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Concept
Theory of constraints
Summary
The theory of constraints (TOC) is a management paradigm that views any manageable system as being limited in achieving more of its goals by a very small number of constraints. There is always at least one constraint, and TOC uses a focusing process to identify the constraint and restructure the rest of the organization around it. TOC adopts the common idiom "a chain is no stronger than its weakest link". That means that organizations and processes are vulnerable because the weakest person or part can always damage or break them, or at least adversely affect the outcome.
The theory of constraints (TOC) is an overall management philosophy, introduced by Eliyahu M. Goldratt in his 1984 book titled The Goal, that is geared to help organizations continually achieve their goals. Goldratt adapted the concept to project management with his book Critical Chain, published in 1997.
An earlier propagator of a similar concept was Wolfgang Mewes in Germany with publications on power-oriented management theory (Machtorientierte Führungstheorie, 1963) and following with his Energo-Kybernetic System (EKS, 1971), later renamed Engpasskonzentrierte Strategie (Bottleneck-focused Strategy) as a more advanced theory of bottlenecks. The publications of Wolfgang Mewes are marketed through the FAZ Verlag, publishing house of the German newspaper Frankfurter Allgemeine Zeitung. However, the paradigm Theory of constraints was first used by Goldratt.
The underlying premise of the theory of constraints is that organizations can be measured and controlled by variations on three measures: throughput, operational expense, and inventory. Inventory is all the money that the system has invested in purchasing things which it intends to sell. Operational expense is all the money the system spends in order to turn inventory into throughput. Throughput is the rate at which the system generates money through sales.
Before the goal itself can be reached, necessary conditions must first be met. These typically include safety, quality, legal obligations, etc.
Official source
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Industrial engineering
Industrial engineering is an engineering profession that is concerned with the optimization of complex processes, systems, or organizations by developing, improving and implementing integrated systems of people, money, knowledge, information and equipment. Industrial engineering is central to manufacturing operations. Industrial engineers use specialized knowledge and skills in the mathematical, physical and social sciences, together with the principles and methods of engineering analysis and design, to specify, predict, and evaluate the results obtained from systems and processes.
Inventory
Inventory (American English) or stock (British English) refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation. Inventory management is a discipline primarily about specifying the shape and placement of stocked goods. It is required at different locations within a facility or within many locations of a supply network to precede the regular and planned course of production and stock of materials.
Throughput accounting
Throughput accounting (TA) is a principle-based and simplified management accounting approach that provides managers with decision support information for enterprise profitability improvement. TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting.