Over the last 20 years, globalisation of economic activity has greatly intensified competition between manufacturers and this intensification has led many of them in search of new and innovative ways to increase their competitive edge. Constraint management (also known as TOC : Theory of Constraints) was one of the new systems that were introduced to help firms improve on their competitive standing. Furthermore, as the world advances, time becomes an even more important factor to companies. Customers demand shorter lead time and the window in which companies can launch a new product and capture market share is getting smaller. With TOC, it focuses not on input nor on output, but throughput - the rate at which the system makes money. Thus reduction in the time to manufacture and ship a product translate into faster throughput and higher revenues.
The theory was first put forward by Eliyahu Goldratt who set out to solve seemingly intractable problems in production scheduling.
Simply put, the fundamentals behind the Theory of Constraints is that constraints determine the performance of any system and thus managers should focus on managing the constraints in a system rather that cutting costs. We will discuss this in detail later in the article. Next, we will attempt to compare TOC with respect to other cost tools e.g. Absorption costing, Activity based costing (ABC), Contribution margin analysis and etc. We will concentrate on ABC and contribution margin analysis, as these are popular cost techniques that are used and are also covered in out course. Finally, we will then look at the implementation issues that are associated with TOC
The Theory of Constraints.
TOC is a systems-management philosophy developed since the early 1980's and it emphasizes that constraints are the ones that limit the performance of a system. Thus, to significantly improve...