What is the theory of constraints and how can it help my business?

The theory of constraints is a management philosophy. It is underpinned by the belief that organisations are always faced by at least one constraint that limits business operations. 

The theory of constraints meaning

According to the theory of constraints, a business should always strive to remove the most pressing constraint. This is the constraint that is having the most negative impact on the company's ability to reach its goals. 

Ideally, a business should eliminate all constraints. In practice, however, as one constraint is removed, another one will tend to arise. Hence the process of removing constraints is an infinite one.

Constraints tend to fall into one of four categories. These are as follows:

• Physical – for example, a lack of equipment or staff

• Policy – a decision or requirement to work in a limiting manner

• Paradigm – a strongly-held limiting belief

• Market – demand is weaker than supply

The theory of constraints core principles

The theory of constraints is guided by three core principles. These are:

• Convergence: The belief that a change to one aspect of a system will feed through to an entire system.

• Consistency: The belief that internal conflicts are the result of flawed assumptions.

• Respect: The belief that staff (and people in general) always deserve to be treated with respect even though they will inevitably make mistakes.

The theory of constraints thinking process

The theory of constraints thinking process is described as a five-step process because it assumes that the goal has already been agreed. If this assumption is incorrect then the theory of constraints thinking process effectively has to become a six-step process. The first step becomes identifying the goal.

The theory of constraints five focusing steps

Assuming that the goal has already been agreed, the theory of constraints five focusing steps are as follows.

• Identify the constraint: More specifically, identify the most important constraint, namely the one which has the most negative impact on your ability to achieve your goal.

• Exploit the constraint: See what you can do to reduce the impact of the constraint using either your existing resources or resources which can be acquired easily.

• Subordinate operations to the constraint: Review all the other activities involved in the process to make sure that they are contributing to the elimination of the constraint.

• Elevate the constraint: If the constraint still exists, do whatever it takes to remove it. Look beyond your existing resources and be prepared to make capital investments. If necessary, look at business process reengineering.

• Repeat with a new constraint: The theory of constraints assumes that there will always be at least one constraint somewhere in the system.

The theory of constraints tools

The theory of constraints provides a selection of tools to help implement the five focusing steps. The main ones are as follows.

Current reality tree

This gives a bird’s eye overview of the current situation. It is used to identify the most pressing constraint.

Future reality tree

This shows the desired situation, that is the situation with the constraint removed.

Evaporating cloud tree

This tool helps evaluate potential improvements. It is used when there is more than one possible approach to exploiting or elevating a constraint. Essentially it provides insight into the pros and cons of each approach.

Strategy and tactics tree

This is the plan for getting from the current reality tree to the future reality tree.

The theory of constraints in accounting

The theory of constraints essentially flips traditional accounting on its head. Instead, it advocates an approach known as ‘throughput accounting’. 

In throughput accounting, throughput represents revenues generated through sales. Inventory is seen not as an asset, but as a liability tying up money that could be used elsewhere. Operating expenses are the expenses involved in converting inventory to throughput.

The theory of constraints benefits

The main benefit of the theory of constraints is that it improves working efficiency. This enables a business to maximise its output capacity if it chooses to do so. Even if it doesn’t, it helps to minimise costly downtime and potentially wasted resources. 

How we can help

If you’re interested in finding out more about the theory of constraints, then get in touch with the financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.