Theory of Constraints Step 2: Exploiting the Constraint
In our blogs we mentioned the Theory of Constraints (TOC) several times. In short, it is an organizational change methodology with focused improvement of the organizational goal. The main idea of TOC is that every organization, or complex system, must have at least one constraint. If there was no constraint, then the organization would be able to generate unlimited goal units. “A constraint” is a factor that limits or constrains the organization from achieving more goal units. The goal of most “for profit” companies is to make a profit, provide a secure environment for employees, and satisfy the market. Theory of Constraints provides an essential set of tools that help to achieve the defined goal.
The Five Focusing Steps
The essential part of the TOC is called “The Five Focusing Steps”, where the key word is “FOCUS”. These steps are the cornerstone of the Theory of Constraints with its goal to grow profits through sales on the one hand, and control costs and eliminate waste – on the other. Speaking in terms of the TOC, this step by step methodology starts with identifying the constraint.
Step 1: Identifying the constraint.
In the previous blog we talked about the first step of the “Five Focusing Steps” in the Theory of Constraints and all the peculiarities that step encounters. The process starts with identification of the system constraint, as improvements to the constraint will improve the overall performance of the organization. Identifying the “weakest link of a chain” is challenging due to several reasons.
Step 2: Decide How to Exploit the System’s Constraint
Once the constraint is identified, it has to be decided how to EXPLOIT the system’s constraint. This is the second step of the “Five Focusing Steps”. By definition, “exploit” means “to make full use of and derive benefit from a resource”, which summarizes the goal of this step. But, the essential part of this step is the decision of HOW to exploit the constraint. At this point in the process, the decision of how to exploit the constraint must take careful consideration. The organization should consider what location within the system does the position of the constraint provide the most leverage for the organization. In this case, leverage can be defined as the use of the constraint to maximum advantage. Therefore, the company should strategically determine the location where the constraint creates the maximum leverage for the organization. Depending on where the constraint is identified in step one, and where the strategic position of the constraint should be, this will guide the decision making in the remaining steps.
How to exploit the constraint
Deciding how to exploit the constraint will be different based on whether the constraint is internal to the organization or external in the market. When the constraint is internal to the organization, it means that there is more market demand then there is capacity at the internal constraint. When the constraint is external, it means that there is more internal capacity then there is market demand. If the constraint is internal, and the strategic leverage point is external, the organization must decide how to increase the capacity of the internal constraint above the market demand. Determining the amount of protective capacity to create internally will depend on the amount of leverage that can be created in the market by a market offer. Hence defining all the necessary actions to create the necessary internal protective capacity.
Keep in mind, that even though it might make sense to move the constraint externally, the organization must also maintain control of the internal system. This is accomplished by identifying the internal control point that is the best place for managing and controlling the flow of work within the organization. The internal control point can also be defined as the capacity constrained resource, which is defined as the resource with the least amount of capacity of the internal value streams, but has more capacity then the market demand. Based on experience, there is certain criteria to consider when defining where it makes sense to position the internal control point. The criteria include:
- A resource where there is significant effort required to increase the capacity of the resource (effort can be defined as time and/or money)
- Convergent point in the flow (where multiple value streams come together into a single process, such as assembly operations)
- Divergent point in the flow (where multiple value stream have a common starting point, and then go different flow paths).
It is of great importance to understand that the constraint governs the productivity of the company as a whole. The decision on how to exploit the constraint is essential to understanding how to maximize the utilization of the best leverage point for the organization, which will lead to breakthrough performance results.
In my next blog, I will be discussing the third step of the five focusing steps: Subordinate everything else to the above decisions.
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