Management And Accounting Web

Yahya-Zadeh, M. 1999. Integrating long-run strategic decisions into the theory of constraints. Journal of Cost Management (January/February): 11-19.

Summary by Charles Nowlin
Master of Accountancy Program
University of South Florida, Fall 2004

Strategy Main Page | TOC Main Page

This article is meant to address the short-run focus of the Theory of Constraints mindset as well as offer a new solution.


Throughput- “the difference between money coming into the company and money paid to outside suppliers, subcontractors, and salespeople.”

Inventory- “the material and other items purchased but not yet converted into throughput.”

Operating Expenses- “Overhead plus direct labor expenses.”

What is the Theory of Constraints?

The theory of constraints (TOC) is a management tool in which the whole system may be viewed together with the goal of maximizing throughput.

Criticisms of The Theory of Constraints

One of the weaknesses of the TOC, according to this author, is that it treats many items, such as production technology, capacity, constrained resources, product mix, demand, and prices, as fixed and inflexible. Although these items may be fixed in the short run, TOC fails to recognize the fact that in the long run each of these items is flexible1.

Robert Kaplan criticizes TOC because it seems to ignore operating expenses and simply accept them as a part of the cost. He says that “if the traditional method of overhead allocation has been accused of treating overhead as a big blob, the TOC approach defines operating expenses as an even bigger blob …(it) is not concerned with tracing operating expense to products or doing anything about it.” Kaplan, an ABC advocate, believes that ABC provides better information and allows managers to make more informed decisions. Another critic of TOC, John Shank, believes that the short-run focus of TOC can cause serious problems with very serious consequences, such as causing managers to always favor making component parts instead of outsourcing and to favor adding new products2.

Even advocates of TOC are forced to recognize the inherent weaknesses in the TOC system because of its short-term focus. For long-run strategic decisions, other techniques including full product cost and ABC are probably more effective. Although these advocates see the limitations of the TOC mindset, they also see its strengths.

Strengths of TOC

1. It is a simple, easily understood theory that management is able to implement.

2. The information can be easily reported.

3. The techniques involved lead to improved business performance and efficiency.

Modified TOC in Action

In this article there is an in depth algebraic analysis of different options which show the ways that TOC can be used to compare alternative long-term strategic decisions. Yahya-Zadeh uses linear programming and mixed-integer programming to solve a series of problems and shows how different possible decisions can be represented in algebraic form and then compared to determine the most effective course of action.


TOC has the ability to be a very useful tool as long as it is used properly and its shortcomings are understood. TOC must be used in conjunction with a long-term strategic planning tool to form a successful managerial information tool. Using linear programming and mixed integer programming Yahya-Zadeh is able to use TOC for short-run decisions as well as long-run decisions.



1 A careful reading of Goldratt's publications shows that this statement is incorrect.

2 See Robinson, M. A., ed. 1990. Contribution margin analysis: no longer relevant/strategic cost management: the new paradigm. Journal of Management Accounting Research 2 (Fall): 1-32. (Note: This paper is related to ABC as well as TOC and the contribution margin approach. It includes a debate between Boer, Horngren, Kaplan and Shank.) (Summary of Kaplan & Shank). (Summary of Horngren & Boer).

Other related summaries:

Atwater, B. and M. L. Gagne. 1997. The theory of constraints versus contribution margin analysis for product mix decisions. Journal of Cost Management (January/February): 6-15. (Summary).

Goldratt, E. M. 1990. What is this thing called Theory of Constraints. New York: North River Press. (Summary). (In Chapter 4 Goldratt says 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).

Goldratt, E. M. 1990. The Haystack Syndrome: Sifting Information Out of the Data Ocean. New York: North River Press. (Summary). (In Chapter 7 Goldratt tells us that the business world today has changed and cost accounting has been slow to react. They have not reexamined the fundamentals, the financial statement logic, to create new solutions. Instead, they have formulated ineffective answers like “cost drivers” and “activity-based costing.” We can no longer allocate based on direct labor. So allocating expenses at the unit level, batch level, group level, and company level is meaningless. These cannot be aggregated at their respective levels nor at the top. So why do it?).

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).

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).

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.

Martin, J. R. Not dated. Drum-Buffer-Rope System. Management And Accounting Web.

Martin, J. R. Not dated. Global measurements of the theory of constraints. Management And Accounting Web.

Martin, J. R. Not dated. Goldratt's dice game or match bowl experiment. Management And Accounting Web.

Martin, J. R. Not dated. TOC problems and introduction to linear programming. Management And Accounting Web.

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).