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What is Theory of Constraints?

During the 1980s Goldratt and Cox (1989) advocated a new approach to production management called optimized production technology (OPT). OPT is based on the principle that profits are expanded by increasing the throughput of the plant. The OPT approach determines what prevents throughput being higher by distinguishing between bottleneck and non-bottleneck resources. This approach advocates that bottleneck resources/ activities should be fully utilized while non bottleneck resources/activities should not be
utilized to 100% of their capacity since it would result in increase in inventory.
 
OPT is based on the principle that profits are expanded by increasing throughput of the plant i.e. rate at which raw material are turned into sales. The most widely recognized management accounting system developed for this purpose is known as throughput accounting (TA). The concept behind the system was first formulated and developed by Goldratt and Core (1986) in USA. Goldratt developed the concept and eventually gave it the name the Theory of Constraints (TOC). The theory was picked up and inducted into an accounting system in the UK where it is known as Throughput Accounting (TA).

The theory of constraint focuses its attention on constraints and bottlenecks within the organisation which hinder speedy production. The main concept is to maximize the rate of manufacturing output i.e. the throughput of the organisation. This requires to examine the bottlenecks and constraints which are defined was:
A bottleneck is an activity within the organisation where the demand for that resource is more than its capacity to supply. A constraint is a situational factor which makes the achievement of objectives/throughput more difficult then it would otherwise be. Constraints may take several forms such as lack of skilled employees, lack of customers orders or the need to achieve a high level of quality product output. Using above definition, therefore, a bottleneck is always a constraint but a constraints need not be a bottleneck. Let the customers due date performance i.e. meeting the delivery schedule for customers orders is the major constraint in the organisation. The bottleneck in such a case may be certain machine in the factory. Throughput thus related directly to the ability to cope with the constraint and to manage the bottleneck.

This focus on throughput forced management to examine both the constraints and the bottleneck in order to increase throughput.
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