Between the Strategic Constraint and the Current Constraint

This article assumes the reader is familiar with the Theory of Constraints (TOC), especially the definition of a constraint, and the five focusing steps.  This belongs to the basic knowledge of the Theory of Constraints (TOC).

The concept of the Strategic Constraint has been raised because it could well be an important strategic choice; targeting the desired future situation where the particular resource would become the active constraint.  Once this happens the organization’s performance will depend on the exploitation and subordination to that resource.

Actually, strategic constraint does not need to be a resource.  There are two other options.  The first is to declare the market as the strategic constraint.  The second is a rare situation where a critical material is truly scarce, so it could constrain the performance of the organization when nothing else limits it.

First, let’s deal with an internal resource as the strategic constraint.

The characteristics of a strategic constraint are:

  1. Adding capacity is very expensive, and it is also limited either by low availability in the market or by having to purchase the capacity in big chunks. It certainly needs to be much more expensive than any other resource.
  2. There is an effective way to control the exploitation of the strategic constraint resource.
  3. The overall achievable results when the specific resource is the constraint are better than when the constraint is something else. Determining the wishful future state where a specific resource would become a constraint is a very challenging objective, as is going to be explained and demonstrated later in this article.

Some organizations have an obvious strategic constraint.  When we consider an expensive restaurant it is easy to determine that the space where the guests sit and eat is naturally the strategic constraint.  Space is the more expensive resource, and enlarging the space is difficult or even impossible.  All the other resources, the kitchen, the chef, the staff, and the waiters are easier to manage and control.  Eventually, they are also not as expensive as space.  Even if one is tempted to think of the chef as the constraint, because of being the core of the decisive competitive edge, then space would easily become the actual constraint.  The reputation of the chef could serve several restaurants, which emphasizes the point that it is the reputation, rather than the physical capacity of the chef, that is exploited.

Most organizations do not have one clear resource that is much more expensive to elevate than all the rest, even though one resource is naturally somewhat more expensive than the rest.  Is it enough to make it the chosen constraint?

In order to answer the question, we need to understand better the way from the current situation to the desired situation where the strategic constraint becomes the actual constraint.

What happens when the current constraint is not the chosen strategic constraint?

The five focusing steps lead management to focus on exploitation and subordination to the constraint, which would bring a considerable increase to the bottom-line.  Question is:  would these steps make the organization closer to the strategy of having the chosen constraint becoming the constraint?

Suppose the organization is constrained by the current demand.  A good exploitation scheme is to ensure reliable delivery performance.  When the organization succeeds to improve the flow and deliver faster – more demand could be generated.  As long as there is no internal constraint, any additional demand with positive T would increase the net profit.   There is no need to choose what specific sales to increase, as there is no tradeoff between increasing the sales of product A or product B.  When these efforts continue then an internal constraint would emerge.  So, we come back to the question of what should we do when the internal current active constraint (new or old) is not strategic?

When the current constraint is a resource, but not the one we like to have, the only way to come closer to making the chosen strategic constraint is to elevate the current constraint as soon as possible.  Exploiting and subordinating to the current “wrong” constraint doesn’t make sense unless the elevation takes a very long time.

So, how can we make the chosen strategic constraint the actual constraint?

Trying to exploit the strategic constraint, when it is not the current constraint, is not effective and could cause considerable damage.  Using the T/constraint-time as a priority mechanism works contrary to the objective when the constraint-unit isn’t the current constraint.  To illustrate the point assume two product categories:  A and B.  Category A takes significant capacity from MX, which is the strategic constraint, so its T/strategic-constraint-time is low.  Category B requires less of MX, but much more from another resource called MY.  At the current state, there is no active capacity constraint.  MX is more expensive than MY, which is the main reason why MX is considered the strategic constraint.  Which product you like to expand?  Considering T/MX would lead to expanding category B sales as much as possible, but then MY might emerge as the constraint.  Expanding the sales of category A would make MX the constraint, which is what we want, but for low overall T.  Is it the product mix we have longed for?

The point is that high T/constraint-time means nice T for less utilization of the constraint.  However, that product might need much more utilization from a non-constraint, which means that significant more sales might cause a non-constraint to penetrate into its protective capacity and become an interactive constraint.  When this happens a new question emerges: are there quick means to add capacity to that resource, and what are the costs of adding this capacity?

Generally speaking whenever growth is considered it is necessary to carefully check the capacity of several critical resources and not just the strategic constraint!

The P&Q is the most known example demonstrating the concept of T/constraint-unit.  Here is the original case:

PandQsmall

Just suppose, unlike the original case where the demand for P and Q is fixed, that it is possible to expand the demand to both products.  It is also possible to double the capacity of every resource for an extra $1,500 per week.

Starting with the Blue resource as the strategic constraint:

If our chosen constraint is the Blue resource, where the P product yields T(P)/hour-of-Blue is (90-45)*4 (the Blue is able to produce 4 Ps per hour) = $180, while Q yields (100-40)*2 (Blue allows only two units of Q per hour) = $120, then the organization should produce only P!  The total weekly T, of selling 160 Ps, would be:  180*40 (weekly hours) = $7,200. We still have the same operating expenses (OE) of $6,000 per week, so the net weekly profit is $1,200.

By the way, the situation of producing only P is that there are four resources with the exact same load.  If you need protective capacity it’d be problematic, as any additional unit would increase OE by $1,500 and by that bringing loss!  Selling only P could also be risky for the long term.  Right now let’s stay with the theoretical situation that there are no fluctuations (Murphy).

What if we choose the Light-Blue resource as the strategic constraint?

First obvious recognition: there is a need to elevate the capacity of the Blue resource.  Actually, this might not be obvious to everybody.  When the focus is on the Light Blue, we might lose sight of the current constraint.

Anyway, considering a future state where the Light Blue is the constraint, then similar calculations would show that Q brings more T per hour of the Light Blue resource ($360 per Light Blue hour as 6 Qs are produced) than P.  Selling only Qs, with the Light-Blue as the constraint, would generate weekly T of 360*40 = $14,400.  But, OE cannot be just $6,000.  There is a need for 3 units of the Blue resource, so we need to add two units of the Blue resource.  The OE would be:  6,000 + 2*1,500 = $9,000.  The net weekly profit would be $5,400, bringing better profit than with the Blue resource as the constraint, but with a higher level of OE.  This situation is also theoretical as both the Blue and the Light-Blue are loaded to 100% of their available capacity.

A simple realization is:

It is not trivial to guess which resource as a strategic constraint would yield the best profit!

One needs to consider the capacity profile of other resources to ensure they have enough capacity to support the maximum T that the strategic constraint is able to generate.  Practically it means trying several scenarios where the limited capacity of several critical resources is calculated and solved.

In reality, there is a need to keep protective capacity on all non-constraints.  Actually, even the constraint itself should not be planned for 100% of its theoretical capacity, in order to keep the delivery performance intact.

Realizing the above lessons, and assuming there is no clear one resource that is very difficult to elevate, then why should we be bounded by the capacity of a resource, which can be easily elevated, when there is enough potential demand to grab?

Another issue is the wish for stability.  If the capacity constraint resource is frequently moving then the exploitation schemes, including the priorities between products and markets, might frequently change.  But the problem is that looking for stability might constrain the growth, or force to elevate several resources whenever an expansion of the demand occurs.

This leads us to consider recognizing the market demand as the strategic constraint.

Subordinating to the market demand is actually a basic necessary requirement for the vast majority of the businesses, even when an internal constraint prevents the management from accepting more orders.   It is easy to imagine what might happen when the organization, focusing on exploiting the limited capacity of an internal constraint, would fail to maintain reliable and high-quality delivery to its clients.  If the demand would go down, then the internal constraint will stop from being a constraint.

Keeping growth means constantly expanding market demand!  Keeping enough protective capacity for the critical resources means frequently increasing the capacity of one or more resources whenever buffer management, or the planned load, warn from penetration into the protective capacity.  Goldratt coined it “progressive equilibrium”.  The difference between this and keeping a strategic capacity constraint resource is that there is no need to keep that particular resource as the weakest link, which means less overall elevations to serve the same growth in sales.

It seems to me that as long as there is no natural strategic constraint, treating the market demand as the constraint makes better sense.  The growth plan has to frequently check the capacity profile of several key resources, making sure all commitments to the market can be reliably delivered.

As a final comment:  Goldratt mentioned Management Attention as the ultimate constraint.  To my mind, this is true for the Flow of Initiatives, which looks on how to improve the current Flow of Value (products and services delivered to existing clients).  Management Attention constrains the pace of growth of organizations.  Once managers learn how to focus on the right issues their attention capacity becomes the strategic constraint for growth.

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Eli Schragenheim

My love for challenges makes my life interesting. I'm concerned when I see organizations ignore uncertainty and I cannot understand people blindly following their leader.

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