Financial Data
Updated 26 Feb 2020

Stay profitable this quarter: Theory of Constraints in a nutshell

Every business has at least one weak link that limits it from getting more of what you want, which is usually profit. If making a profit is your main goal, your primary focus should be to identify where you lose profit. 

Heinrich van der Vyver, 16 November 2017  Share  0 comments  Print

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When we ignore weak links in our business systems, we effectively hamstring our success. In his book The Goal, Dr Eli Goldratt unpacks the Theory of Constraints (TOC) and how businesses can spot and improve weak links or constraints. TOC suggests that every system has a constraint that can be improved to increase capacity – and ultimately profitability.

But, what is a constraint? A constraint is anything that hinders throughput. Once it is improved, more throughput ensues, allowing greater potential for more profit. Let’s see how this theory could be applied in your business.

Step 1: Identify the constraint

First, identify the factor or aspect that is affecting you the most.

  • Most used / Most important: First, earmark the processes that you use the most or that are most important to your organisation.
  • Identify bottlenecks: Bottlenecks can be due to lack of skills, poor machine speed, or lack of capacity in a key area. What bottlenecks are causing delay in your most important processes (identified above)?
  • Map it out: Take a fine-toothed comb through your system process and identify potential constraints. If you have ERP software you will easily be able to identify these constraints, else use flowcharts or process diagrams.
  • Remember the non-manufacturing constraints: These could be restrictive company policies, a poor team attitude, union politics, and so on, and will also need your review.
  • Prioritise: A system can only have one constraint in review at a time. Identify which element is your absolute weakest link, and focus on just that. Only once that is resolved will the next area of weakness become the key constraint.

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Step 2: Plans for improvement

After you've identified the constraint, we need to see how to unblock it. 

  • Get real: What needs to be done to improve this weak link? Try to not be defensive in your thinking here - don’t be precious about anything that could be undermining your profitability.
  • System insight: Again, use your ERP system to identify the real issues behind complex problems to significantly streamline this process.
  • If / then: I find using ‘if / then’ scenarios help me to strategise here. For instance, if we implement a night shift, then I can clear my bottleneck in production.
  • Apply your changes: Start to implement the change accordingly. Use best practice to ensure the changes are adopted across the organisation, and carried out consistently. 

According to Goldratt, because the focus is on improving the weakest link only, and not the entire business, these changes should result in improvement after just three months of effort, and won’t use up a great deal of resources. 

Step 3: Evaluate and Measure

Look at how your constraint is performing now that the fixes have been put into place. Is there improvement?

  • Yes: If your changes have unblocked the constraint, you can revert back to step one and identify the next constraint within that system.
  • No: If the constraint is still slowing down performance, revert back to step two and try another approach to unblock this constraint. 

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Consider this: It is critical that you have the ability to measure improvements - otherwise how will you know if the constraint has been removed? A helicopter view of all stages of production via a planner or dashboard like BOS is key if you are to evaluate, and continue, the cycle of continuous improvement.

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About the author

Heinrich van der Vyver

Heinrich is the founder of QuickEasy Software’s Business Operating Software (BOS). BOS is a fully integrated operating system that makes information – and control – available to business owners. Integrating everything from quotes, sales, orders, production, purchasing, stock control and accounting, this robust system is deceptively simple to operate. “Our goal was to create business software so easy to use that a single click gives clarity into every aspect of your business. We have done this. Which means you can run your business from the beach, from your home or from anywhere you choose.” Operational clarity is control, and BOS offers that in spades.

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