TOC: Theory of Constraints

Theory of Constraints (TOC) is a management philosophy developed by Dr. Eliyahu M. Goldratt and based on the principle that complex systems exhibit inherent simplicity.

TOC began as an approach to shop-floor scheduling (manufacturing) but, over the years, it has been applied to many parts of the organization and has, in more recent times, evolved into a comprehensive management philosophy.

The business world was introduced to TOC 20 years ago by a business novel called The Goal.  The Goal is one of the best-selling business books of all time (required reading in almost every business school the world over).

Here at Ballistix, we have embraced TOC for two reasons:

  1. To assist in the scheduling of the sales process (workflow management)
  2. To integrate sales with other parts of the organization (new-product development, promotion, production and distribution)

Others within the TOC community have experimented with the application of TOC to sales but we are the first to create a comprehensive sales management solution (or application).

Other TOC applications include:

  1. Shop-floor scheduling (Drum Buffer Rope)
  2. Project management (Critical Chain)
  3. Distribution
  4. Management accounting (Throughput Accounting)
  5. Strategy (Thinking Process)

As a management philosophy, TOC is an alternative to cost-based decision-making (cost accounting).  The assumption that underpins cost accounting is that you can maximize the efficiency of a system by maximizing the efficiency of each of its parts (resources).

In the TOC-world, we recognize that this is a fallacy — and that cost-based decisions are more likely to be precisely wrong than they are vaguely right!

We understand that the performance of a system is determined only by its constraint (its weakest link) — and that this constraint provides management with a source of both information and control.

Rather than attempting to eliminate bottlenecks (ultimately, a  futile endeavor), we ensure:

  1. That each organization has only one — and that it stays put (as opposed to wandering from resource to resource)
  2. That all management decisions, organization-wide, are made by considering the implications of that decision at the constraint

The result of this approach to management is that many accepted management practices are rejected by practitioners of TOC, including:

  1. The notion of profit and cost centers
  2. The notion of profitable sales, profitable customers, profitable projects and so on
  3. Cost-plus pricing
  4. Any absorption-based costing (including activity-based costing)
  5. Time-and-materials billing
  6. Performance pay

In the sales environment we reject the following as cost-world concepts:

  1. A focus on conversion rates (the percentage of opportunities that are won)
  2. The practice of qualification
  3. Commissions

The problem with all of these practices is that they result in what Deming used to call sub-optimization (an improvement in a part of a system at the expense of the performance of the whole).

In the TOC world, we replace these practices with a new management approach that ensures that decisions are made locally by considering their system-wide impact.

To learn more about TOC, you should read (or re-read) The Goal — and post a question or two on this forum.