A business is a supply chain; it starts with an enquiry or request for information, moves through production and delivery, and ends with cash in the bank.

Just as the links of a chain work together to form a complete system that is capable of a certain carrying capacity, so too do the various departments of a company work together to generate throughput.

But the carrying capacity of a chain is not related to performance of all the links, but the performance of the weakest link. That weakest link is therefore the constraint on the total strength (or profitability) of the corporate chain. 

If each manufacturing section can process 10 units per day, but the transport division can only process 2 units per day, your company's actual "strength" is 2 units. Any additional units that you produce but don't deliver, means capital tied up in production costs.

If the weakest link determines the load bearing capacity of the entire chain. To double the load carrying capacity of our chain, do we double the strength of all the links, or should we focus our efforts on the one weak link? 

The obvious answer is also correct. Making the nine strong links even stronger does nothing to improve the performance of the chain. The one weakest link still limits the performance of the entire chain. 

Like the weakest link in the chain, every business is subject to at least one constraint that prevents it from achieving infinitely high profits. The weakest link in the process. 

Do such constraints exist? 

Do you know of any company that reports infinite profits? We need only look at the very finite profits reported by every company, to verify that indeed something exists that limits profits. That "something" is a constraint on company performance. 

Like the chain, improving throughput in all the departments of a company simultaneously costs money (increasing Operating Expense) and does little to improve the performance of the company as a whole. The constraint, the choke point, continues to limit performance. Therefore, our efforts and limited resources are used more effectively by identifying and improving the most serious constraint. 

Is cost reduction passé? Of course not. But it should certainly be viewed in context as part of a larger strategy to realize the company's goal, but not necessarily the most important part. 

With this kind of system level focus, the system's constraint can be precisely located, whether it resides within the company or outside of it (e.g., the market place). If the constraint is internal, it can be readily ascertained whether the constraint is physical (i.e. a machine, person, or facility) or a policy which inadvertently discourages improved Throughput. Efforts to break the constraint can then be applied without delay or distraction. 

However, as soon as that weakest link is strengthened to the degree that it is no longer the weakest link, there is by definition a new constraint which limits overall system performance. 

BUILDING EFFICIENT CHAINS 

How do you continually identify the constraint in your corporate chain, thus improving the speed at which your company makes money? 

There is a straightforward three step process that assists executives towards global rather than non-productive local improvement. 

1. Identify the system’s constraints 
2. Eliminate inefficiency from the constraint (but without spending money) 
3. Elevate the constraint - obtain additional purchased capacity. 

1. Identify the system's constraints

You need to understand what is really limiting performance. 

Identify the critical constraint is the most time consuming and difficult part of the process - it is easy to settle on a symptom rather than a root cause of a constraint, particularly if the root cause lies with management behaviour or a traditional method of operation. 

In a factory, the constraint is usually identified rather easily. It is the workstation with a mountain of work-in-progress inventory before it. Or look for the first workstation that is standing around with nothing to do - the first constraint is in the previous workstation (that doesn't however make it a critical constraint) 

Throughput is however more than just the production constraints, it is measured from the enquiry to cash in the bank. 

If our company were to produce at full capacity continuously, much of the goods produced would accumulate in warehouses - the buffer before the last work centre in our profit-generating system. What is that last work centre? It's the market, our customers. 

Customers are the most important link in the chain, because they are the one work centre that converts finished products to cash. Thus, if your company has excess capacity, then the market is the constraint. Often, the market is the critical constraint. 

Constraints can be around cash collection after delivery. Many companies focus on the most obvious constraints of markets (sales), production and delivery, but because the traditional accounts method records the invoice to the customer as the "end" of the process, the "throughput cycle" remains incomplete for another 120 days. This could triple the total rate of throughput! 

2. Eliminate inefficiency from the constraint

Before you spend any money (operating expense) squeeze every last drop of capacity out of the constraint. In other words, make fixing the constraint your company’s top priority. Proactively focus your organisation on effectively strengthening the weak link. 

If the market is your constraint, make sure that not a single sale is lost as a result of your own actions or your lack of action. Exploit the constraint of a workstation by diverting resources to the "weakest" link. We exploit the constraint on cash collection by focusing time and effort on getting cash into the bank. 

This holds true no matter what the constraint is. And if this means the Financial Director has to phone for the cheque, so be it. 

3. Elevate the system's constraint

Obtain additional capacity to eliminate the constraint. This differs from the previous step in that it comes from additional purchased capacity: buying a second machine tool, or implementing a new IT solution. It increases Operating Expense so you only elevate a constraint to this stage when there is no other viable way to eliminate the constraint with only the redistribution of current resources. 

At this point, the constraint will no longer be the "weakest link". There must, of course, be a new constraint. Go back to Step 1 and find the next weakest link that limits system performance, and then begin the process all over again. This is a crucial step, or you risk letting inertia stop the improvement process. 

Could the Theory of Constraints - the principle behind the Business Chain – improve the effectiveness of your business? 

InterComm offers “Business Chain” modules as part of our Strategy Workshops to guide your staff through the concept, as well as assist you to identify and exploit your critical constraints.