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2015 TOCICO International Conference

Transforming Businesses Track

Christoph Lenhartz
General Manager
Catena Strategies

What is TOC? A Basics Workshop
September 7, 2015

While most business professionals and academics relate Theory of Constraints (TOC) to The Goal (a novel on managing production processes more effectively) and therefore a manufacturing environment only, TOC is far more than just a production philosophy.This workshop describes the evolution of TOC based on the business problems encountered and solved at each stage in its development, the TOC solutions redefined the focus and expanded the scope of the new system encompassed by the TOC philosophy. At each stage in the development of TOC, a new type of constraint was identified and Dr. Goldratt and others developed new tools for addressing this type of constraint and thus expand the scope of TOC. The TOC evolution starts with Goldratt’s recognition of the differences between and the role of constraints and non-constraints in a system modeled in the OPT software and as described by the OPT rules. For each roadblock in the development of TOC, the identification and illustration of the problem and its solution are provided. In chapter 1 of the Theory of Constraints Handbook, Goldratt describes TOC in one word: FOCUS (his definition is "taking the right actions”).

While The Goal wasn’t written until 1984, a passage on page 1 describes Goldratt’s approach to life and analyzing problems. This passage sheds light into Goldratt’s approach to problem solving::

The secret of being a good scientist, I believe, lies not in our brain power. We have enough. We simply need to look at reality and think logically and precisely about what we see. The key ingredient is to have the courage to face inconsistencies between what we see and deduce and the way things are done. This challenging of basic assumptions is essential to breakthroughs… Yet few have challenged this sacred cow directly. Progress in understanding requires that we challenge basic assumptions about how the world is and why it is that way. If we can better understand our world and the principles that govern it, I suspect all our lives will be better.

Goldratt’s journey in developing TOC started with a friend asking for help in scheduling his manufacturing plant which made chicken houses. Goldratt devised a scheduling algorithm based on the many bodied problem in physics. From this solution the OPT software was developed and the understanding of the difference between constraints and non-constraints. Over time he realized that the evolution of "all things being equal” and Pareto’s law describing an environment of independent resources where 20% of items cause 50% of impact didn’t model a dependent resource environment. Goldratt recognized that in complex dependent relationship environments .1% of resources provide 99.9% of the impact on system improvement. In other words, the more complex the resource interrelationships in a system the simpler the solution to improving performance of the system. Using this concept, Goldratt derived the few control points and simple OPT rulesrequired to plan, schedule and control various types of manufacturing environments (VAtI analysis). This method of planning and controlling operations clashed directly with the cost accounting concept of maximizing the use of all resources to reduce product unit costs.

Goldratt developed a simple accounting system, called throughput accounting, to determine whether an organization was truly making profits or not. Throughput, Inventory and Operating Expense replaced the dozens of revenue and expense classifications and created a simple methodology linking local actions to global financial results. The terms throughput world paradigm (its focus is making money now and in the future) and cost world paradigm (it focus is saving money everywhere) were coined to emphasize the conflict in decision making of TOC and traditional cost accounting. The first edition of The Goal (1984 with Jeff Cox) and The Race (1986 with Bob Fox) provided the new rules for manufacturing and accounting.

In 1989 Goldratt was asked to help develop a solution to scheduling projects and in studying this environment he realized that the constraint in projects was the critical path (better described as a critical chain). He thus renamed his management philosophy "Theory of Constraints” recognizing that bottlenecks exist in production and other types of constraints exist in other environments. Later he recognized that TOC applied to distribution and supplychains with cash (in the case of distributors, for example) and the number of customers entering a store being the constraint in retailing.

As Goldratt examined more and quite different environments he recognized the need for a robust tool to help identify the core problem of a system and any potential negative results in implementing a proposed solution. The current reality tree, the evaporating cloud, the future reality tree (and negative branch reservation), the prerequisite tree, and the transition tree were graphical logic tools developed and polished from 1989 to 1992 to identify: what to change, what to change to, and how to cause the change. These tools became known as the Thinking Processesand today are used extensively in analyzing not only business problems but in diverse environments such as the problems of prison inmates and school children in search of win-win solutions.

In 1994 Goldratt revised The Goal to consider market constraints more directly and to introduce the five focusing steps process. The introduction of drum-buffer-rope scheduling and buffer management (a process of on-going improvement) created significant reductions in lead time, improved due date performance, higher quality, and higher levels of throughput which allowed a manufacturer to have a decisive competitive edge. In different markets and for different product different decisive competitive edges were required. The use of the thinking processes to analyze and identify customer needs was introduced.

For the next decade Goldratt identified and refined solutions for the project environment production, throughput accounting, (multi-project), sales, marketing, human resources, distribution and supply chain, and business strategy. He launched the Goldratt Satellite Program in 1999 which provided solutions in each functional area. In hopes of providing a holistic solutionfor businesses.

The concept of an ever-flourishing organization replaced the goal of an organization being to make money now and in the future. Two necessary conditions were introduced: satisfy customers now and in the future and provide employees a satisfying and secure work environment. The redefining of the red curve versus green curve concept to an organization needing both the red curve (continued financial growth) and green curve (organization stability) provided the missing links for the foundation of holistic solutions for organizations.

While Goldratt introduced the concept of a strategy and tactic tree in a paper in the mid 1980’s, he did not fully develop the methodology until 2002-2005. The strategy and tactic tree provides a means of communicating across all functions and levels of management the synchronization of actions across functions to achieve the organization’s decisive competitive edge(s). Goldratt developed five strategy and tactics tree covering about 70% of industries: make-to-order (reliable rapid response), make-to-availability (consumer goods), projects, retailing, and pay-per-click.

CHRISTOPH LENHARTZ, MBA, Jonah, TOCICO-certified, Certified Consultant (bdvb), CDDP, is a Board Member and Past Chairman of TOCICO.

In over 20 years he has acquired a wide-ranging, international experience in industry, as a successful entrepreneur and also a leader of management consulting teams in high complexity TOC implementations. He has lead strategic, business transformation, supply chain management and IT projects and his expertise also includes post-merger integration of supply chain operations for major international groups.

One of the leading TOC and management experts in Europe he is the General Manager of Catena Strategies, a leading consultancy in operational excellence consulting based on TOC principles.

He has published articles on TOC and management topics in journals such as "Quality Progress” and has translated and written books on TOC and management topics in German. He is an appreciated speaker and teacher of TOC and related topics.

Christoph holds an MBA from Clemson University (USA), he graduated from the University Essen (Germany) as a Diplom-Kaufmann and has pursued post-graduate studies at Washington State University (USA).

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