Lean and the Theory of Constraints: Friends or Foes?

Is the theory of constraints compatible with lean thinking and can the two approaches be used together? This article looks at some of the similarities and differences between the two approaches and suggests how they might be coupled to advantage.

The book, Lean Lexicon: A Graphical Glossary for Lean Thinkers (Lean Enterprise Institute, 2003) defines lean production as: “A business system for organizing and managing product development, operations, suppliers, and customer relations that requires less human effort, less space, less capital, and less time to make products with fewer defects to precise customer desires, compared with the previous system of mass production.”

As the Lean Lexicon states, lean production was pioneered by Toyota after World War II and typically required half the human effort, half the manufacturing space and capital investment for a given amount of capacity, and a fraction of the development and lead time of mass production systems—while making products in wider variety at lower volumes with many fewer defects. The term “lean” was coined by John Krafcik, a research assistant at MIT with the International Motor Vehicle Program in the late 1980s.

The focus of lean production is on specifying value from the standpoint of the customer, removing wasteful actions from the value stream for a product family, and making those actions which do create value occur in a continuous flow as pulled by the customer. In the lean paradigm, wasteful actions are those activities that consume resources but create no value for the customer. Thus, a key objective of lean thinking is the elimination of nonvalue-adding activities and their associated costs throughout the enterprise.

In their book, Lean Thinking (Free Press, 2003), James P. Womack and Daniel T. Jones articulate five key principles for implementing lean thinking within an organization:

1. Specify value from the standpoint of the end customer by product family.

2. Identify the value stream for each product family and eliminate those steps that do not create value. The value stream is all the actions that are required to bring a product from concept to launch and from order to delivery.

3. Make the remaining steps in the value stream flow.

4. Let the customer pull value through the value stream.

5. Pursue perfection.

These principles help organizations to identify waste and provide ways to help reduce it. By applying lean principles to each value stream within their enterprise, organizations may become evermore lean by continuously eliminating waste and its associated costs.

The theory of constraints

A relatively recent approach for improving organizational performance is called the theory of constraints (TOC). Conceived by Eliyahu M. Goldratt, TOC places the highest premium on increasing throughput, which Goldratt defines as the rate at which the system generates money through sales. The key principles of TOC were articulated by Goldratt in his best selling business novel, The Goal (North River Press, 1984), and since then he has authored numerous other books and created The Goldratt Institute to further the dissemination of TOC knowledge and training.

The theory of constraints likens the business or production system of a company to a chain, or a network of chains. According to Goldratt, a system, by its very nature, always has something that constrains or limits its performance—the ability of the system to achieve its goal. That something may be, for example, a process that has insufficient capacity, or a lack of market demand for the output of the system. With TOC, Goldratt advocates that any improvement of a system must begin by focusing improvement effort at the system’s constraint—the thing that is preventing the system from moving toward its goal. Equally important, Goldratt postulates that expending effort in improving nonconstraining processes is essentially wasted effort since any improvement won’t advance the overall performance of the system.

The primary strength of TOC is its orientation toward optimizing the global performance of a system, rather than optimizing local components of a system that may have little or no positive effect on the system’s overall performance. With TOC’s system-level focus, a system’s constraint can be precisely located, whether it resides within the company or outside of it (i.e., in the marketplace). If the constraint is internal, it can be readily ascertained whether the constraint is physical (i.e., a machine, person, or facility) or a policy that inadvertently discourages improved throughput. Efforts to break the constraint can then be applied without delay or distraction. (Note: Physical process constraints are usually referred to as “bottlenecks” in TOC parlance. A bottleneck process is not necessarily the process with either the fewest machines or the slowest cycle times. More about finding bottleneck processes in a later article.)

Goldratt offers some powerful tools for dealing with system constraints. Foremost among them is a five-step process that ensures that improvement efforts remain focused on securing global optimization of a system, rather than digressing into nonproductive and localized suboptimization of the system’s components. These five steps provide a process for driving effective improvement of a system:

1. Identify the system’s constraints. Determine what limits the system’s performance.

2. Decide how to exploit the system’s constraint. Eliminate inefficiency from the constraint.

3. Subordinate everything else to the above decision (step 2). Make effective management of the existing constraint the top priority.

4. Elevate the system’s constraint. Break the constraint by increasing its capacity above the level of demand.

5. If in the previous steps a constraint has been broken, go back to step 1, but don’t allow inertia to cause a new constraint. Go back and find the next weakest link that limits system performance.

Goldratt also provides a set of three essential measurements that support the TOC change process. He asserts that conventional accounting systems do not support TOC or lean-based efforts to improve. He proposes replacing all traditional accounting measures that are derived from the notion of the “product cost” accounting paradigm. According to Goldratt, the following TOC metrics represent the global measures through which the performance of any business system can be assessed:

• Throughput. This is the rate at which the entire organization generates money through sales for a product or service. Throughput is a financial measure and it represents all the money coming into an organization from product sales. If you have produced a product, but not yet sold it, it cannot be considered as throughput. Throughput is calculated as the difference between a product’s sale price minus the truly variable costs incurred to produce it.

• Inventory. This is all the money the organization invests in things it intends to sell. Inventory represents all the money tied up inside an organization. Goldratt’s definition includes facilities, equipment, obsolete items, as well as raw material, work in process, and finished goods.

• Operating expense. Operating expense is all the money an organization spends turning inventory into throughput. It represents the money going out of the organization. Examples include direct labor, utilities, consumable supplies, and depreciation of assets.

All three of these measures are interdependent. This means that a change in one will result in a change in one or more of the other two. Therefore, to improve the performance of an organization using TOC, one would apply the following formula when making decisions: maximize throughput while minimizing inventory and operating expense. In addition, the TOC measures can be related back to traditional accounting measures. For example: “Net Profit = Throughput – Operating Expense.”

Lean and TOC: similarities and differences

Both lean and TOC are focused on increasing profit. However, they approach the problem in different ways. The essential difference is that while lean is focused on reducing costs, TOC is focused on improving throughput.
 
Here’s a simple example. Let’s say a manufacturing company’s goal is to improve profitability. Several necessary conditions must be satisfied for this to happen. Two of them might be an effective marketing and sales effort and a capable production process. Let’s assume that the production process is so good that it’s able to complete all requirements with a substantial amount of idle time to spare. This company’s constraint is clearly in the marketplace—there are not enough sales to fully occupy the company’s total capacity.
 
Even if the company’s production process could be further streamlined, making it faster (through, say, a lean initiative), the inadequacy of demand for the company’s product would render that effort useless to the company. No doubt a financial case could be made about how much time (which is equated to money) was saved by the production improvement project, but it wouldn’t show on the bottom line unless the improvement resulted in layoffs—not exactly a desirable outcome.

Now let’s say that an initiative is undertaken to break the market constraint. Demand subsequently increases so much that instead of having idle time, the production process now has a backlog. Chances are the company is making more money from this new situation. But increasing sales even more would not generate more money. Backlogs are an indication of overloaded production capacity. The company’s constraint has moved from the market to the production line. Now a lean initiative to speed up production or reduce rework would have a direct effect on the constraint, allowing the company to realize real financial improvement from increasing its capacity—but only if production were the system’s constraint.
 
In effect, with TOC, Goldratt is saying that efficiency, or doing more with less, is only half the improvement equation. Ultimately, the ability of a system to attain its goal depends on the effectiveness of the action taken—where the action is applied, and in the way it is applied. Thus, while neither efficiency nor effectiveness alone is sufficient to improve a system, taken together they both are. Organizations that focus exclusively on efficiency alone, without considering effectiveness, can fall victim to “polishing the brass on the Titanic.”
 
There appears to be enough similarity between lean and TOC for the two approaches to be used synergistically. TOC can bring power and punch to the lean effort by helping to focus it where it will bring the most benefit (i.e., at the system constraint). Lean, on the other hand, offers a very deep and powerful toolkit which can be applied to constrained processes in order to break constraints and dramatically improve system performance. In addition, replacing the traditional financial metrics of asset utilization and cost burden absorption with TOC’s measures of throughput, inventory, and operating expense offers a simple way for management to see the benefit and consequences of applying lean thinking.