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Theory of Constraints

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Theory of Constraints

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  1. Theory of Constraints • The Concept • The Process • The Measures STRATEGIC COST MANAGEMENT - BA122B - Spring 2005 Slide 6-1

  2. The Concept • Presented in Eliyahu Goldratt’s The Goal • The goal of a business is to make money…consistent with customer satisfaction • Continuous flow • Avoid the “herbies” • Eliminate the bottlenecks first STRATEGIC COST MANAGEMENT - BA122B - Spring 2005 Slide 6-2

  3. The Process • Identify the constraints • Exploit the constraints (reduce the bottlenecks) • Subordinate everything else • Elevate the constraints (remove the bottlenecks) • Reiterate the process STRATEGIC COST MANAGEMENT - BA122B - Spring 2005 Slide 6-3

  4. The Measures • Throughput - Net income • Inventory - ROI • Ops. Expenses - Cash Flow STRATEGIC COST MANAGEMENT - BA122B - Spring 2005 Slide 6-4

  5. Lou’s Moral Dilemma • What caused it? • How did he handle it? • How would you handle it? STRATEGIC COST MANAGEMENT - BA122B - Spring 2005 Slide 6-5