Theory of Constraints vs. Lean Manufacturing

Updated: May 11


Lean and Theory of Constraints: Same Objectives but Different Approaches.

There is much said and much written about the two management approaches, Lean Manufacturing and Theory of Constraints (TOC).

In this article we want to make a comparison between them, highlighting the core concepts, the differences and why we believe TOC – despite being less known – is superior to Lean.

Let’s first try to figure out what are the objectives of the two approaches and what do they have in common and where they differ.

Lean and TOC try to balance the material flow within the shop floor

They both come to the conclusion that balancing the flow of operations is a core condition to avoid growth of uncontrolled inventories. Balancing the flow means to adjust the pace of every operations so that the entire systems produces exactly what is in demand, limiting the amount of inventory introduced in the system.

Lean tries to achieve this objective by controlling the flow with a specific manufacturing lay-out (line or cellular manufacturing) and with the Kanban Scheduling System, an approach where the production flow is pulled by the demand that comes from the market first and thus by downward operations, with the use of the Kanban signals. A Kanban card is a signal that an operation releases when it withdraws materials from inventory (the Supermarket). This signal is released to the upfront feeding operation to start producing the exact quantity of materials indicated by the Kanban card to restore the quantity in the Supermarket. Because of this approach the flow and the amount of WIP in the system is controlled by the number of containers, each having its Kanban card.

Theory of Constraints tries to achieve this objective by regulating the entire flow around the DRUM beat dictated by the Constraint, the weakest link within the operations, and subordinating the schedule of any other non-constrained resources to such beat. Ideally the material release information is like a ROPE that connects the constraints to its upward feeding operations. The ROPE informs about the quantity of materials to be released with the objective to maintain proper TIME BUFFERS in front of the constraint, to avoid it goes idle. Due to this mechanism, the entire scheduling approach is called DRUM-BUFFER-ROPE.

TOC and Lean disrupt the common and traditional measurement and accounting system

Let’s have first a look to traditional performance and accounting system.Traditional accounting is dominated by the “cost focus”, as it strives to allocate all manufacturing costs to the product with full costing approach. On top of direct material, that are allocated to the products based on the parametric – and direct – consumption, full costing allocates to products also the other manufacturing costs (conversion costs) in proportion to the time (set-up and run time [1]) each product absorbs at each work-center operations.

The most important implications of this approach are:

  • It assumes that time drives costs: the longer the operations time, the higher the portion of costs allocated to the product. A 500 items batch for product A that absorb 2 hours of set up and 4 hours of run time costs two times a 500 items batch of product B that takes 1 hour of set up and 2 hours of run time. At a superficial glance it makes common sense, but it is not so true.

  • Conversion costs absorbed by products that are in the system still in the form of inventory – work in process or finished goods – will be suspended to inventory as well.

What is wrong here are the implications of this measurement, as they are both incentives to produce more inventory:

  • to lower the incidence of set-up costs, the tendency is to launch greater batch to spread them over a higher number of items;

  • as inventory is accounted as an asset, the more inventory is built the more profit flows into the P&L. Keeping resources idle, generates only costs, while activating them to building inventory generats profit.

What traditional accounting doesn’t capture here as a direct and evident relationship is that more inventory will traduce in:

  • higher carrying costs (to storage, handle and manage this inventory);

  • obsolescence costs if such inventory cannot be sold (e.g. launch of a new product)

Let’s now look how both Lean and Theory of Constraints disrupts that principles, first of all considering Inventory a waste, a form of liability rather than an asset. Let’s look why:

  1. Creating more inventory than needed means that more material than needed is released to the shop floor (by launching batch greater than necessary to reduce the set-up costs or by releasing material for batches not in current demand)

  2. Having bigger batch means having longer lead times

  3. Longer lead times with more batches than needed in the shop floor means more traffic jam in the system and longer inter-operational times (queues and wait time)

Queues and wait time are the main cause of variability and fluctuations in the manufacturing environment:

  • higher statistical fluctuations in the flow;

  • less capacity available to recover the problems;

  • deterioration of service level;

  • less control of the process;

  • higher need of management time and supervision.

This lead to higher accumulation of WIP that in turns causes a further increase of lead time: a sort of deadly spiral.

In short, Lean and TOC, in their effort of optimizing the process flow, goes exactly in the opposite direction:

  • they push for the reduction of batch size in order to reduce lead time, as shorter lead times means shorter queues and better flow in the system;

  • they do no allocate conversion costs to the product so that to eliminate any incentive to create more inventory and avoid distortions as more set up = more costs. As-soon-as to do more set up it's not necessary to hire resources or pay for overtime, the additional set-up does not add a dollar to the operating expenses.

For Lean and Theory of Constraint, the optimization of the production flow within the entire system is king, and to achieve this objective they are ready to subordinate any local optima and local efficiencies:

  • reducing to minimum the number of set up is not the system goal, so smaller batch and additional set up allow to optimize the flow, the flow has the priority

  • keeping all the resources 100% productive is not the system goal: if the demand requires for certain workcenter to operate at 70% while other are at 100%, no reason to create excess inventory to push at 100% the other resources

Let’s now look where the two systems, despite the common leading objective, presents the most important differences.

A different tension towards the ultimate goal

Both Theory of Constraints and Lean put the accent on the need to have a smooth operations flow. Why? What is the ultimate goal of it? Here lays a first slight difference.

No doubt that for Taiichi Ohno the ultimate objective of Lean was to make Toyota more competitive and more profitable, and thus his efforts to improve the flow in Toyota Production System were subordinated to this objective.

But we may argue that - after Toyota - the way Lean has be translated, conceptualized and been interpreted and implemented so far, has moved the focus mainly on the optimization of the value stream by eliminating any form of waste and reducing variability, losing its strict connection with the maximization of flow to maximize profit.

In other words, in many lean implementations, the focus on 5s and Kaizen blitz has moved on optimizing operational expenses, to reduce cost of the products and eliminate operations that does not add value into the eyes of the final customer.

TOC instead reveals a bolder conceptualization of its goal. The Goal – the ultimate objective of the organization – is to maximize Throughput,

"Throughput is the rate at which the system generates money through Sales [...] If you produce something, but don't sell it, it's not Throughput." Says Jonah to Alex Rogo in The Goal [2]

Such objective is extremely clear: more money - through sales

Throughput margin (T) is defined as the value of sales less the True Variable Costs (TVC) to make that sales happen (direct materials, transportation, sales commissions in general). Any sales whose price is higher than TVC generate positive Throughput

How does a company create its throughput?

  • by converting Inventories (I), “all the money that the system has invested in purchasing things that it intends to sell” [2];

  • By incurring into Operational Expenses (OE) to pay the capacity and the capabilities needed to convert those inventories into sellable products.

Throughput is the core objective and is the priority one of the measurement system. Any action and improvement should be evaluated in terms of impact on throughput.

Inventories is a form of throughput withheld in the system waiting for further processing, and they are the second priority of the measurement system, as the lowest the level of inventory the less amount of money invested to generate throughput and because excess inventory generate additional operating expenses.

Operating expenses is the third priority, as there is no value of squeezing operational expenses if they do not help achieving more goal or, worst, if they put at risk the ability to grow throughput.

Differences in balancing the Flow

Both TOC and Lean aim at balancing the flow but they do it in a very different way. What is the core difference of the two approaches?

With line or cellular manufacturing and with Kanban system, Lean tends to balance not only the flow but also the capacity used to produce that flow. For that reasons Lean requires a certain level of STABILITY:

  • Stability in the product: implementing Lean requires considerable amount of time to tune the flow. Fast changing products specifications and components requires continuous and huge redesign and tuning efforts;

  • Stability in demand and Load: as the amount of WIP is controlled by the Kanban and as production cannot be anticipated unless a Kanban is received, it does not allow to anticipate built of inventory to match with surging peaks of demand.

In other words, Lean is not really flexible to manage erratic demand.

On the other hand, TOC pursue a balanced flow WITHOUT BALANCING THE CAPACITY. The balancing is achieved with the Drum-Buffer-Rope scheduling whose purpose is:

  • To produce exactly what the demand asks (no more, no less);

  • To synchronize the entire flow at the pace of the slowest resource (the constraint) that dictate the pace and is the DRUM;

  • To protect and synchronize the flow sizing properly TIME BUFFERS in strategic locations (at the gateway, at the constraint and at converging operations);

  • To keep under control the buffers with the ROPE that governs the release of materials

To achieve this objective, TOC does not pursue a capacity balancing. Apart the constraint that should be kept at 100% utilization of its available time, all other non-constrained resources must subordinate to keep the pace at the constraint. Those resources shall keep a certain level of PROTECTIVE CAPACITY in order not only to feed the constraint at the pace it consumes materials, but also to restore buffers when they fall below their target level due to statistical fluctuation in the process (e.g. a batch that has to be scrapped due to quality issues; a delay from a supplier to deliver materials; an unplanned maintenance break, etc)

As the system has protective capacity and as the protection of the system flow is based on time buffers, TOC can adapt to any manufacturing environment, including Job-shop lay out typically adopted in MTO and ETO environments, that are characterized by higher fluctuation of demand and load.

In thus sense TOC is far more felxible than Lean.

It is not a surprise that Lean is less flexible and less adaptable to environments. We shall not forget that Lean is the result of an application studied and tailored for a specific productive system, to fit into a specific manufacturing environment (Toyota’s Environment): probably Ohno’s purposes was to maximize its Company outcome, without ambition to define a holistic model with a scientific method valid for all.

Theory of Constraints is the outcome of a scientific method elaborated by Dr. Eliyahu Goldratt, that aims providing a holistic framework and principles that can be applied to many industrial (and non-industrial) contexts. Instead of using a “physical” restriction to inventory like the Kanban, by using time-buffers it gives a much more flexible approach to regulate the flow, that is suitable to environments with low stability.

It actually provides the best result in such complex environments, characterized by job-shop layouts, producing high quantities of SKU and with lumpy demand.

For instance, Hitachi Tools Engineering Ltd, characterized by such kind of complexity, producing more than 20.000 SKU, implemented TOC and DBR principles in early 2000 and has achieved impressive results [3]:

  • OTIF from 40 to 85%

  • Reduced inventory from 8 to 2.4 months

  • Net profit increased from 1.1 Bns of Yen to 5.3 Bns Yen in 6 years

Recommendation

Many companies are attempting to introduce Lean in their organizations and many are failing. Not because Lean is not a good approach, but simply because it is an application for a specific context that requires to have in place the same or very similar conditions to be successful:

  • Stability of product, demand and load;

  • Line or cellular lay-out and product standardization;

  • Same cultural approaches;

  • Tight coordination with supplier and stability in the supplier relationship.

TOC, instead, being a more holistic approach, not designed for a specific environment, presents itself to be more flexibly adapted to different organizational context, assuring same or even more benefits than Lean itself.

TOC strongest advantages are:

  • It definitely generates a strong competitive advantage as it improves the ability to shorten lead times of 50% and more; improve dependability with customers, reduce inventories 50% and more and make more money that can be released to accumulate further advantage against competition.

  • It can be implemented very quickly, and it is possible to benefit its improvement in a very short timeframe (already in 2 / 3 months it is possible to achieve great results).

  • It does not require huge IT investments. It is, first, a management science and approach.

  • It introduces a new way of thinking that set the conditions to start continuous improvement processes naturally

Notes and Links

[1] Inter-operational time like Queues and Wait time are not take in account, assuming that those time does not absorb capacity costs.

[2] E. Goldratt and J.Cox - "The Goal - A process of Ongoing Improvement", 1984, North River Press

[3] Umble M., Umble E., Murakami S., "Implementing Theory of Constraints in a traditional Japanese manufacturing environment: the case of Hitachi Tool Engineering", International Journal of Production Research, Vol. 44, No. 10, 15, May 2006.


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