TOC- To improve Supply Chain with special emphasis

by Kuldeep Singh Malik

A Literature Review Of Theory Of Constraint In Performance Improvement With Special Emphasis On Supply Chain Management

Research Papers

Vector Consulting Group www.vectorconsulting.in

Abundant literature is available on the revolutionary theory of management known as “the Theory of Constraints” .It discusses the applications of this theory but in very few limited aspects of management. The present paper overcomes this limitation and broadens the scope of literature review by covering the latest studies including the studies conducted till March 2011.Although the paper highlights different applications of TOC in manufacturing, project management, ERP, integration of TOC with Lean, Six Sigma including 6TOC,specific applications in marketing, HRM, Product management, sales management, education field, restaurants, Healthcare, medical science, sustainable development E–commerce, Innovations management, Small business management, Enterprenership, Oil refineries, Airlines, and Banking sector Yet, special mention has been given on the recent studies of TOC based on distribution management and replenishments practices resulting in an increase in ROI, reduction in operating expenses, improvements in sales force performance, sales force productivity and range selling in FMCG sector. The present paper also highlighted the three level strategies i.e. Strategic, tactical and operational level planning of a TOC project. This paper can serve as a quick reference guiding tool for academicians, researchers and industry professional to gain insights into the TOC literature and applications to achieve significant improvement in manufacturing, services and not-for profits sector.

The TOC is a system's management philosophy developed by an Israeli physicist Eliyahu M. Goldratt. It took over two decades research, claiming that each system has at least one constraint, challenging current state of businesses practices and it's been inspired from root cause analysis. In his book, “The Goal: A Process of Ongoing Improvement”. Goldratt states that a firm's goal is to make money now and in the future. A company will not exist if it is not making money. Any activity that does not help make money is a waste of time and resources [The Goal, Goldratt].

1. Theory Of ConstraintsThe real inspiration of TOC came from Prof. Ishikawa's the Fish-bone analysis/ the root -cause analysis. It builds on the Lean philosophy of eliminating waste to cut costs and decrease production time ([38] Lori Ranson., 2010).In his book, “The Goal: A Process of Ongoing Improvement”. Goldratt states that a firm's goal is to make money now and in the future. A company will not exist if it is not making money. Any activity that does not help make money is a waste of time and resources ([15] Goldratt, 2004).Each system has at least one constraint that challenges the current state of a business's practices and its location can be in the market, resources, suppliers, knowledge and competence. In the absence of it, the system could produce unlimited amounts of profit ([31] Kuldeep Singh Malik., (2011).The identification and exploitation of constraints or bottlenecks remains focus of TOC to get closer and closer to fully attaining its performance objectives ([38] Lori Ranson., 2010). Although TOC has been praised as a beneficial theory yet the same has also been subject to criticism mainly by ([52] Paul Husby); 2007) on the ground of being complex to master, excessively using an "intellectual" language for problem-solving process , a strong need of a well trained experts for implementation and the top-down nature that discourages all team members.

2. Applications Of The Principle Of TOCThe TOC applications range from Project Management, Distribution, Production, Supply Chain, Financial Management, Marketing, HRM, Sales& Buy-In, Managing People, and Strategy & Tactics, Health care and Education sector .However, there are several other areas of TOC applications yet to be explored. In Project management, it has been discussed through Buffer management by Dr Goldratt and Fox in 1986, Dr Goldratt and Cox in 1992, Stein in 1996, Cox and Spencer in 1998, Goldratt in 1997 and Goldratt et al in 2000 and they found that Buffer management was the key to effective production scheduling. In Distribution, It involves the drum-buffer-rope (DBR) scheduling method, buffer management, and the VAT analysis through the TOC based measurements to make the system accomplish its goal of making money. TOC based Performance measurement includes operating measures (throughput, inventory, operating expenses) and local performance measures (throughput-dollar-days and inventory-dollar-days) ([68] Togar M Simatupang et al; 2004).The benefits of the TOC interventions in Distribution are mainly an increment in the sales volume together with the reduction in the expenses of a distributor/retailer in the distribution

Theory of Constraint's role in the success of IT with special reference to ERP

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network, reduction in the investments and hence, improvement in the ROI. The bottlenecks are tackled using automatic- replenishment method ([9] Cyplik P., Hadaś Lukasz, Domański R., 2009).In the Education field, Goldratt established a not-for-profit foundation named "TOC for Education" in 1995 with a goal to improve children's education by training them on TOC tools for better learning, thinking and communication skills. The academic institutions of Philippines, Malaysia, Mexico, Yugoslavia, Venezuela, United Kingdom, and South Africa are taking advantage of the TOC. In Malaysia alone, about 35,000 teachers and 650,000 students are being taught TOC. According to ([64] Smith et al;1996).TOC makes it easier to make sensible decisions in areas such as product mix, product pricing, capital investment and process improvement expenditures, and product addition/deletion decisions that are in alignment with corporate goals.

3. Literature ReviewAccording to ([71] Victoria J. Mabin: (2003), majority of books and items on TOC made claims like increased throughputs, reduced inventories and lead-times, which in turn would lead to higher sales, and improved profits, quality, and customer satisfaction. While, majority of the TOC applications involved the philosophy, operations management, DBR, and the constraint management led continuous improvement along with the Five Focusing Steps. The TOC applications in an FMCG sector has been discussed by ([31] Kuldeep Singh Malik, 2011), in the area of Supply Chain Management and significant improvements in the system has been presented .The paper also discusses the variable affecting the success of a TOC project. The variables most significant are the initial loss of sales due to changeover of the old system of replenishment to TOC based DBR, The loss of man days as a result of the sales force being trained of the job, 3) Resistance to change of the concerned entities, Training of 980 distributors, Sales officers, and 1698 salesmen of the company at the mass level covering over thousand distributors and salesmen. The paper describes the unique strategy adopted by the management to buy back the existing excess stock of retailers to start from scratch rather than awaiting for the stock to get sold. The need and challenges of monitoring the physical stock at retail by the sales force for each outlet to adhere to TOC guideline has been mentioned. Since the TOC generates data on replenishment and It has to be Managed by the less equipped sales force, which becomes a challenging issue in the success of a TOC project. Fulfilling of single piece orders by the distributors requires strong commitment levels. Training of the all retailers in their outlets by the company sales force on TOC without any formal arrangements suitable for training becomes a challenge to HR department.([31] Kuldeep S.Malik, 2011) discussed the TOC applications in distribution logistics in FMCG sector and explained how TOC can improve ROI of distributors and retailers leading to improvements in Sales force performance. This paper's strength lies in the TOC projects practical application described at strategic, tactical and operational level. The challenges narrated through a case study can serve a guide to top management, practitioners and TOC consultants while successful implementing TOC. The paper also discusses a survey of opinions of distributors and the company executives to gain buy-ins of all the entities concerned. ([32]Kuldeep S.Malik;2011) presented a unique combination of TOC and ERP called TOC-ERP which is suggested to make an ERP Project to achieve success during all the stages of an ERP project life cycles. The presentation of the paper in the conference covered the success achieved of the TOC-ERP in an Indian firm named Sheela Foam limited. In a study conducted by ([34]Kuldeep S.Malik,2011),a combination of TOC and Lean has been discussed and it has been revealed that the TOC-Lean combination is very powerful tool in which the weaknesses of Lean are covered into strengths and the combination leads a firm in achieving continuous improvements.([65]Seung-Hyun Rhee ,2010) discussed combination of TOC and BPMS and asserted that TOC improves the efficiency in a system by BPMS in heavy workloads.([41] Mahesh Pophaley, 2010) discussed the combination of TOC and TPM; and explained how the combination leads called “TOC-TPM” improves flow and Throughput, reduces OE and inefficiencies. The author studied An Indian plant that was already using the 5S, Kaizen, and Daily Management. In a study ([2] Amarpeet Kohli, 2010) implemented TOC in Restaurants and presented a case study on a small family-owned Pizza restaurant and presented the results achieved using the TOC's five focusing steps .The significant improvement noticed in Throughput,




resource utilization and customer satisfaction along with a reduction in Operating Expenses. ([43] Mariza Siller ;2010) used a TOC Project case study of a Mexican firm with one- piece production for on-time delivery.([1] A Ray ,2010) developed a unique TOC modeling and presented an Analytic hierarchy process (AHP). The study also compared the TOC, AHP and Integer Linear Programming models and concluded that AHP was the best among the three methods. TOC in Healthcare was studied by ([57] Roy Stratton ,2010) wherein the TOC based time buffer management was used to improve patient flow in UK hospitals using Jonah software and the results reported were reduction in length of stay over 20%, improvement in emergency and accident handling. In a case study presented by([6]Bernardo Villarreal ,2010) a Mexican firm was studied for handling agility using FMS and explained a scheme by ranking set-up reduction projects to achieve the Goal .TOC applications in small scale firms was discussed by ([40] Mahesh c. Gupta ,2010) and suggested 3 M frameworks for small fir owners with a new mindset of “Increasing Throughput rather than “Reducing Expenses”. In a study by ([60] Seonmin Kim, 2010) a literature review of TOC TPs was conducted to find the research gaps. The Compared TOC tools and their usages, by using TOC Evaporating Cloud and simulation and it was concluded that the level of WIP inventory and the protective capacity determines cycle time and throughput of the re-entrant line. TOC project and the critical chain methodology and simulations was used by ([26]John H Blackstone Jr , 2009) using uniform, triangular and exponential distributions. TOC and A3 reports were implemented by ([59] Satya S Chakravorty; 2009) in manufacturing operations of an Aircraft repair project the results were discussed using an exploratory study. The study highlighted the four phases of a TOC project with the help of A3 reports. The four phases are namely; 1) Preparation and training, 2) Process mapping and current state analysis,3) Process mapping and future state analysis and 4) Implementation and ownership. The role of TOC in innovation has been described by ([59] Michael A Dalton, 2009) wherein TOC lead innovation discovered bottleneck-the the constraint that is holding back the entire process. The Five focusing steps were used to eliminate constraints and move to next level with increased innovation throughput. The importance of a good implementer to reduced the perceived risk of failure has been discussed by ([25] John Fagan, 2009). TOC improved the efficiency and financial performance of the sick and inefficient shop owned by ([66] Tim Sramcik, 2009). The author asserted that Lean should not be partly applied in a business. It should be adopted throughout a business to gain its full benefits. An Exploratory study was undertaken by ([19]Frank Birkin (2009) in Nordic countries to identify business model for sustainable development and it was concluded that social context and the right management tools such as TOC were found to be critical for sustainable development. TOC applications in retail and supply chain were studied by ([49]Neetu Andotra , 2009) by comparing a firm practices and its customers' perceptions on supply chain links variables using survey based research and suggested some specific lot sizes in retail towards supply chain efficiency. ([67] Todd Creasy, 2009) said that 6 TOC as a combination of Lean and Six Sigma was proposed to avoid the organizational failures and a new method for buffers management at critical resources in shop floor control was proposed. ([54] R. A. Inman, 2009) empirically examined the relationships among TOC, expected results of TOC, and organizational performance by using a structural equation modeling and revealed the results in form of improved performance. The book “The Goal” was reviewed by ([56] Ronald S, 2009) using a fictional case study. It was asserted by ([7] Bob Sproull, 2009) that Lean and Six Sigma are important for success of TOC. It was discussed by ([44] Maria Z Ramos, 2009) that a TOC and Lean integration helps to create the right sequence of production on equipment. TOC application in mental health discussed by ([20] Gupta and Kline, 2008) and revealed that TOC could improve clinician efficiency and reduce waiting times in mental health care industry. TOC applications in banking industry has been study area of ([53] Richard A Reid, 2008) and it was revealed that TOC improved efficiency in banking system through the use of the five focusing steps and system control. TOC applications in marketing has been proposed by ([10]David Lavin ,2008) to satisfy customer demand with reliable delivery and rapid response and it was concluded that TOC helps to increase demand for products. An Empirical research on Inter organizational systems based on TOC has been conducted by ([50] Nitza Geri, 2008) in 139 firms in Israel. The proposed study explained organizations reluctance to implement IOS models and barrier found were lack of management support and uninterested




potential partners. It was suggested that TOC removes these barriers. A case study of a dynamic Expert system developed on the TOC was presented by ([22]I Rosolio ,2008) and the proposed system was implemented at an Oil Refineries in Israel. The model responds to dynamic bottlenecks and market constraint by linking production planning and operation control to maximize profits. A case study was presented by ([46] Mats Larsson, 2008) and the limitations of continuous improvement philosophies were discussed along with a proposal of the nine ways of increasing the system boundary. In a study of TOC and JIT by ([29] K J Watson, 2008) the impact of buffering was discussed under JIT and TOC and a simulation output suggested that TOC was better than JIT. ([3] Amitava Ray, 2008) developed an outsourcing model by combining the Hurwicz criterion, TOC and linear programming and with the help of a case study proved that the proposed model could maximize the product throughput. In a study of TOC & Technology ([4] Anton V. D. Merwe, 2008) presented limitations of TOC in providing opportunity cost and technology adoption decision scenarios. TOC and Inventory area was explored by ([27] John Mansuy, 2008) and it was revealed that TOC did not regard inventory as an asset. It was proposed to add inventory contra account to the balance sheet. TOC and healthcare were discussed by ([51] Noriaki Aoki, 2008) with TOC applications in medicine, diagnosis and treatment field. The study proposed physician executives to use the systematic thinking along with the three principles: 1). Total optimization 2) Constraints and 3) Policy-measurement-behaviour.TOC Literature was reviewed by ([42] Mahmoud M Yasin, 2008) and a field research was conducted. The field research revealed operational and customer related benefits as a result of TOC implementation and emphasized the need of systematic implementation, change management techniques, the total system and Benchmarking. TOC for Green Environment was discussed by ([28] Julie Lockhart, 2008) the role of TOC has been highlighted in the production of clean products with maximum benefits through a better mix of Earth-friendly products. TOC in E-Businesses studied by ([48] Narcyz Roztocki, 2008) and the paper explored TOC based Throughput Accounting (TA) using a case study of an on-line retailer and the TOC based TA has been proposed over costing for E-Businesses for operating efficiency and profitability. TOC and Six sigma has been discussed by ([52] Paul Husby, 2007) stated that Six Sigma lacks a value chain orientation and supply chain orientation whereas TOC has both these orientations. The author also discussed the limitation of TOC .The TOC language is tough to understand becoming a barrier in improvement efforts. TOC Replenishment and supply chain area has been explored by ([68] T.M.Simatupang, 2007) and studied a conceptual framework for TOC approach through supply chain collaboration. It was concluded that collaborative replenishment policy with Collaborative performance metrics helped in improving customer satisfaction in Supply chain. The quantification of replenishment by TOC and reverse logistics were given as the future research areas. The area of Supply chain management through replenishment has been discussed by ([72] Victoria J Mabin, 2007) with a case survey to ascertain the real impact of TOC for improving lead time, cycle-time, and revenue. The research indicates TOC is a source of competitive advantage for manufacturing organizations and proposed for commercial and for not-for-profit sectors. Goldratt & Goldratt, (2007) Considered that points of sale generally operate with shortage levels of at least 20%.The TOC distribution methodology decreases system stock (typically 50%),increase in sales (typically at least 20%),increases stock turnover (typically over 100%),decreases internal transferences between regional warehouses, decreases obsolescence (typically to less than 50%),Operational Expense kept approx the same and improvement in relationship between clients and suppliers.

Period Key Focus Areas

1980-90 Production, Throughput Accounting.1990-95 TOC TPs(Jonah certification)1995-97 Distribution, Marketing management1997-99 Project Management1999-00 TOC-Technology2000-07 TOC-Business strategy, TOC for Airlines management.




2007-09 TOC-JIT-Six Sigma-TQM-Lean2009-10 TOC--5S-TPM- Kaizen–FMS–BPMS2010-11 TOC in NGOs, E-Business, Environment, Healthcare, Retail, Sustainable Development.

The Theory of Constraints development in literature can be examined by drawing a parallel with Product life cycle. The Introduction stage (1980-90) of the Theory of constraints focused on Production and Throughput accounting and the TOC was considered as a software program only rather than a philosophy. During it, Dr.Goldratt himself was the pioneer in popularizing it across the world through his novels and books such as, The Goal, The race, and The Haystack Syndrome. The second stage, the growth stage further can be broken down into the initial tools based growth stage (1990-95) which marked an era of the TOC thinking process in which structured training and certification programs were developed that were riding high on the success of the success at the introduction stage. The tools developed at this stage were namely The Evaporating Cloud (EC) based on The Core Conflict (CC), The Current Reality Tree (CRT), The Transition Tree (TT), and The Future reality tree (FRT). The second part of the growth stage (1995-97) is TOC based Distribution, Marketing and logistics management. During this phase, several research papers and success stories exhibited how TOC was effective in reducing the Operating Expenses (OE), reducing the stock levels across the supply chain, improving Throughputs and reduce investment to improve ROI. The impact of DBR and the Dynamic Buffer Zones on inventory control was highlighted in several cases studies. The third part of the growth stage marked a beginning of using TOC in managing projects with the Critical Chain to ensure on time performance. The fourth part of the growth stage (1999-00) dealt with collaboration of TOC with ERP and other technologies. There is special mention of how TOC can help ERP project to achieve success throughout the life cycle of an ERP implementation. The book “Necessary but Not Sufficient” deals with same issue in this phase. The fifth part of the growth stage (2000-07) involves a focus on TOC application in business strategy and some highly specific applications in service sector e.g. Airlines management. In this period, TOC has been made popular using the TOC holistic approach through the eight video session released by the Goldratt School. The sixth part of TOC (2007-09) discussed TOC in collaboration with the other management philosophies of improving the system performance of an organization. The collaborations of TOC –JIT, TOC-Six Sigma, TOC-TQM and TOC-Lean have been discussed by several thought leaders like ([52] Paul Husby, 2007) on TOC and Six sigma. However TOC applications in the area of Supply chain management have been mentioned by([68] T.M.Simatupang, 2007),Goldratt & Goldratt, (2007) and ([72] Victoria J Mabin, 2007) .The seventh part of the growth stage of TOC philosophy (2009-10) again demonstrates TOC collaboration with several popular philosophies namely TOC--5S, TOC-TPM, TOC- Kaizen, TOC–FMS, and TOC–BPMS. The current year (2010-11) represents the latest stage of growth of TOC philosophy with discussion recent issues belonging to the new millennium. The notable work in this era deals with TOC applications in NGOs, E-Business, Environment protection, Healthcare management ,Retail sector, Sustainable Development, Banking & Insurance, small business management, Restaurant management, biomedical and engineering services, aircraft maintenance and repair operations, and innovation investment & leadership. The work of ([60] Seonmin Kim, 2010) on TOC and re-entrant lines using TOC TPs, ([40] Mahesh c. Gupta, 2010) on 3 M frameworks for small firm entrepreneurs, ([6] Bernardo Villarreal, 2010) on a case study of a Mexican firm for handling agility using FMS, ([57] Roy Stratton, 2010) on TOC in Healthcare to improve patient flow in UK hospitals using the Jonah software to improve in emergency and accident handling, ([1] A Ray ,2010) presented and compared the TOC, AHP and Integer Linear Programming models, ([43] Mariza Siller ;2010) discussed one piece production using TOC case study of a Mexican firm to achieve on –time delivery, ([2] Amarpeet Kohli ,2010) presented a case study on a small family-owned Pizza restaurant to improved Throughput, resource utilization and customer satisfaction with lesser OE, ([41]Mahesh Pophaley ,2010) and ([65]Seung-Hyun Rhee ,2010) studied the collaborations of TOC with TPM and BPMS respectively, ([34]Kuldeep S.Malik,2011) studied the combination of TOC with Lean to overcome the weaknesses of Lean to provide a powerful combination to improve business performance, ([32]Kuldeep S.Malik;2011) revealed that when TOC is used along with an ERP




implementation, TOC can provide support on human issues during all stages of the ERP project life cycle and ([31]Kuldeep S.Malik,2011) demonstrated through a case study of an Indian FMCG firm that how TOC can not only help a firm to reduce stock pressures at retail, distributors and CFA but also improve the Key Performance Indicators (KPIs) of the FMCG sales force including significant improvements in productivity and Total Lines Sold in Day (TLSD).

The Theory of Constraints development in literature can be examined by drawing a parallel with Product life cycle. The Introduction stage focuses on Production and Throughput accounting and it is a software program only rather than a philosophy. The second stage is tools based growth stage which marked an era of the TOC thinking with tools developed like The Evaporating Cloud (EC) based on The Core Conflict (CC), The Current Reality Tree (CRT), The Transition Tree (TT), and The Future reality tree (FRT). Later ,TOC based Distribution, Marketing and logistics management to reduce the Operating Expenses (OE), reducing the stock levels across the supply chain, improving Throughputs and ROI have been mentioned in the TOC literature through cases studies. The third part mentioned Projects management which later followed by collaboration of TOC with ERP and other technologies. The book “Necessary but Not Sufficient” remained the most significant work in this phase. Later, the focus of TOC shifted to application in business strategy formulation and service sector along with the audio-visual content developed in the form of eight video session released by the Goldratt School. The sixth part discusses TOC in collaboration namely TOC –JIT, TOC-Six Sigma, TOC-TQM and TOC-Lean. However TOC applications in the area of Supply chain management have been mentioned by several authors including Dr Goldratt himself .Later till the end of the present decade, TOC collaborations namely TOC--5S, TOC-TPM, TOC- Kaizen, TOC–FMS, and TOC–BPMS were highlighted. The first quarter of current year (2011) represents the latest stage of growth of TOC philosophy with discussion of recent issues & TOC applications in NGOs, E-Business, Environment protection, Healthcare management, Retail sector, Sustainable Development, Banking & Insurance, small business management, Restaurant management, biomedical and engineering services innovation investment &leadership. As per the authors' knowledge the recent study by ( Kuldeep S.Malik,2011) demonstrated a TOC case study in FMCG sector in the areas of distribution, replenishment and supply chain across retail and distributor points .The study stands unique to discuss findings of the opinion survey conducted on the distributors and executives of the firm prior to the TOC rollout and the associated improvements of the Key Performance Indicators and sales force performance management in a TOC environment.

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Kuldeep Singh Malik is Head of Research at .

Vector Consulting Group ( ) is the leader of ‘Theory of Constraints’ consulting in India. Vector has been working closely with some of the well known retail chains, FMCG, fashion products, custom manufacturing industry and auto after market companies to improve their overall profitability through supply chain effectiveness.

Kuldeep Singh Malik can be reached at

Vector Consulting Group

www.vectorconsulting.in

[email protected]


TOC- To improve Supply Chain with special emphasis

Business

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