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
The Threshold – External 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.
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?
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
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.
causes of marketing and sales constraints can be subdivided into two;
(1) Causes that are internal to
(2) Causes that are external to
(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
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.
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-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.
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.
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.
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.
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.
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.
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!
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.
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