Profit From Constraints

When having less provides you with more

By: Andrew Cooke, Blue Sky GPS

Operating in a tight and volatile marketplace is challenging, but it is also full of opportunity.  Companies often look at the constraints on how they have to operate and how they can accommodate this situation.  This is a reactive approach, which limits your opportunities and creates a problem-solving mindset i.e. everything is a problem, rather than an opportunity.

Here we look at a more proactive approach which can create opportunities for you.

The Power of Constraints

Constraints are those factors which restrict or confine you within certain boundaries; as such they limit or regulate your business, its operations and potential results.  Constraints exist at various levels including:

  • Economic – macro-economic effects that you have to operate within, for example the exchange rate, interest rates and the cost of borrowings, trade agreements etcetera
  • Governmental – legislation and compliance regarding working conditions and practices, subsidies, insurance, government expenditure and tax regimes etcetera
  • Industrial – those factors which affect your industry including the level of capacity, industry structure (from monopolies, concentrated to distribute), supply chains etcetera
  • Business – pricing, client retention rate, capacity, employees (number, skills, experience etcetera), number of competitors, level and quality of differentiation etcetera.

Some of these you can influence others you cannot.  But with all of them you have a choice on how to respond – even if your choice is to do nothing you still have made a choice.

These constraints provide an opportunity for you to develop you, your people and your business in adapting to and capitalising on them.

Defining the Correct Constraints

Before you can determine the opportunities you need to clearly define the correct constraints. Be careful not to state the objective or problem too much in the terms of current “legacy” solution to the problem. As Henry Ford supposedly said, “If I’d asked people what they wanted, they’d have said a faster horse.” So avoid defining the problem as “a faster horse” versus “a faster way to travel.”

Types of Constraint

A constraint is anything that prevents the system from achieving more of its goal. There are many ways that constraints can show up, but there are usually only a few underlying and root constraints.  These can be internal or external to the system.

  • An internal constraint – this is when the market demands more than the business can deliver. Here you look to remove those constraints, for example:
    • Equipment: The way equipment is currently used limits the ability of the system to produce more saleable goods/services.
    • People: Lack of skilled people limits the system. Mental models held by people can cause behaviour that becomes a constraint.
    • Policy: A written or unwritten policy prevents the system from making more.
  • An external constraint – this is when the business can deliver more than the market demands.  Here you focus on creating more demand for your products or services.

Andrew’s Four-Step Process for Profiting From Constraints

Step 1: Identify the Constraint

The first step is to identify your weakest link – this is the factor that’s holding you back the most.

Start by looking at the processes that you use regularly. Are you working as efficiently as you could be, or are there bottlenecks – for example, because your people lack skills or training, or because you lack capacity in a key area?

Look at where you see the problem and ask “Why?” up to five times (the Five Whys Technique) to get from the surface problem to the root cause.  This way you can address the underlying problem, rather than dealing with the surface issue, and avoid the problem re-surfacing later elsewhere.  If you have a number of weak factors then use Pareto Analysis (also known as the 80/20 rule) to identify which one, if addressed, will have the greatest impact.

Step 2: Manage the Constraint

Once you’ve identified the constraint, you need to figure out how to manage it. What small changes can you make to increase efficiency in this area and cure the problem, without committing to potentially expensive changes?  Your solutions will vary depending on your team, your goals, and the constraint you’re trying to overcome.

Step 3: Evaluate Performance

Now review how you are performing with the simple changes you’ve put into place. Is the constraint still causing problems? If it is, you need to do whatever you can to solve the issue.  You may need to look at further changes which may take more resources, time, investment or effort to further address.  For example, using a “Magic Wand” question can help achieve this (i.e. “If I could do anything to remove the constraint(s) and improve performance what could I do?”)  Look at the ideas created and then rank them according to suitable criteria.  This will stimulate a good discussion and enable further ideas to be developed, and the most suitable decision to be made.

For instance, do you need to invest in new equipment, outsource certain tasks, or take on more ?

Step 4: Start Over

Once you’ve eliminated the constraint, you can move back to step 1 and identify another constraint. This is an on-going process, not a one-off event, which allows you to continually improve and to address and pre-empty changes in the four areas (Economic, Government, Industry and Business) as they may occur.

So what are your constraints, your priorities and what do you want to achieve?  Work through this process for yourself and see what opportunities you can develop – you will be pleasantly surprised.

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Share your thoughts and ideas here, or email me at andrew.cooke@business-gps.com.au

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Click here to find out more about Andrew Cooke and Growth & Profit Solutions.

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