Theory of Constraints (TOC) and Supply Chain Management

Theory of Constraints (TOC) and Supply Chain Management
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 Theory of Constraints (TOC) and Supply Chain Management
Introduction
‘The Goal’ is a business novel that follows the journey of Alex, a highly educated and competent manager working at UniCo. Alex is transferred back to Bearington (his hometown) only to realize that the factory is facing a crisis that might lead to a shutdown. Among the problems were a growing production backlog, late shipments, and growing inventory (Goldratt, 1984). The team in the factory does not understand why timely, quality and affordable shipment of products is problematic. After a conversation with his old Physics professor (Jonah), Alex mobilizes his team to actualize some of the professor's thoughts with only three months to turn around the factory, of which the overall 'goal' is to make more and more money. Among the essential concepts that Jonah mentioned include operational expense, throughput, and inventory.
 At the time of Alex's arrival at the factory, it was facing a bottleneck along its chain of production. A bottleneck refers to the point of congestion in a system that emerges when workloads arrive quicker than they are processed, leading to congestion of workloads (Barone, 2019). Bottlenecks cause inefficiencies along the production system leading to higher production costs and delays in delivery. To get around the bottlenecks at the company, Jonah defines and relates the mentioned terms as follows. 
Operational Expense
Operation expense (OPEX) is an expense incurred by a business during business operations. Examples of operating expenses include, but not limited to, marketing expenditures, payroll, insurance, rent, equipment purchase, and inventory costs. A business can only make a profit if operational expenses do not exceed income. Such expenses are, however, not associated with the production process. Jonah argues that operational expense refers to the funds spent by the system to turn inventory into throughput. According to Jonah, managers should not worry whether a dollar is an expense or an investment. Rather, what matters is if the dollar not part of the final packaged product to be sold, then it is an operating expense. Installing robots in a factory, for instance, reduces labor costs, increases sales, and decreases inventory needed. In essence, measures that reduce operating expenses increase the profits and, therefore, works towards 'the goal' of making more money.
Inventory
 Further, Jonah defines inventory is the documentation of property held by a company. The property includes finished goods waiting to be sold, goods in the production process, goods to be consumed during the production process, and raw materials. At his new factory, Alex realized that the inventory was always on the increase, creating problems for the company's operations. High inventory levels have several disadvantages. First, higher inventories a symptom that a company is not selling enough to prevent the buildup of inventory (Kokemuller, 2017). 
 Often, the goal of any company is to produce and maintain enough inventory to sufficiently address immediate demands and, therefore, to avoid stockouts. Furthermore, holding excess inventory causes increased operational expenses. For instance, additional labor and space are required to manage such inventory. Other instances require such inventory to be insured for protection against loss and damage. Thus, Jonah argues that maintaining a reasonable inventory will help Alex's factory save funds and contribute towards making more money.  
Throughput
Apart from inventory and operational expense, Jonah also discusses the concepts around throughput. He defines throughput as the amount of material passing through a process or a system. Given the high inventory at the factory, Alex realized that the factory's throughput was not sufficient as it was growing on the back of product backlog and late shipments. In a factory, manufacturing throughput refers to the time required for a product to be converted from raw materials to finished goods (Johnson, 2003). According to Jonah, an increase in inventory is a sign of struggling throughput because the production process is marred with obstacles such as bottlenecks. Thus, an inefficient throughput is essentially money stuck in the system but cannot be realized in the company's income statements. Any measures that ensure an organization has an efficient throughput increases the organization's chances of making increased profits. This is the case for 'the goal' which is to accumulate as much money as possible after covering operational expenses.
Debt to Burden Ratio
 Given the factory's predicaments, one of survival is by accumulative dept that will help in moving the inventory and easing pressure on the factory's production process. However, the more the factory borrows, the more it reduces its ability to finance the piling debts since the factory's inventory keeps growing. Therefore, debt to burden ratio is among the financial ratios that determine a company's capacity to repay outstanding debts (Salman & Munir, 2012). It can also be perceived as the proportion of assets that have been financed through borrowing. A high ratio, therefore, implies that a company has more liabilities exceeding assets. Thus, a company with a high debt to burden ratio has a high chance of defaulting on its loans. Such was the case with the factory when Alex arrived to assume his managerial role.
 As mentioned earlier, the factory was running behind production schedules due to backlogs and late shipments. As a result, the inventory kept piling. The consequences, therefore, were that the factory was experiencing a reduction in sales with increased operational expenses. Staying afloat would require the factory to identify other sources of revenue, including borrowing from financial institutions. Even so, this would only solve the factory's temporary problems, while long-term predicaments would not be affected. For Alex, therefore, the solution to the factory's problems was within the factory and did not require extensive funding from external sources. The problems were in the bottlenecks that were present in the factory's manufacturing process.    Identification of Bottlenecks
As mentioned earlier, bottlenecks in a production l...