Management And Accounting Web

Goldratt, E. M. 1990. What is this thing called Theory of Constraints and how should it be implemented? New York: North Press, Inc.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Theory of Constraints Main Page | The Goal Summary

According to Goldratt, the purpose of this book is to answer two major questions: "What are the thinking processes that enable people to invent simple solutions to seemingly complicated situations?" and How can we use the psychological aspects of individuals and organizations to implement those solutions. The book includes two main parts and two appendices. Part I: What is this thing called the Theory of Constraints, and Part II: How Should it be implemented?

Part I: What is this thing called the Theory of Constraints

Part I includes four chapters:

In Chapter 1, Goldratt builds on the two major questions above by describing the five focusing steps listed below.

In Chapter 2, he discusses the process of change, resistance to change, and how to overcome the resistance to change.

The Effect-Cause-Effect method for identifying constraints is discussed in Chapter 3 and

the Evaporating Cloud method of inventing simple solutions is explained in Chapter 4. These ideas are sketched out in the table below and discussed more fully following the table.

1. The Five Steps of Focusing

Five Focusing Steps Steps Expressed
in Terms of Continuous Improvement
How To Implement
1. Identify the system's constraints. What to change? Use the Effect-Cause-Effect method to identify constraints.
2. Decide how to exploit the system's constraints. What to change to?
Construct simple practical solutions.
Use the Evaporating Cloud method to invent simple solutions.
3. Subordinate everything else to the above decision. How to change? How to overcome the emotional resistance to change. Use the Socratic method to induce people to invent solutions. The Socratic approach reduces or eliminates the emotional resistance to change and allows the inventor to take ownership of the idea.
4. Elevate the system's constraints.
5. If a constraint has been broken, go back to step 1, but do not allow inertia to cause a system's constraint.

2. The Process of Change

The Socratic Method

Any change is perceived by some as a threat, so a method is needed to overcome the emotional resistance to change with a stronger emotion. The Socratic method is discussed as a way to overcome resistance to change. Using this approach involves asking questions that help a person invent their own solutions. According to Goldratt, when you provide a person with the answers, you block them from the opportunity of inventing the answers for themselves and create emotional resistance to acceptance and implementation. In The Goal, Jonah (the consultant who appears to have all the answers) asks Alex (the plant manager with the problems) a series of questions, but does not provide the answers. Alex struggles with the questions but eventually discovers the answers and internalizes the whole concept of TOC in the process. By inventing their own solutions, Alex and his employees take ownership of the concepts.

3. How to Prove Effect-Cause-Effect

Goldratt defines the effect-cause-effect method as the process of speculating a cause for a given effect (hypothesis) and then predicting other effects from the same cause. Verifying each predicted effect builds a logical tree and provides a powerful way to determine core problems.

An example is provided from Chapter 4 of The Goal that combines the Socratic and effect-cause-effect methods. Alex meets Jonah, by chance in an airport between flights. Alex tells Jonah that his plant installed some robots that have increased productivity by 36%. Jonah responds, "So your company is making 36% more money from your plant, just by installing some robots?" Alex says no and thinks Jonah is confused. Jonah asks "Was your plant able to ship even one more product per day as a result of what happened in the departments where the robots were installed?" Again, the answer is no. "Did you fire anybody?" No. "Did your inventories go down?" No. "With such high efficiencies you must be running your robots constantly?" Yes, says Alex. Jonah continues, "Come on, be honest, your inventories are going through the roof, are they not? And everything is late, you can't ship anything on time." Jonah keeps building on a constant effect-cause-effect analysis to help Alex discover his plants core problems. Walking towards the gate to board a plane, Jonah continues, "You think you are running an efficient plant ... but your thinking is wrong." Alex responds, "What's wrong with my thinking?" Jonah tells Alex that he has accepted so many things without question that he is not really thinking at all. "Tell me again why you believe your robots are such an improvement." "Because they increased productivity" Alex says. "And what is productivity?" With some more help from Jonah, Alex comes to the conclusion that productivity is the act of bringing a company closer to its goal. Jonah tells Alex that productivity is meaningless unless you know what your goal is. Alex responds that his companies goal is to increase efficiencies. Jonah says, "Your problem is you don't know what your goal is." "What is the real goal?" Alex wants Jonah to give him the answer, but Jonah says "Think about it, Alex. You can find the answer with your own mind."

4. How to Invent Simple Solutions with the Evaporating Clouds Method

The evaporating clouds method is described in Chapter 4 and involves examining the foundations of the system. The idea is to find the minimum number of changes that are needed to create an environment where the core problem (big black cloud) cannot exist. You do not try to solve the problem, but instead cause the problem not to exist. Goldratt says to solve the problem involves a compromise. "The Evaporating Clouds method does not strive to reach a compromise solution, rather it concentrates on invalidating the problem itself." He uses the economic batch size as an illustration. Methods for finding the optimal solution have been taught for more than 50 years in almost every university, but few, according to Goldratt, have bothered to check the local objectives versus the global goal. The idea has been to find the compromise between setup costs and carrying costs. But there is usually a hidden assumption underlying every core problem. The evaporating clouds technique involves verbalizing the assumptions underlying the problem and challenging them to find the invalid assumptions. According to Goldratt, most problems are created when we try to satisfy local objectives that do not match the global goal. An underlying assumption in the batch size problem is that setup costs are fixed. We have learned from the concept of just-in-time that setup costs are not fixed. Significantly reducing setup time and effort eliminates the batch size problem. The cloud evaporates. A compromise solution is not needed.

In this section of the book, Goldratt mentions that the word "cost" is a dangerous and confusing multi-meaning word and that the word "product cost" is "an artificial, mathematical phantom" (p. 49).

Part II: How Should it be Implemented

Part II includes five chapters:

1. How to become a Jonah;

2. The devastating impact of the organization's psychology;

3. Reaching the initial consensus and the initial step;

4. How to reach the top; and

5. What about existing new projects?

1. How to Become a Jonah

In this chapter Goldratt provides a discussion of the 10 day Jonah course as it was taught during the time this book was written. The first day concentrates on terminology. Examples used are the process line, line design and line balance concepts. The second day emphasizes multi-purpose lines and simulations designed to focus on the verbalization process and the Effect-Cause-Effect method. The third day involves an assault on policy constraints and their devastating impact on an organization, and on properly focusing on the constraints rather than using a shotgun approach to improvement. The Evaporating Clouds method is introduced next with various homework assignments related to it's use. The homework is discussed and criticized by other students in the next session. The sessions continue through the second week with various case problems related to the particular group of students in the Jonah course.

2. The Devastating Impact of the Organization's Psychology

This chapter addresses the questions of who should be Jonahs, how many Jonahs an organization should have, who should be first, and so on to provide the best way to introduce TOC into the organization. It is a discussion of the psychology and politics that make it difficult to introduce anything new. Goldratt says that the organization has it's own psychology in addition to the psychology of the individuals within the organization. Emotional resistance, the defense mechanism, can block the implementation. If TOC starts in one function, without involvement from the other functions within the organization, it is likely to be resisted and blocked by some other function. The message of this chapter is that all parts of an organization need to decide together on how to proceed.

3. Reaching the Initial Consensus and Initial Step

From the discussion in the previous chapter it is clear that all functions in an organization need to be involved in the decision to implement the theory of constraints. The questions become who should be Jonahs, in what sequence, who should decide, and so on. The key ideas in this chapter appear to be the following:

1. Start at the division level.

2. Achieve a group consensus by the top people in each functional area.

3. This group should send the division head and the controller to the Jonah course. The controller has to be one of the first Jonahs because finance can block any other function. The controller has a dotted line outside the division to the top of the company.

4. The division head and controller should prepare the implementation plan and the sequence and timing related to the functional heads becoming Jonahs.

5. The implementation plan should be approved by the entire group before the implementation begins.

4. How to Reach the Top

This chapter is very short and addresses the question of how a lower level manager, or staff person, can persuade the top people in a division to spend two or more days in a short Jonah course or seminar. Goldratt's advice is to get a top person, or one on your level, in another functional area to work with you to become Jonahs and then through the proper channels (your bosses' knowledge and okay) send a joint letter (signed by you and the other advocate) to the top person in the division. Use psychology and approach everyone in a positive way. Don't be critical of the current system, but point out that there appears to be a better approach to managing the organizations resources.

5. What About Existing Projects

In this chapter Goldratt's discusses the relationships between TOC, JIT and TQM. Comparing these concepts, with emphasis on the differences helps to blend them into one theory.

All three concepts have the same objective, i.e., to increase the ability of the company to make more money. They all attack the same erroneous assumption and use the same new assumption. Each of the three concepts is an overall management philosophy. There are only three ways to improve the ability of a company to make money: 1) increase throughput, 2) decrease inventory or assets, and 3) reduce operating expense. All three concepts, TOC, JIT and TQM, reject the traditional ranking that places costs or operating expense first in the ranking. Part of the problem with the traditional approach is that cost accounting disguises part of operating expense as inventory. The main potential for improvement is in increasing throughput. Both inventory (assets) and operating expense are limited by zero, but the potential to increase throughput is unlimited. All three methods adopt the new ranking.

Traditional Ranking JIT, TQM and TOC Ranking
Operating expense Throughput
Throughput Inventory or Assets
Inventory or Assets Operating expense

All three methods attack the underlying assumptions that created a problem related to inventory levels. They ask, Why do we need inventory to protect throughput? The answer, Because there are statistical fluctuations (variations) and dependent resources. All three methods attempt to reduce variation and recognize the interdependencies. Statistical process control is emphasized in the quality area to help identify ways to reduce variation. Cells are used to reduce the dependencies "... U cell configurations, where one worker is moving with the processed piece from one machine to another" (p. 120). Predetermined schedules in TOC reduce both variation and dependent resources.

Viewing an organization from the operating expense world perspective causes one to believe that almost everything is important, that the organization is composed of independent variables. But viewing the organization from the throughput world perspective forces the realization that the organization is a collection of dependent variables and that the artificial barriers between these variables, or functions, must be eliminated. Managing the parts of an organization as if they were isolated kingdoms is not possible in the throughput world where throughput is the dominant measurement. In the throughput world, constraints become the main tools of management and the previous tool, product cost, can be discarded.

Appendix 1: Sections from The Goal

1. The Encounter. Alex's first meeting with Jonah in the airport.

2. The Hike. Alex's discovery of the drum-buffer-rope concepts and the Dice Game or match bowl experiment related to why a company should not try to balance the plant.

Appendix 2: The Theory of Constraints Journal

Goldratt makes a few comments about each of the following.

Volume 1, Number 1: Hierarchical Management - The Inherent Conflict.
Volume 1, Number 2: Laying the Foundation.
Volume 1, Number 3: The Fundamental Measurements.
Volume 1, Number 4: The Importance of a System's Constraints
Volume 1, Number 5: How Complex Are Our Systems?
Volume 1, Number 6: Coexistence or Amalgamation.

_____________________________________________________

Related summaries:

Corbett, T. 2000. Throughput accounting and activity-based costing: The driving factors behind each methodology. Journal of Cost Management (January/February): 37-45. (Summary).

Goldratt, E. M. 1990. The Haystack Syndrome: Sifting Information Out of the Data Ocean. New York: North River Press. (Summary).

Goldratt, E. M. 1992. From Cost world to throughput world. Advances In Management Accounting (1): 35-53. (Summary).

Goldratt, E. M. and J. Cox. 1986. The Goal: A Process of Ongoing Improvement. New York: North River Press. (Summary).

Goldratt, E. M., E. Schragenheim and C. A. Ptak. 2000. Necessary But Not Sufficient. New York: North River Press. (Summary).

Hall, R., N. P. Galambos, and M. Karlsson. 1997. Constraint-based profitability analysis: Stepping beyond the Theory of Constraints. Journal of Cost Management (July/August): 6-10. (Summary).

Huff, P. 2001. Using drum-buffer-rope scheduling rather than just-in-time production. Management Accounting Quarterly (Winter): 36-40. (Summary).

Lepore, D. and O. Cohen. 1999. Deming and Goldratt: The Theory of Constraints and the System of Profound Knowledge- The Decalogue. North River Press. (Note).

Louderback, J. And J. W. Patterson. 1996. Theory of constraints versus traditional management accounting. Accounting Education 1(2): 189-196. (Summary).

Luther, R. and B. O’Donovan. 1998. Cost-volume-profit analysis and the theory of constraints. Journal of Cost Management (September/October): 16-21. (Summary).

Martin, J. R. Not dated. Comparing Dupont's ROI with Goldratt's ROI. Management And Accounting Web. http://maaw.info/ComparingDupontGoldrattROI.htm

Martin, J. R. Not dated. Comparing Traditional Costing, ABC, JIT, and TOC.  Management And Accounting Web. http://maaw.info/TradABCJITTOC.htm

Martin, J. R. Not dated. Drum-Buffer-Rope System. Management And Accounting Web. http://maaw.info/DrumBufferRope.htm

Martin, J. R. Not dated. Global measurements of the theory of constraints. Management And Accounting Web. http://maaw.info/TOCMeasurements.htm

Martin, J. R. Not dated. Goldratt's dice game or match bowl experiment. Management And Accounting Web. http://maaw.info/MatchBowlExperiment.htm

Martin, J. R. Not dated. TOC problems and introduction to linear programming.  Management And Accounting Web. http://maaw.info/TOCProblemsIntroToLP.htm

Rezaee, Z. and R. C. Elmore. 1997. Synchronous manufacturing: Putting the goal to work. Journal of Cost Management (March/April): 6-15. (Summary).

Ruhl, J. M. 1996. An introduction to the theory of constraints. Journal of Cost Management (Summer): 43-48. (Summary).

Ruhl, J. M. 1997. The Theory of Constraints within a cost management framework. Journal of Cost Management (November/December): 16-24. (TOC Illustration).

Westra, D., M. L. Srikanth and M. Kane. 1996. Measuring operational performance in a throughput world. Management Accounting (April): 41-47. (Summary).