Course 9.  Constraints

Since a process is a series of steps, it stands to reason that sometimes problems prevent the steps from happening.  These are called constraints.  Constraints stop or impair processes in your business.

In this course you'll learn about:

1. Types of Constraints

2. A Breaking Point in a Process

3. Underlying Principles to Break Points

Businesses become most aware of their processes when things aren’t working. Eliyahu M. Goldratt, an Israeli physicist contends systems behave like chains: one weakest link determines how well the entire chain can perform. Goldratt calls this link the system constraint. There might be many weak links in a chain - the definition of "weak" always depends on some arbitrary standard, but there is only one weakest link: the one that will break first when excessive demand is placed upon it.

According to Goldratt, no matter what ills the system might be suffering, repairing the weakest link (the constraint) offers the only promise of immediate improvement that can be observed at the system level. Conversely, if the constraint is not improved, working on a non-constraint will not produce any noticeable improvement in system performance.

Types of Constraints

Here's a rule of thumb, developed by Dr. Van Gray, of the Hankamer School of Business at Baylor University. For most organizations, constraints can be classified into one of six categories: market, resource, material, supplier/vendor, financial, or policy.

1. Market. Is market demand the constraint? A market constraint is external. Could we sell more products or serve more customers than are queuing up for what we have? If so, quality could definitely be a cause, but it might be something else as well.

2. Resource. Are we unable to keep up with demand? A resource constraint is internal. Do we have long lead times between orders for service or products and our deliveries? Are parts of our system overloaded (bottlenecks)? If so, availability of machines or people (or both) might be the constraint. Are we doing a lot of rework that diminishes our rate of output? If so, quality might be a cause.

3. Material. Are we losing business or delaying deliveries because the materials we use are faulty or supplies of good materials are inadequate? If so, we have a material constraint. Material constraints are largely external.

4. Supplier/Vendor. Do unreliable suppliers hobble our success or vendors, who miss required delivery dates, deliver the wrong items, or provide poor quality items? If so, the constraint lies in our supplier or vendor. This would also be an external constraint.

5. Financial. Sometimes companies can be so cash-constrained that they can't deliver Friday's orders until they sell and are paid for Tuesday's orders, because that revenue is needed to buy more materials for Friday's orders. Other times lack of financial resources can prevent a company from upgrading capital equipment needed to fill new orders. In either case, the company suffers from a financial constraint. The financial constraint is usually internal.

6. Knowledge/Competence. In some cases, organizations must change the way they do business in order to survive. Successfully shifting to new business opportunities depends on how transferable the company's existing core competencies are, or how quickly it can develop new ones. A narrow focus of competence or knowledge could be an internal constraint to success, which could become critical, if survival is at stake.

A Breaking Point in a Process

Break Points are the specific place in the process where the constraint is occurring. Break points are caused by constraints in the process.  Where the link in the chain is impaired or broken is where the break point exists.  It's helpful to think in terms of break points.  Processes are often hard for people to see or visualize.  This is especially true of processes at work between people.  A break point is a simple way to think of the place where constraints are occurring.

We’ve established that businesses operate by process.  When you have a number of people performing tasks in a process it is defined by a chain of events.  Each significant behavior that defines the chain of events is a Break Point.

For example, lead generation is a common constraint in marketing.  Many companies fail to generate enough prequalified prospects through their lead generation to sustain the revenue requirements of the company.

For whatever reason, lead generation activity isn’t sufficient.  As far as the revenue process is concerned, whatever human behaviors are responsible for this weak link is causing a break point.  The chain is breaking at Lead Generation.

I consulted with a company where the primary sales rep kept hitting break points in his selling process.  He couldn’t get a buying decision.  He could overcome objections but he couldn’t come up with buying incentives that would close the deal.  He had lots of everything else.  Buying incentives and obtaining a buying decision were the break points in his sales process.  He wasted thousands of dollars in lead generation, and he cost management a lot of sales opportunities. 

He wouldn’t change.  He wouldn’t overcome his break points. 

I consulted for a large printer.  It was a superior organization in many ways,  but the management team was not marketing minded.  They focused on everything but marketing.  We organized a great customer service program for their many retail locations.  The first month, the store managers made thousands of telephone calls to their customers to drive up sales.  It worked. 

The second month?  A fraction of the number of calls was made.  They didn’t do the work.  Management didn’t train and reinforce the concept.  Change was forced upon the group instead of being integrated.  Subsequently, the customer service initiative failed.

It hit a break point.  You could see it coming.  Calling customers wasn’t something the store managers were accustomed to doing.  It was a totally new behavior.  They could accomplish their calling goals in the short run.  In the long run, they didn’t take the time to make the calling a habit.  The break point arrived and they stopped calling.

Let me give you a principle.  Every process has break points.  Find them.  Learn them.  Watch out for them.  They stop your revenue chain dead in its tracks.

Underlying Principles to Break Points

Here are three principles that explain why a lot of human constraints occur.  We focus on human behavior in this program so it makes sense to present behavioral principles to constraints.

The Pareto Principle

Named after Italian economist Vilfredo Parito (1848 – 1923), the Parito Principle is also known as the 80/20 rule.  It simply states that an imbalance always exists.  A small core of people, problems, ideas or events is responsible for the majority of effect or importance.

An imbalance occurs in any system.  Sometimes the imbalance works for you and other times it works against you. 

Let’s look at a marketing example where an imbalance occurs. 

Here is a standard formula for sales people:  leads, calls, contacts, appointments, presentations and deals.  If you start with x amount of leads and make x amount of calls you get x amount of contacts which yield x amount of presentations which give you x amount of deals.  This is a standard sales formula.

The imbalance will be at work in this formula.  You will find it easy to get part of the formula and difficult to get another part of the formula. 

For example, if you start with 100 leads, you may make 200 calls to contact 50 of the people.  It’s hard to reach people with cold calling, you have to make three calls for every one contact.  This is an imbalance.  You have to plan on the three to one ratio in your scheduling.

The appointment to contact ratio may also vary.  Some products are hot.  You can get an appointment with virtually every contact.  Other times you may get one appointment for every three contacts.  The imbalance shifts depending on the market and the product.

Parito’s Law says that 80% of your results will come from 20% of your customers.  Internally, 80% of the productivity will come from 20% of the people. Parito’s Law isn’t always 80% to 20%.  It can be 70% to 30% or 60% to 40%.  It merely states that an imbalance will always occur. 

This imbalance will identify break points in human performance.  At what point are people performing and not performing.  Find the imbalance to find the break point.

Parkinson's Law

Work expands so as to fill the time available for its completion. If a project is given six months for completion, it will require six months to finish. If the same project is given two years for completion, it will require two years to finish.

Parkinson’s Law is critical in revenue generation.  If you contact a prospect and present your product, you have to give a time limit for action.  You cannot leave a sales process open ended.  Parkinson’s Law will kick in and you will not sell your product.

I watch for the effect of Parkinson’s Law in every project.  I consciously set deadlines for all actions.  You have to.  If you don’t set deadlines you’ll wait for everything. 

For example, if you create a prequalified prospect and you don’t get an appointment, what do you do?  You have to set a timeline for the setting of the appointment.  At a minimum you have to set a timeline for a callback.  You have to set a deadline for something at some point.  If you don’t, you will most likely never get an appointment.

Every aspect of the Customer Profiles works on this principle.  At each and every step you have to have a deadline for performance.

Break points occur when there is no time limit.

Most for the Least

Buyers and Sellers have an inherent conflict that affects all transactions.  The Buyer seeks to make choices that will maximize satisfaction from a variety of products and services.  The Buyer wants to buy at the lowest price and get the best results.  In contrast, the Seller wishes to maximize profits.  The Seller wants to receive the most money at the least cost. Even if the Buyer and Seller are very cooperative in the transaction, the issue of "most for the least" is managed in some way.  Most often it is not spoken but agreed to.

Most for the least applies to almost every situation.  Employees will often want the most money for doing the least amount of work.  Or they’ll do just enough work to get by but not get ahead.  Whenever results are not measuring up, look for situations where someone has the a lot to gain but can get by with minimal effort.  You’ll find a break point.  It’s a place where the goal is to get the most benefit with the least amount of effort.

Summary

We identified constraints as the weakest link in a chain.  Constraints are any problem that stops or impairs processes in your business. Six categories of constraints were identified:

1. Market.

2. Resource.

3. Material.

4. Supplier/Vendor.

5. Financial.

6. Knowledge/Competence.

Next, we discussed Break Points.  A break point is the place where a system is constrained.  It helps to identify the specific place so people can set about fixing the constraint. We identified three principles that are often at the root of Break Points.  Parito’s Law, Parkinson’s Law and Most for the Least are important principles for you to know.