What blocks the organization from achieving more?

The Difference between the Constraint and the Core Problem

The question in the title is one that all managers and consultants, working for an organization, should ask themselves all the time.  The question puts the focus on the goal of the organization. In order to obtain an answer one should look for the relatively weakest point, which currently limits the performance of the whole organization.

The truly wrong, but very common, answer is:  “There are many things that limit the performance…”  On one hand, if the CEO would be more intelligent, the regulations more permissive, the economy supportive of more expenditure, and the competitors less effective, then the organization will do better. But, the impact we have on each one of the above is very limited, if at all.  Such broad answers run away from the task of not only answer the direct question but also explaining how come no actions are taken now to significantly improve the key limiting factor.

Generally speaking TOC comes with two different answers to the question.

One answer looks for what currently limits the flow of product/services/value to the customers.  TOC calls it the “constraint”. The second answer looks for the key practical internal conflict where doing X is absolutely required, but also doing Y is necessary and there seems to be a major difficulty taking both actions at the same time.  The conflict that causes the majority of the key conflicts is a representation of the ‘core problem’, which blocks the performance of the organization.

In order to understand the difference between the constraint and the core problem, let’s consider the following example:

Auto-One is a local producer of cars.  Actually Auto-One only assembles cars, designed by a foreign well known international company.  The idea, backed up by the government, was to provide cheap cars for those who cannot afford the price of imported cars.  So, the assembled cars carry a different brand name, but everybody is aware that it is a replica of the original one.  Because of the perceived superior quality of the original maker there is still sizable import of the same cars under the original brand, but they cost 30% more than the local cars.

Auto-One buys the parts from the original maker and pays for the license to produce.  It is internally constrained by the capacity of the assembly line, causing the supply time of a new car to a client to be over six months.  Many potential clients who would prefer to buy the cheaper car eventually buy the imported car because of their unwillingness to wait so long.

What is the constraint of Auto-One?  What improvement would this identification lead to?

What is the core problem?  What improvement would this lead to?

There is enough information in the short description of the local car producer to deduce the following:

• Improving the capacity utilization of the assembly line would increase the pace of producing the cars and reduce the supply time. As the current long supply time chases out potential buyers this step would increase sales/throughput, and more throughput will increase net profit.
  • We assume that improving the capacity utilization of the production-line does not require substantial investments or additional operating expenses.
  • The above assumption is also based on the TOC methodology of formally recognizing the constraint and implementing the required exploitation and subordination steps, resulting in faster response and higher quantity of finished cars.
• Another way is to elevate the capacity of the assembly line. This makes sense when the TOC methods are already used to exploit the assembly capacity, assuming that the still long supply time, even though it is faster than before, still causes loss of sales.
  • When the assembly line is not operational 24/7 then the elementary elevation is adding shifts. This step requires additional manpower. The likely assumption is that the cost of the additional manpower is much lower than the delta-throughput.
  • When the assembly line works 24/7 at the best exploitation and subordination schemes then there is a need to elevate the specific constraining operation within the assembly line.
• A very different approach is to consider the low perception of the quality as the key limiting factor. Improving the perception of value might not improve the number of cars sold, unless the capacity of the assembly line is elevated. But, it would allow the local company to increase the price. 
  • Question: is the quality of the local cars truly lower than the quality of the import?
  • Another question is what Marketing can do to change the perception of the potential buys? When the quality is truly inferior it is one challenge. When only the perception of quality is low – it is another challenge.  The important realization is that efforts to improve the quality are not sufficient to increase sales.

The constraint is what currently limits the flow of value to the clients.  This means the constraint is the immediate leverage point.  The idea is to exploit it better, and subordinate the rest of the organization to the exploitation plan.  Exploiting the constraint focuses on the short-term.

We know that the constraint of this specific local company lies in its assembly line.  The low hanging fruits point to draw more from the specific capacity constraint – leading to making more cars every month.

The core problem has to be logically linked to the perception of low quality in the market and what prevents the company from successfully dealing with this issue.  Another undesired-effect is that there is an unsatisfied demand, caused by too long supply time, caused by lack of capacity of the assembly line. The core problem has to explain how come there is an internal capacity constraint, leaving unsatisfied market demand?

The elevation step already poses a key concern:  is the investment in elevation economically worthwhile?

The ultimate constraint of any organization is the market demand.  The perception of value by the market limits the current value even when a capacity constraint is active.  More thoughts on that topic were raised by a previous post in this blog: “Short-Term and Long-Term TOC or the Two Critical Flows”.

Dealing with the market perception of inferior quality is risky.  In this particular example there is little doubt that once capacity elevation would take place the quantity of cars sold will grow, the only question is whether it’ll grow enough to generate good return on the investment.  However, trying to change the public perceptions is definitely not guaranteed to succeed. Without changing the perception of low quality there is no way to charge higher price.

So, what is the core problem?

Whenever an investment is required in order to grow the business there is a major concern that it’d fail. There are two highly undesired effects resulting from losing due to unsuccessful investment.

The first undesired effect is the concern of the organization to keep its current state and not let it deteriorate.  Even temporary worsening of the current state causes major concerns both internally and for the share-holders.

The other concern is the personal concern of the CEO and the person raising the idea.  The connotation of failure causes serious negative consequences for the individuals involved with the decision and endangers their career.

Assuming the management does not challenge the low reputation of its quality and also not having clear plans to increase capacity we can deduce that the specific core problem is the ongoing conflict between investing money and efforts to significantly improve the current state of the business and refraining from taking such risks in order not to worsen the current state.  This is a common core problem.

In typical TOC representation of a conflict, called a “cloud”, the conflict looks like this:

The specific example poses two possible ways to improve the performance of the organization. One is through exploiting and eventually elevating the capacity constraint.  The other is improving the perception of quality and by that the perception of value of the assembled cars.

Elevation of the constraint already looks to the longer time frame as it requires investment of money and efforts (managerial attention).  The core problem is the difficulty in making investment decisions, aiming at improving sales, when high uncertainty is part of the equation.

Overcoming the core problem, resolving the conflict, can be achieved only by challenging one or more of the underlining assumptions behind the entities of the conflict.  The big obstacle is to reveal the hidden assumptions that are shared by all the key people in the organization and usually also by all the competitors as well.

For instance, the bottom leg of the above conflict assumes that there is no big risk to the current state of the organization when no new significant investments are made.  This is usually a flawed assumption as any change in the domestic economic state might impose a negative impact on the demand.

Back to the example of the domestic car producer, a possible threatening change could be that the original maker might reduce its price, or come up with a cheaper model, making the competition in the domestic market fiercer.

Another assumption behind the bottom-leg is that every investment is highly risky.  Challenging the assumption, by employing superior process for checking uncertain decisions, and making the investment gradual, where signals for the effectiveness of the steps taken are carefully observed, could resolve the conflict.  It is possible to be careful enough so the current state is not seriously compromised, while having excellent chance for achieving a major breakthrough.

Recognizing the risks, both the risk of the proposed initiative and the risk of not growing, is a worthy first step.  The challenge of  finding good answers to reduce the potential risk, while being ready to take chances with lower risks, constitutes a direction to resolve the core problem.  A recent technique developed by Dr. Alan Barnard, based on the change matrix of Goldratt, offers a kind of double conflict diagram that nicely states the practical questions that direct the mindset to come with good answers.

The core problem is what prevents management from looking hard at reality and challenge long-held assumptions.  The constraint is the more immediate issue and it is useful to prove to ourselves we can get much better results.  Designing the future of the organization requires facing the core problem, struggling with challenging assumptions rooted in our comfort-zone, and mainly deal with our fears from uncertainty.