Maximizing Profitability Part 16

In previous blogs I focused on identifying the physical constraints in a manufacturing process and how to break them, but what if the constraint isn’t located inside the process? What if the constraint is policy related or something non-physical such as the efficiency metric? The next several blogs are going to focus on another part of the Theory of Constraints (TOC) referred to as the Logical Thinking Processes (TP). Dettmer [1] explains that, “Identifying and breaking constraints becomes a little easier if there is an orderly way to classify them.” Dettmer tells us that there are seven basic types of constraints as follows:

1. Resource/Capacity Constraints
2. Market Constraints
3. Material Constraints
4. Supplier/Vendor Constraints
5. Financial Constraints
6. Knowledge/Competence Constraints
7. Policy Constraints

Before we get into a discussion about the TP's, let’s first talk about each of these constraints and what they mean to us.

Resource/Capacity Constraints

This type of constraint exists when the ability to produce or deliver the product is less than the demands of the marketplace. That is, the orders exist, but the company has insufficient capacity to deliver. These types of constraints have been what we have been discussing since we started this blog series and why using the Ultimate Improvement Cycle (UIC) will increase capacity (throughput) to high enough levels. In fact, eliminating this type of constraint, leads directly to the next one.

Market Constraint

This type of constraint exists when the demand for a product or service is less than the capacity to produce or deliver the product or service. That is, the company has not developed a competitive edge to realize enough orders for their product or service. Market constraints come about simply because the company is unable to differentiate itself from its competition. So how can a company differentiate itself? Quite simply, there are four primary factors associated with having or not having a competitive edge as follows:

1. Quality – In its most basic form, quality is a measure of how well a product conforms to design standards. The secret to becoming quality competitive is first, designing quality into products; second, the complete eradication of special cause variation; and third, developing processes that are both capable and in control.

2. On-Time Delivery – This factor requires that you produce products (or deliver services) to the rate at which customers expect them. This means that you must have product flow within your facility that is better than that of your competition. As you now know, this involves identifying, focusing on, and improving your constraint. It also involves reducing unnecessary inventory that both lengthens cycle times and hides defects.

3. Customer Service – This simply means that you are responsive to the needs of your customer base. Customers must feel comfortable that if their market changes, their supply base will be able to change right along with them, without missing a beat. If the customer has an immediate need for more product, the supplier that can deliver will become the supplier of choice.

4. Cost – This factor is perhaps the greatest differentiator of all, especially in a down economy like we have now. But having said this, low cost without the other three factors will not guarantee you more market share. The good news is, if you are improving throughput at a fast enough rate, the amount you charge a customer for their business can be used to capture it. So as long as your selling price is greater than your totally variable costs, the net flows to the bottom line.

Material Constraints

This type of constraint occurs because the company is unable to obtain the essential materials in the quantity or quality needed to satisfy the demand of the marketplace. Material constraints are very real for production managers, and over the years they have been such a problem that material replenishment systems like MRP, ERP, and SAP were developed in an attempt to fix them. However, as you know (or should know) MRP, ERP, and SAP haven’t delivered the needed fix and as a result companies have spent millions of $’s needlessly, simply because these systems haven’t addressed the root cause of the shortages.

Supplier/Vendor Constraints

This type of constraint is closely related to Material Constraints but the difference is that suppliers are inconsistent because of excessive lead times in responding to orders. The net effect is that because the raw materials are late arriving, products cannot be built and shipped on time.

Financial Constraints

This type of constraint exists when a company has inadequate cash flow needed to purchase raw materials for future orders. Under this scenario companies typically must wait to receive payments for an existing order before taking any new orders. An example of this type of constraint is a weak accounts receivable process, whereby companies deliver products, but payments take long times to be received and posted.

Knowledge/Competence Constraints

This type of constraint exists because the knowledge or skills required to improve business performance, or perform at a higher level, is not available within the company. An example of this is a company purchasing robotics, but fails to develop the necessary infrastructure and knowledge to support the new technology. What typically happens is the equipment breaks down and remains down for extended periods of time thus losing needed throughput.

Policy Constraints

Last, but certainly not least, is the policy constraint which includes all of the written and unwritten policies, rules, laws, or business practices that get in the way of moving your company closer to your goal of making more money now and in the future. In fact, Dettmer tells us, “In most cases, a policy is most likely behind a constraint from any of the first six categories. For this reason, TOC assigns a very high importance to policy analysis.” [2] The most common examples of policy constraints include the use of performance metrics like operator efficiency or machine utilization where there is a push to maximize metrics in all steps in the process when in reality maximizing them in the constraint is the only place that matters.

In my next blog posting, we will begin to discuss the tools associated with TOC’s logical thinking processes and how to deal with these type constraints.

1 H. William Dettmer, Breaking the Constraints to World Class Performance, (Milwaukee, WI:, Quality Press, 1998)

2 H. William Dettmer, Goldratt’s Theory of Constraints: A System’s Approach to Continuous Improvement (Milwaukee, WI, :Quality Press, 1996)