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The Theory Of Constraints For Small Businesses

The Theory of Constraints (TOC), as originally developed by Eliyahu Goldratt and introduced to the world in the business novel “The Goal“, has produced some remarkable successes in big companies, showing huge improvements in the three main measurements:

  1. More Throughput (T) – this is effectively increasing sales less the direct cost of sales without any questionable apportionment of shared costs.
  2. Lower Operating Expenses (OE) – reducing the other costs of the business.
  3. Lower Inventory and Investments (I) – reducing the money tied up in the business whilst also improving due date performance and cutting lead times.

This has been achieved by focusing improvement efforts on the main constraint or the weakest link in the chain. Quite simply, this is where you can get the biggest bang for your buck.

Just to be clear, a constraint is something that stops you from reaching your goal. For example, consistent customer service problems may stop a business from reaching its goal to increase profit.

TOC focuses on the big things and therefore takes away much of the complexity involved with thinking about a business.

No One is More Constrained Than Your Average Small Business

Huge, international companies have constraints – everybody does – but probably nowhere suffers from constraints more than small businesses yet small businesses in total represent the dominant sector in most economies.

For example, according to Circle Research, small and medium sized businesses in the UK, i.e. independently owned businesses with 250 employees or less represent:

  • 33% of business turnover,
  • 59% of employment
  • more than 99% of all businesses.

For various reasons, the theory of constraints hasn’t yet helped many of these smaller businesses but I believe that has to change.

In the typical small business, the owner-manager or managers are often working far too many hours and too often, for too little money. These people are both constrained on time and money as well as possibly facing constraints in the market where there aren’t enough customers buying enough products and services. One of those constraints will be the biggest issue and therefore the first area that needs to be tackled.

Analogies Of The Constraints Problem

Two main ways are used to explain why focusing on the constraint can be so effective.

1 The Production System

In a production line, work in progress automatically passings from one process to another without allowing any build up of work in progress. The output of each individual station in the line is also the output of the entire line.

Many manufacturing firms have discrete operations, perhaps in different departments. For example, the business I worked in in the early 1990s when I became interested in TOC made electrical conduit fittings and had the following:

  1. Core shop – formed a sand moulding
  2. Foundry – poured molten iron around the cores
  3. Hard sort – the first quality check
  4. Annealing – heat treated the iron to make it malleable
  5. Soft sort – the second quality check
  6. Outside processing – either annealing or black enamelling
  7. Several machining operations to drill and tap the fittings
  8. Sometimes an assembly.
  9. Packing.

We had a lot of work in progress including unwanted production where the casting machines in the foundry had overproduced along with long lead times for newly produced items.

If we have an imaginary factory with five production stages:

  1. Operation A with a capacity of 10 units
  2. Operation B with a capacity of 9
  3. Operation C with a capacity of 6
  4. Operation D with a capacity of 12
  5. Operation E with a capacity of 8

Here the factory is constrained by operation C and the entire system is limited to producing 6 units.Work in progress is likely to build up in front of operation C if the first two operations are allowed to work at their capacity.

Improvements elsewhere, perhaps increasing the capacity of operation B up to 11, have little or no effect on the output of the system.

2 The Weakest Link In A Chain

It’s easy to see how the constraint limits the output in a production environment but elsewhere, the analogy often shifts to being the weakest link in the chain.

Everything is fine if the chain of operations aren’t put under much pressure, but as pressure builds, the chain will consistently break at the weakest point.

Imagine a mortgage application process in a bank. There is a lot of capacity to handle enquiries and receive new applications along with getting the agreement signed and transferring the money. The weak link is in the mortgage approval stage because this is a specialist task where fine judgement is needed about the level of risk and the return needed to compensate for the risk. This is where delays will build up if the process is put under more pressure than it was designed for, or if something reduces the normal capacity at the mortgage approval stage.

Once again, strengthening the system away from the weakest link will have little impact on the overall system, just as making a strong link stronger won’t make the chain with a weak link any stronger.

The Constraint May Be Inside Or Outside The Business

In those two examples above, the constraint is in the business.

The constraint can also be in the interface between the business and the outside world, i.e. the marketing and sales operations don’t convert enough potential customers into customers.

Or it may be in the market itself where there aren’t enough customers to satisfy all the suppliers.

The Five Focusing Steps

The five focusing steps are used to create a process of ongoing improvement (often abbreviated to POOGI). It assumes that the goal of the business (system) has already been established.

  1. Identify the constraint.
  2. Exploit the constraint.
  3. Subordinate everything else to the constraint.
  4. Elevate the constraint.
  5. Review the system for the new constraint and start the process over again.

Let me delve into those a little.

Identifying the constraint can be relatively easy in some situations but harder in others. Eli Goldratt developed a logical thinking process to help understand the current situation, identify problems and their causes and how to make improvements.

Exploiting the constraint means getting everything you can out of the constraint without adding extra capacity. For example, if a machine is the constraint, you’d exploit it by:

  • Making sure it was manned and operating during break times.
  • Making sure it always had a safety buffer of work to produce.
  • Minimising lost time of any changeover procedures by innovating ways to reduce changeover times.
  • Doing any necessary inspection processes before the key operation to make sure that valuable time at the constraint isn’t wasted on product that should be scrapped.
  • Making sure that, if the machine needed repairing, it was a high priority job and engineering staff switched to it immediately.

Subordinating everything else to the constraint means that you let the constraint dictate the pace for earlier operations. In my production example, the constraint, operation C could only produce 6 units, so ignoring any scrappage issues, the first two operations should only put 6 units into the system.

The standard TOC manufacturing solution is called Drum – Buffer – Rope where the constraint sets the pace for the entire factory by “beating the drum”, it is protected by a buffer and the rope restricts the earlier operations to the production levels of the constraint.

When you’ve done everything you can and the constraint is still limiting the system, it is time to take the actions needed to increase the capacity of the constraint, perhaps buying an extra machine or recruiting extra people.

The final step is to start the process again since somewhere else is likely to have become the constraint unless you’re deliberating elevating the existing constraint one small step at a time. Even then, don’t assume that the constraint has stayed in the same place.

How Can The Theory Of Constraints Help A Small Business?

The Theory Of Constraints started as a production based system to solve the problems of two much stock and work in progress combined with poor due date delivery performance (despite the stock/inventory) and long lead times.

Since then, it has been extended in a wide range of different areas:

  1. The TOC Thinking Processes are a generic problem solving technique based on identifying logical cause and effect relationships.
  2. Marketing and Sales including the creation of a Mafia Offer – one that is too good to be refused.
  3. Project Management with the development of Critical Chain thinking.
  4. Distribution & Retail solutions that reduce inventory while provide a more consistent stock level of a wider range of products.
  5. Business Strategy & Planning.

Plus of course the production/operations solutions.

Each provides an area where small business owners can gain from understanding TOC thinking and some businesses will benefit from many of the different categories.

Why Is The Theory Of Constraints Thought Of As More Of A Big Company Solution?

TOC hasn’t developed in the small business area as much as I think it should. There are good reasons for this but that doesn’t mean that it’s not appropriate to use.

  1. The big money is in the big companies and government bodies. This is where Dr Goldratt’s consultancy firm and many other TOC experts have focused their attention.
    .
  2. If you read “The Goal”, you’ll see that the original problems that the Theory of Constraints was developed to solve were much more prevalent in big companies.
    • The damage done by cost accounting and its arbitrary apportionment of costs to products and the use of this information isn’t normally an issue in smaller businesses, simply because they don’t have a cost accounting system.
    • The organisational silos, management politics and the damage done by focusing on local optimisation rather than the entire business [system] isn’t a feature of small businesses. That’s because most small businesses are relatively simple and streamlined and the business owner(s) is the coordinating force.
      .
  3. TOC draws out the inherent simplicity of complex situations but it can feel confusing. TOC tends to have its own specialised vocabulary which, like all jargon, forms barriers for those on the outside. This can become a barrier for the business owner to learn TOC him- or herself to the level of confidence.
    .
  4. The small budgets of smaller businesses means that many TOC specialists are too expensive and projects can feel too risky.
    .
  5. The wide breadth of what TOC can do creates its own problems and makes it harder for functional specialists to cover the entire approach. For example, my own interest in TOC started when I worked in a manufacturing business and I’ve managed projects for clients but I’m more drawn to using TOC to help solve strategy problems, marketing and sales problems and performance measurement problems.

TOC As A Small Business Solution

Things have to change. The small business sector is much too important to ignore, both for each business owner and for the economy as a whole.

If BIG TOC is too much – too expensive, too complex, too overwhelming – a smaller version needs to be adapted for use in small businesses.

In some ways, this can happen automatically. Small company solutions won’t have the complexity of large organisations and they won’t be as many competing powerful forces that need to be aligned, especially if there is only one business owner.

I’m not the only person who sees an opportunity for using TOC successfully with small business owners in different settings:

  • When a business “gets stuck” and growth stalls. Naturally some kind of constraint is at work, so what better way to tackle it than to use the principles developed as the Theory of Constraints?
  • When a business is making some progress towards its goals but it seems slow and steady while the business owner is getting impatient. Again, it’s likely that the business is being held back by constraints.
  • When a new business is in the start-up planning stage. This business situation doesn’t have a current reality to investigate but several of the later stage thinking processes are ideal for thinking through the cause and effect relationships for how the business should succeed and get past the likely obstacles to success.

Where Do You Go From Here?

If you’re based in the UK, I offer a free 60 minute Business SOS which can be an ideal time to use TOC principles to talk through your situation. Tell me why you feel stuck and that you’re interested in explaining TOC based solutions.

I also recommend that you read various Theory Of Constraints based books that I’ve reviewed.

The Goal was the first book and it’s an obvious place to start, even if you don’t work in a manufacturing business. It is written as a fast moving business novel.

The relatively high proportion of 5 star books probably shows how important I feel the topic is.

The books come in various formats.

Eli Goldratt often introduced his ideas in the form of business novels and others have followed this practice. This has advantages in that you can be carried along by the story but you can also get to the end and find yourself thinking something along the lines of “That was fascinating but what do I do?”

Other books have been written to pull out the lessons from the novels and to provide more of a traditional non-fiction book format. The quality of these ranges from excellent to poor.

Finally, there are the heavy duty guides to the Theory Of Constraints in books that may cost £50 or more. I don’t feel that these are the places to start but are essential if you want to lean how to do TOC on your own.

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