Theory of Constraints is a theory developed by Eli Goldratt as an approach to production and constraint management. Constraints can be due to people, equipment or a combination of more factors. Goldratt specifies a five-step process for dealing with constraints:
Step1: Identify the binding constraint:
In this step, the bottleneck or the binding constraint is determined. We come across a constraint in manufacturing firms that impacts the throughput or creates a bottleneck. Binding constraint is that constraint.
Step2: Optimize use of constraint
The second step is to optimize use of constraint. Here the firm tries to use the constraint and produce products that have the highest contribution margin per unit of the constraint.
Step3: Subordinate everything else to the constraint
This means that the managers of the manufacturing firm should focus only on trying to loosen the constraint and ignore other issues. As the binding constraint is the element that hinders production, so, it should be given complete focus.
Step4: Break the Constraint
This step can be accomplished in many ways:
• Cross-train workers
• Purchasing additional equipment
• Hire additional workers
Step5: Identify new binding constraint
If the constraint in one part of the firm is broken, the new binding constraint will now shift to some other part. So, do net let inertia to creep in and identify the new binding constraint, i.e., move to Step 1.
For instance process A has a capacity of 7 units per hour, process B having 5 units,C having a capacity of 3 units ,D has 6 units per hour.
Process C is the constraint which limits the production capacity to 3 units /hr. On improving the efficiency and utilization of processes A,B and D will only increase the inventory but not sales . After identification of the constraint our next step is to eliminate the constraint .This can be done by increasing the available no of hours to the bottleneck step. The constraint is exploited till it is no longer the rate determining step and the same steps are repeated with the next constraint.