How to leverage the Theory of Constraints

What is the Theory of Constraints?

The Theory of Constraints is a methodology that is focused on throughput improvement. Utilizing this system to identify the constraint(s) that are impeding optimized process flow for controlled momentum fluidity. Businesses use it to ideally improve profitability. The Theory of Constraints states that every process or operation in a business consists of a series of interrelated activities and amidst those is a weak link or limiting factor that hinders the output of the process as a whole. business organizations and individuals can optimize or improve their business processes by focusing their attention on managing, improving, or optimizing the performance of those weak links or limiting factors. The four main areas in business to evaluate are SALES – OPERATIONS – FINANCE – LEADERSHIP.

Each department should already have some benchmarks that measure productivity. The sales department drives the revenue for the company by converting leads into paying clients. We identify this as “Get Work”. The operations team is evaluated by the optimized time to make the products or complete the services that the client has requested. We call this “Do Work”. The financial department oversees the inflow and out flow of money for the business. We label this as “Get Paid for Work”. When each department is working harmoniously the company is functioning at optimized capacity.

What is Throughput?

Think of a pipe or tube for water to flow through, or cashflow in a business. The pipe controls the speed at which it can travel consistently. The below graphic shows an ideal flow-through in a business structure. Each pipe is of the same size allowing for the monetary flow to move efficiently inside the business. The Reinvestment Growth (RIG) percentage is a determined amount to generate new business back to the front of the funnel which is above the current marketing amount the company is spending. The Net % is the targeted net profit percentage the business desires.

Theory of Constraints Diagram

How to use the Theory of Constraints?

The first step in using the theory of constraints is identifying what is the slowdown or bottleneck in cash flow. The business owner, CEO or leadership team can do this by analyzing each departments efficiency. Knowing the optimized efficiency of what each department is capable of operating is the first step. Next you would then determine which division is not functioning by looking at the performance. An example would be if the operations department had team members standing around because they did not have work orders to fulfill. Where do you think the constraint would be in this scenario?

Below is a graphic depicting the identified constraint in the company.

Theory of Constraints Diagram - Sales Contraints

Did you answer sales? If so, then you identified the constraint on the business operating at capacity. The constraint is not enough sales to fill the other pipes with cash flow or work for the company.

Conclusion

A business can have multiple constraints at the same time. It is important for each leadership team member to understand how to use the practice for their responsible department and effectively correct and communicate with their team to ensure operational efficiency.

The process is simple and easy to leverage for business improvement. Once you identify the constraint, you can then take corrective action, establish metrics, and evaluate the change improvement to maximize business continuity.