Applying the Theory of Constraints to Increase Economic Value Added: Part 1—theory

Abstract

This article, presented in two parts, explains how to apply the Theory of Constraints (TOC) in a business to increase Economic Value Added (EVA). The first part deals with the theory, while the second part deals with the implementation. The goal of a business, the measurements of the goal and the priority of the measurements are discussed. The future reality of a company which implements TOC principles is shown through cause and effect to lead to an increase in EVA. The increase i n EVA is caused by an increase in return on investment and a reduction in the cost of capital. The actions the company must take to increase EVA is presented.

Application of the Theory of Constraints for Continuous Improvement of a Production Process-Case Study

“…From the viewpoint of this article the most interesting usage of the method is the industrial engineering approach [13,14,15,16,17]. We can distinguish many types of constraints, for example [2,11,18,19,20,21,22]:…”

Applying the Theory of Constraints to Increase Economic Value Added: Part 2—implementation

“…By executing the actions to reach the intermediate objectives agreed to by the management of the company, the company has started managing through a holistic approach (management through the application of TOC principles). The company has then implemented the first action necessary to increase EVA described in [2].…”

“…Since the root causes are usually wrong policies and assumptions, it is very difficult for competitors to imitate the offering without understanding why these policies and assumptions are wrong. By following this process, the company implements one of the actions described in [2]: the company finds new ways to market its current offerings. Also, by understanding the market's perception of value, the company can create new offerings to satisfy that perception of value and therefore implement another of the actions described in [2]: the company expands its offerings.…”

“…When the segment goes down, the company shifts focus to the segments that are up. By segmenting its markets correctly, the company implements an action described in [2]: the company chooses market segments where the probability of a simultaneous downturn is small.…”

“…This article discusses the actions management have to take to manage the company according to the holistic approach of TOC. In the first part of this article [2], it is shown how to increase the Economic Value Added (EVA) of a company by applying TOC. It is specifically shown that the following actions must be taken to create the desired effect of increased EVA in the business [2]:…”