Theory of Constraints Handbook - James Cox Iii [335]
FIGURE 16-15 Exponential growth of First Solar’s annual Throughput.
Theory of constraints explains corporate actions
Management alluded a few times to using a “Theory of Constraints” in running the business. Theory of Constraints is a management approach introduced by Dr. Eliyahu Goldratt in 1984 that says organizations can be measured by Throughput, Operating Expense, and Inventory. The company’s acquisitions and other actions have been aimed at removing constraints throughout the solar value chain.
What follows is a description of this remarkable holistic application and implementation of TOC.
Theory of Constraints Contribution to First Solar’s Success
At the outset, TOC is one of a set of tools and approaches introduced to drive performance improvement in First Solar. The impact of TOC (and similar approaches) is determined entirely by top management’s attitude to change and its assumptions about limits to sustainable growth. It is only an enabler of extremely capable managerial skill and orientation. Although TOC started out as a set of Throughput-focused applications, TOC grew to become a business management philosophy embedded in decision-making at many levels in the company. Therefore, the key question that this case study serves to answer is “How does management turn a set of Throughput-enhancing tools into an embedded Throughput-driven culture?”
To appreciate the significance of TOC as a business management philosophy, we should place it in context of the 21st century global economic and business environment.
The advent of the Internet and the massive increase in the availability of information has made the world a much smaller and connected environment within which to conduct business. Any comparative advantage that a company may have has a much shorter and precarious life. In order to stay ahead, management is more pressed to drive continuous improvement faster and more predictably.
There is a very significant risk of applying resources to low leverage improvement opportunities, which may slow growth. You may recall Microsoft’s spectacular failure to grasp the impact of the Internet when Netscape became the dominant browser, only to have the error repeated when Google came to dominate the search engine space.
By truly understanding the constraints that limit growth and profitability, scarce resources can be focused on the most valuable points of leverage. First Solar top management deliberately and continually assess the internal and external business environments to identify the constraints to rapid growth and to focus the organization on leveraging those constraints.
Organizations that consider the inward focused, internal efficiency of individual resources to be the primary cause for success are frequently blindsided by changes in behavior of the large systems within which they exist.
Conversely, those that consciously, and with discipline, take advantage of such system changes are bound to be more successful in the long-term. TOC accomplishes exactly that. First Solar’s stellar success can be attributed also to the diligent analysis of internal and external system-level constraints.
Building the Foundation
Three aspects are crucial to elevate TOC from a defined toolset to a deeply embedded culture: Throughput World versus Cost World, the importance of systems and constraints, and the importance of a dedicated and motivated TOC subject matter expert.
Throughput World versus Cost World
This very subtle, but crucial aspect affects the entire organization.
Cost World companies are characterized by an inherently defensive mindset. There is a general feeling that the company always has its back to the wall. Expenditures are subject to prolonged scrutiny, employees are constantly in a