Theory of Constraints is a conceptualization by Eli Goldratt that focuses on the entire system level

process rather than individual processes. The underlying principle according to Goldratt is for a company
to achieve its goal, which is nothing but making money today and in the future. This is demonstrated
using throughput accounting which constitutes throughput, Inventory, Operating expenses. One
important deviation from convention here is that inventory is not an asset. It is not considered as
throughput until it is sold. He also suggests that allocating overheads and indirect costs is not significant
in decision making.

He views productivity as not increased output per labor or increased machine utilization but something
that brings a company closer to its goals. From an operational standpoint, Productivity of the firm can be
maximized by increasing the throughput while reducing both Inventory and Operating expenses. Thus,
profit of the company is dependent on effectively managing these 3 components.

Most manufacturing firms try to balance capacity across the process. However, this invites trouble due
to the cumulative effect of statistical variation of capacities. This might lead to longer idle times or
inventory build-up. Thus, capacities should not be balanced, instead effort to made to balance the flow
of products through the system.

A bottleneck is a resource whose capacity is less than the demand placed on it. A constraint is a process
that is limiting you from increasing your throughput. Goldratt explains that an hour saved at the
bottleneck adds an extra hour to the entire system, while hour saved at non-bottleneck is a mirage.

To achieve the above objective, the theory of constraints advocates focusing only on the constraint and
subordinating everything else to exploit that constraint and then elevating it. This process is repeated
again. A method to follow this design is the drum buffer rope system.

In the drum buffer rope system, the bottleneck is identified and a plan is created to ensure that nothing
stops the constraint from working at its peak utilization. The constraint is the drum which decides the
beats of the rest of the system. There must be a buffer inventory kept just before the constraint to
ensure that there is no stoppage. The non-bottleneck processes need not work all the time as this will
only cause inventory build-up. The work of preceding stages is decided by a rope. As soon as the
buffer inventory dips below a predetermined level, the rope indicates to the previous stages to start
production. In case the company can meet the market demand, it is also advisable to keep a buffer after
finished goods. This ensures that there is no overproduction and informs the constraint to start working
when this finished goods buffer starts depleting. There is no fixed way to recognize the constraint and
the amount of buffer to be kept. This can be derived from insights gained by actual observation. Also, to
ensure that bottleneck time is used efficiently, there should be a quality control just before bottleneck
so as to avoid wasted time of the bottleneck resource.

The chapter also has a note on Critical Chain Project Management which conveys that instead of having
buffer time at the end of each process, it would be more efficient to have a pooled buffer at strategic
point like the beginning or end of critical path. It also talks about the importance of pipelined projects
and dynamic buffer allocation in uncertain projects.