Focus and Leverage Part 67

One of the most important teachings from the Theory of Constraints is the concept of constraints in general.  While many times the constraint is internal to companies in the form of a physical constraint, sometimes the constraints are in the marketplace.  That is, the company’s capacity is higher than the demand placed on the process.  This is the subject of this blog posting along with what can be done to break this type of constraint.

Marketplace constraints come about simply because the company has no competitive edge.  That is, they are unable to differentiate themselves from their competition.  So how can a company differentiate themselves?  Quite simply there are four primary factors associated with having or not having a competitive edge.

1.      Quality

            2.      On-time Delivery
            3.      Customer Service
            4.      Cost

Let’s explore each of these factors in a bit more detail.

Quality, in its most basic form, is a measure of how well a product conforms to design standards.  It’s clear that Japanese manufacturers like Toyota and Honda and yes, Ford, are the world’s recognized leaders when it comes to producing the highest quality products, but it’s also clear that this wasn’t always the case.  We all know the history here when Dr. Deming went to Japan and taught the Japanese how to become competitive.

The secret to becoming quality competitive is first, by designing quality into the products, second, the complete eradication of special cause variation, and third, developing processes that are in control and capable.  It’s not rocket science, but so few companies focus on these three success elements for creating products and services that differentiate them in the marketplace!  So if you want more orders, the first step is to distinguish yourselves from the competition from a quality perspective.

On-time delivery requires that you produce products to the rate at which customers expect to receive them.  This means that you must have product flow within your facility that is better than your competition.  We’ve discussed ways to accomplish this in previous blog postings, but the basics involve focusing on and improving the physical constraint that exists within your facility, removing wasted time within your processes (both physical and non-physical), eradicating things like down time, quality problems, variation and all of the other things that cause your processes to be inconsistent.  It also involves reducing unnecessary inventory that lengthens cycle times and hides defects.  You must create consistent, reliable processes that don’t impede your ability to produce and ship on time.

Customer service simply means that you are responsive to the needs of your customer base.  Customers must feel comfortable in the fact that if their market changes, their supply base will be able to change right along with them.  If the customer has an immediate need for more product, then the supplier that separates themselves in terms of response time will become the supplier of choice.  This means that your manufacturing lead times must be short enough to respond to the ever-changing demands of the market.  This only comes by creating processes with exceptional flow through constraint optimization and subordination of the other steps to the constraint.  It’s important to remember that the greater the amount of work-in-process inventory, the longer the lead time to produce.

Cost is perhaps the greatest differentiator of all in a down market.  But having said this, low cost without the other three factors in place will not guarantee you more orders.  Low costs are only achieved by removing waste and unecessary operating expense within the company.  In order to be the lowest cost provider in the marketplace, companies must clearly manage all parts of the business.  The quality of the products must be superior with little scrap and rework.  The quantity of raw materials must be low enough to minimize the carrying costs.  The amount of labor required to produce the product must be optimal with little or no overtime.  The cost of expedited shipments must be minimized.  All of these factors and more make up the cost of the product or service.  If the costs are less than the competition, then cost can be a differentiator, but not without the other three factors, quality, on-time delivery, and customer service.

Before we leave cost as a differentiator, let’s talk about how cost can be used as a differentiator from a different perspective.  In one of my blog posting I talked about Throughput Accounting and in that discussion we talked about how we can use reduced profits to enter new markets.  We defined Throughput as Revenue minus Operating Expense which is the definition of profit and as long as the result is a positive number, then there is profit.  So then, one way to use this concept, especially when trying to enter new markets, is to reduce the revenue portion of this equation by lowering the sales cost.  Some will argue that this may create a price war with the competition, but in most cases it will generate new orders to utilize the excess capacity.  Think about it, if you have excellent Quality, On-Time Delivery and Customer Service and now you have the lowest cost, then more sales will come your way.

Bob Sproull