The goal of every company is to make money. In order for that to happen companies must increase net profit, while simultaneously increasing return on investment and cash flow.
In Eliyahu Goldratt’s book, The Goal, he states there are three measurements that express the goal of making money: throughput, inventory, and operational expense. Throughput is the rate at which the system generates money through sales. Inventory is all the money that the system has invested in purchasing things it intends to sell. And, operational expense is all the money the system spends in order to turn inventory into throughput. The goal is not to improve one measurement in isolation, but to reduce operational expense and inventory while simultaneously increasing throughput.
According to Goldratt, every process has a constraint, i.e., a bottleneck that stands in the way of achieving the goal. A bottleneck is any resource whose capacity is equal to or less than the demand placed on it. A non-bottleneck is any resource whose capacity is greater than the demand placed on it.
The Theory of Constraints (TOC) is a methodology for identifying the constraint or bottleneck that stands in the way of achieving our goal by systematically improving the constraint until it is no longer the limiting factor that impedes throughput. It uses a set of tools that help achieve this goal that include:
- A five step process for identifying and eliminating constraints
- A set of tools for analyzing and resolving problems
- A method for measuring performance and guiding management decisions
Whereas, TOC increases profitability by increasing throughput, Lean increases profitability by focusing on adding value from the customer’s perspective by eliminating waste across the whole value stream.
Combining the tools of Lean and TOC provides an organization with a diverse toolset that can effectively increase manufacturing capacity and reduce costs.