility Rates in non bottleneck is not determined by the potential of the work station but by work station bottleneck or other critical resources. Only work stations that are experiencing bottlenecks that need to be run with 100% utility.
3. The activity is not always the same as the utilities. Running in non bottleneck can lead to accumulation of work in process (buffers) in the amount excessive.
4. One hour lost on the bottleneck is an hour lost the overall system.
5. One hour savings on non bottleneck is a mirage.
6. Bottlenecks affect throughput and inventory.
7. Batch transfers are not always the same number with a batch process.
8. The Batch process should not remain (variable).
9. Scheduling (capacity & priorities) done having regard to all constraints (constraint) that exist simultaneously.
10. The number of a local optimum is not the same as the optimum overall (total). Performance measurement is seen as a unity based on the infusion of raw materials and finished products.

The relationship of the TOC and JIT (Just In Time)

The main goal of a Manager using the JIT in the company that is to reduce the time used products in the factory. If total production goes down, it will also decrease occurred at the cost, this is due more to the lack of supplies which need to be financed, stored, managed, and secured. With a JIT, time can be minimized against total production i.e. product throughput up to at the time the goods are delivered. Therefore, the throughput time (throughput time) is the amount of processing time, waiting time, the time of the transfer, the time of the inspection. That is the time the throughput that includes a decline in inventories in the process, will take on things:

• Lowering the cost of capital in stock.
• Reduce overhead costs for the transfer of the material.
• Reduces the risk of wear and tear.
• Improve responsiveness to customers and reduce delivery time.
• Theory of Constraints (TOC) and Activity Based Costing (ABC)

The TOC Approach assumed that operational costs are difficult to be altered in the short term, so that the TOC does not identify individual activities and driving costs. Therefore, the TOC less useful to manage costs in the long run. On the other hand, the activity-based costing (ABC) has a long-term perspective that focuses on improving the process of with eliminate activities that do not add value and reduce costs-costs incurred by activities value-added. Therefore, it is more useful for planning ABC'S profit, cost control and pricing long run.



ABC and TOC are both used to determine product profitability. But both also have differences IE ABC develop a long-term analysis which includes the costs of all products. While the TOC takes the short-term approach to profitability analysis because this theory is only based on the current related costs on materials. ABC provides a comprehensive analysis of locomotion costs (cost drivers) and accurate unit cost, as a basis for strategic decision-making on price and product mix in the long term. Otherwise the TOC provides a useful method for improving short-term profitability through the adjustment of the product mix for short term and through attention to the barriers to production. ABC'S excellence is the focus on activities (activity), that is what is done by labor and equipment to meet customer needs. ABC is generally used by companies with the use of methods such as cost cost management targets (target costing) and TOC.