[The following article appeared in _The_Quality_Management_ Forum_, Fall 1993, pp. 3.] [Goldratt's] THEORY OF CONSTRAINTS: A SYSTEM-LEVEL APPROACH TO CONTINUOUS IMPROVEMENT by H. William Dettmer Does your quality improvement program focus on cost re- duction? Many do. The quality movement has made much of the issue of cost. Juran emphasizes quantifying the cost of quality(COQ) as a means of motivating and rationalizing continuous improvement. The central theme of Crosby's book, Quality is Free, is largely the cost saving aspects of quality. American business' short-term economic orientation makes it particularly susceptible to an inordinate emphasis on cost reduction as a rationale for embracing quality improvement efforts. Cost: One Element in a Complex Relationship But is a cost-based approach the right strategy? There is evidence to suggest that the emphasis on the cost-reducing benefits of quality improvement may be excessive, short-sighted, and misplaced. While cost reduction produces an instant impact on the bottom line, equating quality with cost reduction oversimplifies a complex economic relationship. Moreover, quality alone is not sufficient for ultimate success in an increasingly competitive business environment. Witness the fact that a recent Malcolm Baldrige National Quality Award winner filed for bankruptcy. What advantage is there in winning the battle but losing the war? Factors other than cost alone undoubtedly contrib- uted to the bankruptcy. A lesson to be learned here is that it is important to distinguish between a goal and a necessary condition. Cost and the Company's Goal Quality is increasingly a necessary condition for success in business--the price of admission just to compete in the arena. But product or service quality alone, and its resulting cost saving, will not ensure success. A broader definition of quality, one which addresses the system-level effects of continuous improvement, is needed to preclude suboptimizing (undue focus on system components at the expense of the overall system). This may be a reason why some companies eschew the term "total quality management" in favor of continuous or ongoing improvement. If quality is a necessary condition, then what is the goal? For most companies in the commercial sector, the goal is to make money. Or more precisely, in consonance with the concept of on- going improvement, the goal should probably be to continually make more money. While cost reduction should undoubtedly be an integral part of a company's efforts to make more money, there are two logical reasons why a cost reduction focus might be counter- productive . First, it becomes very easy to carry cost cutting too far. At some point, reducing costs any further will degrade a company's capability to do its job of selling products or services. In the Department of Defense this is known as "cutting into the muscle" in search of the fat. Second, besides this practical limit, there is a theoretical limit to how far costs can be cut--that limit is zero. Even if it were possible to produce a product or service at no cost, it doesn't get any better than that. Does this mean that quality improvement efforts stop at that point? Throughput, Inventory, and Operating Expense On the other hand, a continuous improvement philosophy which centers on increasing the money made from the exchange of products or services offers other options for realizing the goal besides cost reduction. A relatively recent approach for doing this is called the Theory of Constraints (TOC). Conceived by Dr. Eliyahu M. Goldratt, TOC, places the highest premium on increasing Throughput, which Goldratt defines as the rate at which the system generates money through sales.[1] Not forgetting the axiom that "you have to spend money to make money," Goldratt links increases in Throughput to decreases in Inventory and Operating Expenses. Goldratt's concept of Inventory and Operating Expense constitute a significant departure from traditional management accounting thought. He considers Inventory to be all the money the system invests in things it intends to sell, including facilities and equipment, which are likely to be sold off as scrap after they obsolesce beyond their useful lives. And he defines Operating Ex- pense as all the money the system spends to turn Inventory into Throughput. In other words, if it isn't Throughput (money coming in) or Inventory (money tied up within the system), it's Operating Expense (money going out) . Goldratt contends that a change, positive or negative, in any one of these three dimensions will automatically result in a proportional change in at least one, maybe both, of the other two. For example, if actions are taken to reduce Inventory, a commensurate reduction in carrying costs (Operating Expense) can be expected. With this three-dimensional dynamic underlying the system's operation, Goldratt maintains that ongoing improvement requires efforts to increase Throughput, decrease Inventory, and decrease Operating Expense. Management traditionally emphasizes reduction of Operating Expense first, followed by increasing Throughput and, finally, Inventory reduction. But, according to Goldratt, the biggest gains are to be realized by first increasing Throughput, then by reducing Inventory. Operating Expense reduction should be the third priority. Goldratt's rationale for this order of priorities involves the law of diminishing returns: both Operating Expense and Inventory have a theoretical lower limit of zero (and a practical limit considerably higher), but theoretically there is no upper limit to the increase of Throughput. Systems as Chains The Theory of Constraints likens each system (company) to a chain, or a network of chains. In any chain there is one weakest link which limits the performance of the entire chain. This weak- est link is the system's constraint. Improving the performance (Throughput) of the chain requires strengthening that weakest link; improving any other link will cost money (increase Operating Expense) but will not contribute to the increased strength of the entire chain as long as the weakest one is ignored. However, as soon as that weakest link is strengthened to the degree that it is no longer the weakest link, (i.e., the constraint is broken), the next weakest link becomes the brake or constraint which limits overall system performance. The primary benefit of the TOC approach is its orientation toward the output of the entire system, rather than a compartmentalized look at components which may have little or no positive effect on overall performance because of that "elephant in the parlor"--the system constraint which overshadows all other deficiencies in the system. With this kind of system level focus, the system's constraint can be precisely located, whether it resides within the company or outside of it (e.g., the market place). If the constraint is internal, it can be readily ascertained whether the constraint is physical (i.e., a machine, person, or facility) or a policy which inadvertently discourages improved Throughput. Efforts to break the constraint can then be applied without delay or distraction. Five Focusing Steps Goldratt offers some powerful tools for dealing with system constraints. Foremost among them is a five-step process which ensures that improvement efforts remain on track toward system level improvement, rather than digressing into non-productive suboptimization of system components. These five steps provide reliable channel markers enroute to effective improvement--a variation of a well known sign, which, in this case, would remind managers, "It's the system, stupid!" 1. Identify the system's constraints. Determining what limits the system's performance. 2. Decide how to exploit the system's constraint. Eliminate inefficiency from the constraint. 3. Subordinate everything else to the above decision (step #2). Make effective management of the existing constraint the top priority. 4. Elevate the system's constraint. Break the constraint by increasing its capacity above the level of demand. 5. If, in the previous steps, a constraint has been broken, go back to step 1, but do not allow INERTIA to cause a new constraint. Go back and find the next weakest link which limits system performance. A Logical Thinking Process With the ongoing improvement process now defined, Goldratt introduces a rigorous five-stage logical thinking process which zeroes in on what to change, what to change to, and how to effect the change with a minimum of errors and false starts. These processes include the current reality tree, the evaporating cloud, the future reality tree, the prerequisite tree, and the transition tree. In concert with the five focusing steps mentioned above, these logical thinking processes provide a contextual basis from which to apply more commonly known quality tools, such as statistical process control, design of experiments, quality function deployment, and other structured problem solving methods. By now it's probably obvious that there is considerably more to the Theory of Constraints than is possible to address here. Readers desiring to learn more about the theory and its potential for application to their companies are encouraged to contact the Avraham Y. Goldratt Institute, 442 Orange Street, New Haven, Connecticut 06511, (203) 624-9026. Is cost reduction passe? Of course not. But it should certainly be viewed in its proper context--as part of a larger strategy to realize the company's goal, but not necessarily the most important part. ___________________________ ENDNOTE 1. Defining the goal as making more money and defining Throughput as generating money through sales are clearly intended for the for-profit arena. Not-for-profit companies and government agencies are not precluded from applying the principles of the Theory of Constraints; the goal and Throughput may have to be expressed in nonmonetary terms, but the theory still applies. __________________________________________________________________ H. William Dettmer is Adjunct Professor of Systems Management at the University of Southern California's Institute of Safety and Systems Management. He holds a B.A. degree from Rutgers University and an M.S. degree from the University of Southern California. Dettmer is a member of the American Society for Quality Control and the American Society for Training and Development. Prior to beginning his teaching career, Dettmer served 23 years in the U.S. Air Force in a variety of operations, logistics, and project management positions.