Constraints aren’t your enemy—they’re your friend. If you want the most bang-for-buck for your effort, despite the connotation of the word constraint, it’s precisely at that place you’ll find the leverage you’re looking for.
[ Listen to audio version, read by David Hodes]
Making a claim about leverage and the constraint is the equivalent of the Zen master’s mantra that the obstacle is the path. But of course, a constraint only exists once we have defined the system we’re analysing and have nominated its goal.
So what exactly is a constraint? Most simply put, it’s what stops you getting more of what you want—say, vehicles sold for an auto manufacturer, revenue per available seat kilometre for an airline, or rocks on ships for a mine. But is that what these organisations really want? I think not.
As per our universal goal statement for commercial enterprises, what we want as investors is a sustained, competitive return on investment. Everything else, whether cars, planes or rocks, are how we achieve that outcome. In our passion for the domain in which we work, it is common to lose sight of that which makes our continued learning and growth in that domain possible. So, best we pay attention to that which determines whether or not our shareholders will continue to invest, which is making more money, now and in the future.
Before we examine the ‘now and in the future’ aspect of what we nominate as the goal of our system, it’s worth analysing that system at low resolution, from the 40,000-foot view. If we’re asked to find the constraint, we should establish if it is in one of three key locations in the value chain. Is it a problem with supply? Is it a problem with our ability to make or manufacture? Or, is it a problem with the market? After all, a constraint is, in business terms at least, an indicator of the relationship between supply and demand. If there’s no pressure here, there’s no constraint.
Before commencing our analysis, we must think of our systems as extending beyond just the boundary of our organisation. We need to look deeper into how we interact with our suppliers, where their bottlenecks are, and deeper again into their suppliers. Equally, we must understand not only our customers but also how we might mitigate their customers’ constraints through our actions with them. Increasing flow across the whole value chain is a surefire way to embed a competitive advantage that’s not easily replicated.
Many years ago, I was on an assignment with a manufacturer of steel tube and pipe. There was a global shortage of the rolled steel they used as the primary raw material going into their final product. This was an example of a supply-side constraint. They had to make some pretty tough choices about which customers they would serve in full, which ones they would ration and which they would drop altogether.
“Increasing flow across the whole value chain is a surefire way to embed a competitive advantage that’s not easily replicated.”
Between 2007 and 2014, other than a small blip of softening demand caused by the global financial crisis, it was an excellent time to be involved in the expansion of iron ore mines and their associated rail and port facilities. In one of those years, I recall they enjoyed a 70% price increase. If you were a steel mill, you’d undoubtedly be feeling the supply-side pinch. But for the miners, the constraint was clearly in the ‘make’, or production, part of the value chain.
Not long before I started writing this article, I made my first airline reservation since the beginning of the first Covid lockdown, over eight months ago. You would not want to be in the airline industry after the demand for their services has so precipitously collapsed. Clearly, the constraint in this case is squarely located in the market.
Let’s take a deeper look at the three areas, starting with the supply-side constraint. As with all constraints, they may arise because of the physical limits of the system, or because there is a bad policy in place. In the steel tube and pipe example, it was clear that the limits on production were a function of the physics of the plant, and everyone across the supply chain felt its effects.
But what about an example from the world of policy? A process plant I was involved with relied on coal from a nearby colliery. The management of the plant thought it wise to put heavy pressure on the supplier to keep prices low, as energy was one of the highest costs they had in refining their product. The trouble was that the refinery was the only customer for the colliery as, once they factored in transport, their coal became uncompetitive against alternative energy sources, such as gas. In a classic example of the system archetype of the ‘accidental adversary’, the colliery was barely breaking even, and thus had no profits to fund an investment in maintaining their assets.
When deliveries were repeatedly late, and the mine was unable to produce at a rate required to sustain refinery production, the purchasing department finally understood the foolishness of their organisation’s pricing behaviour. The consequence for the plant, in terms of lost throughput, was far higher than the cost of any reasonable price increase.
Iron ore has been a long term behemoth of Australia’s economic prosperity. In the days of the boom, the big mining houses invested billions of dollars, year in and year out, expanding capacity to meet demand. In simple terms, the investments went into the three major parts of the supply chain successively: mine-rail-port. There was a long-term plan which set the goal of how many tonnes they wanted to ship each year. They were deliberate in ‘finding’ the constraint—indeed, declaring it.
It was never the case that they thought of a perfectly balanced supply chain, with equal tonnage dug out the ground, railed the hundreds of kilometres to port and then loaded on ships. Knowing which of the three interlinked components of the supply chain determined how many rocks you could safely and reliably load on ships determined how they designed and built the other two and, furthermore, how people, processes and technology supported that proposition.
What about aviation, then? Before Covid and the shutdown of all domestic and international flights, there was a fascinating question to be answered when looking to find the constraint. Ordinarily, you might think that the major asset, the aeroplane, or ‘tail’ as they call it in the business, was what you would focus on. I had an assignment, in fact, to see what we could do to use Critical Chain Project Management to decrease the turnaround time (TAT) for major maintenance events as well as improve the reliability of promised date for return to service (RTS). The shorter the TAT, the greater the availability of tails in the fleet, the less the likelihood that unplanned breakdowns would disrupt the airline schedule.
Passengers hate nothing more than late departures and arrivals, and every airline is measured publicly on its On-Time Performance (OTP). But, based on our early results, we could see that we would be able to provide ‘free’ tails to the fleet, meaning that even taking into account unplanned events, there was spare capacity that could be deployed to improve overall OTP. Once this capacity buffer was in place to protect the market, there would be yet more capacity, begging the question of what to do with it. Sell the surplus tails? Open up new routes? Nothing?The constraint would move under these circumstances, whether or not management acknowledged that fact.
“With a vaccine on the horizon, airlines will be asking:
‘Where do we want the constraint to be?’ ”
Conceptually, the constraint would move into the market. Were there enough slots at the airports we wanted to fly to? Were there enough passengers to fly on any or all of those flights, if we were to get additional slots? Were there any new routes we could open up which could profitably use the capacity we found? It may take a long time to get back to the circumstance when we again ask these questions. Indeed, many airlines have cancelled orders for new planes and have their tails parked in the hot central Australian desert in Alice Springs. But, with a vaccine on the horizon and a return to a new normal with local and international travel, airlines will once again be asking: ‘Where do we want the constraint to be?’
Let’s give a final thought to an example of looking through your constraint and deeper into the value chain to establish the overall constraint. On an assignment for a global confectionery company, we looked at the value chain associated with their moulded chocolate lines. If we restricted our assessment to the production facility, it was apparent to everyone that the moulding machine itself determined the number of slabs we could make per shift.
There was more than enough capacity for mixing, wrapping and packing. In fact, they had recently completed the commissioning of a new moulding line for an investment of twenty-five million pounds. With such a large investment, the production team wanted to maximise the efficiency of the plant, producing big batches of different products and avoiding downtime for washups and changeovers. This approach, however, meant that running through the cycle of all the products would take a month.
Now, the retailers who sold the product had two essential measures: Gross Margin Return on Capital (GMROC) and Gross Margin Return on Space (GMROS). The first measured the velocity of the contribution from their investment in stock; the second tracked the return they were getting for the finite shelf space available to the store. In this way, they could measure one product or category against another and determine which one gave a better ROI for their twin constraints of space and money.
We did the numbers to demonstrate to the ops team that the business would be far better off if they made smaller batches and replenished more frequently. Paying heed to optimisation of washouts and setups wasa furphy. The rapid relenishment strategy had the effect of delivering a far better GMROC and GMROS to the retailer and even allowed us to secure a better price as a result. The bottom line? You can often make more by thinking about your customer’s constraint than by trying to optimise your own.
Finding the constraint may sometimes be obvious, but certainly not always. And it frequently requires the team to test their assumptions around the goal and consider various pressures on the customer and supplier side, as well as within their own operation. But, once you’ve designed the constraint into your system, rather than playing whack-a-mole from week to week, you can quickly gain leverage. Next, it’s time to optimise around the constraint you’ve defined.
This is Part 3 of our series on The 5 Step FOCUS.
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