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

Definitions

Here are some definitions that must be understood to comprehend this article.

1. Throughput- “the difference between money coming into the company and money paid to outside suppliers, subcontractors, and salespeople.”
2. Inventory- “the material and other items purchased but not yet converted into throughput.”
3. 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.

Conclusion

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 The Goal, What is This Thing Called TOC, and The Haystack Syndrome show that this statement is incorrect.

² See the Robinson summary.

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