A Guide to Implementing the Theory of
Postscript: Eli Schragenheim, Bill Dettmer, and Wayne Patterson have published a book (2009) called Supply Chain Management at Warp Speed: integrating the system from end to end. It is published by CRC Press. If this book had have existed several years ago, I might not have needed to write these pages, especially those on replenishment and replenishment & distribution. If your interest encompasses any part of supply chain or make-to-stock then I thoroughly recommend that you get a copy of this book. You will find it most helpful.
Crossing The Threshold – External Constraints
Constraints have just two locations, internal to the system or external to the system. So far we have pretty much dealt exclusively with internal constraints and usually physical ones at that. However, we have mentioned that often policy constraints are more important than physical constraints and that these physical constraints are often simply an expression – a symptom – of a deeper underlying policy constraint.
Much of the leadership and learning section was really addressed at policy constraints, and similarly our need to reframe the environment from a reductionist/local optima approach to a systemic/global optimum approach in order to address these fairly large-scale or first-order problems. In the next section – tool box – we will examine the means to address these types of constraints in more detail.
We have also briefly touched upon the subject of external constraints – principally their effect on management accounting decisions and manufacturing policy decisions. Now, however, it is time to investigate external constraints – mainly sales constraints – in more detail. We will look at some of the operational implications, the effect of our distribution or marshalling system (regardless of whether we own it or not) and how we can manage these systems to increase sales.
The most common type of external constraint is a sales constraint – we can’t sell as much as we can produce. This is in fact the first time we have a constraint that is apparently outside of our direct span control. Let’s draw it.
Now, the constraint is external, it is in the market, and apparently outside the direct span of control of the organization, however, that doesn’t mean that it is beyond our sphere of influence. In order to determine whether it is within our sphere of influence or not we need to consider where the cause of our external constraint is. Is the cause internal to the system or external to the system?
In our previous dealings with physical constraints we found that often the physical constraint was an expression of a deeper underlying policy constraint. So too with external constraints. Although the constraint may be external to the system the underlying cause may well be internal and therefore actually within our direct span of control. This is why we used the term “apparently outside our direct span of control” in the previous paragraphs. If the cause isn’t within our direct span of control, then the cause must be external to the system but still quite possibly within our sphere of influence.
Think about it. If the cause isn’t within the embrace of these two factors we should give up now, or we should do something to bring it within the embrace of these two factors – extend our span of control, and/or extend our sphere of influence. In fact there are those who argue against the use of the word “external constraint” because it lets people “off the hook” from asking what the real causes are – “it’s the market dummy.” Chances are that it is not.
Therefore the causes of marketing and sales constraints can be subdivided into two;
(1) Causes that are internal to the company
(2) Causes that are external to the company
(1) Identify the system’s constraints.
(2) Decide how to Exploit the system’s constraints.
(3) Subordinate everything else to the above decisions.
(4) Elevate the system’s constraints.
(5) If in the previous steps a constraint has been broken Go back to step 1, but do not allow inertia to cause a system constraint. In other words; Don’t Stop.
Let’s have a look at some of the internal issues first.
Let’s have a look at some causes of sales constraints that are internal to the company and under our direct span of control. We will deal with each of these in more detail in the following pages.
In a make-to-order environment it is insufficient to be able to make acceptable volume by increasing output; we must make it at least as quickly as, or quicker, than our competitors can. Failure to do this will present itself as a sales constraint although the primary cause is our own lead time. People won’t buy from us because they can get the same thing quicker from someone else. Batching and work-in-process are often a substantial cause of the overall lead time in a make-to-order environment.
In a make-to-stock environment, increasing the output but not decreasing the lead time may cause our finished goods stock to balloon. However we seem to be so busy building some needed stock that we can’t keep up with the other needed stock. We end up perpetually chasing our tails while our customers go elsewhere in search of our out-of-stock product. In this case the type of batching that we choose to employ has a substantial effect on overall stock levels. We must use smaller process batches to have an effect in make-to-stock environments.
What if we make-to-stock according to forecast? In a make-to-forecast environment we exacerbate the previous condition, we may in fact end up making too much of some things that our customers don’t want, and too little of some things that our customers do want. Again, this will look like a sales constraint, however, the primary cause is forecasting and forecasting in-turn has an undesirable effect on lead time.
In a distributed make-to-stock environment not only will we sometimes make too much of things that our customers do not want and too little of the things that they do want, but they will sometimes be in the right place at the wrong time, and sometimes the wrong place at the right time. It looks like a sales constraint but the primary cause is distribution, and this in turn is an effect of forecasting and lead time.
In each of these levels we have missed sales by not having the right thing in the right place at the right time. This is internal to the business, we have direct control over this and can rectify it and increase throughput (and decrease dead stock) as a consequence. We will examine these in the sections on lead time, finished goods, and replenishment & distribution.
Once we have exhausted all of the internal causes of the sales constraint, and our throughput has further increased, we should find that we can still produce more than we can sell, thus the cause has also become external to the business. The tool to overcome this external cause is the Mafia Offer or unrefusable offer. Essentially this is the application of the Thinking Process tools to a sales problem.
Sometimes the external constraint may be the next link in the chain – your direct customer, sometimes it’s further removed – maybe it is your customer’s customer, the end user. Even though the end user is outside of our direct control they are still within our sphere of influence. More importantly; regardless of where the cause of the external constraint is, the solution is actually internal to our own organization. This is the power of the mafia offer.
Let’s reiterate; all the “internal” and “external” causes of the external sales and marketing constraints must have internal solutions – just as in the “internal” operations constraints had internal solutions. If they don’t then we must extend our span of control or our sphere of influence outwards until we do have a solution. In most cases the solutions will be changes in our own internal policies.
How transparent will the rationale for the changes in our own internal policies be to our competitors – or even to our customers? Not transparent at all. If the rationale for the changes is not apparent to our competitors, what is the chance that it can be readily imitated? Not a very high chance at all. Now what if we can do this faster and more frequently than our competition, surely that is a significant commercial and strategic advantage. We will return to this theme in the in a number of places, but particularly the page on strategic advantage.
Throughout these webpages we have stressed a systemic/global optimum approach. This means that sales and marketing and production are integral. This does not mean that once manufacturing gets its mess sorted out that, only then, should we look at sales. Sales will always invoke that the real problem is external. Whereas we might be able to refute that in manufacturing we might not be able to refute that in sales or marketing. However, it is not the location of the problem that matters. It is the location of the solution, the pivot point, the leverage point, and those are always internal. When sales personnel explain that the problem is out of their hands, we must reframe the situation so that they understand that the solution is indeed within our direct control.
The most important thing we can do is to make sure that we involve sales and marketing at the very outset of any Theory of Constraints implementation, because even though the constraint may not reside in the market currently it soon will and indeed this is the preferred place for it to be located. Why should the constraint reside externally to the system? Well, when the constraint is internal it means that there are people who want to use our service or buy our products that can’t. We are missing out on real income. People want to give us money but we can’t take it. What a waste!
When the constraint is external we know that we are not missing these sales anymore. Now we are searching for additional sales. The more additional sales that we can leverage over our fixed operating expense the more profitable the organization. The more profitable the organization, the more robust and secure is its future.
Even when the constraint is external, the preferred position, the cause giving rise to the constraint could be external or internal. However, regardless of where the cause is, the solution designed to overcome the cause must be internal. Most causes are policy in nature and therefore so are the solutions. Changes in policy are not usually capital intensive. Moreover changes in policy are not readily visible to competitors.
Let’s have a look at the first of these internal solutions – lead time.
This Webpage Copyright © 2003-2009 by Dr K. J. Youngman