When you’re having trouble producing your product fast enough, Theory of Constraints can help you! Now of course, if you’re in this situation of struggling to keep up with demand, that’s a great problem to have! It means people like your product and you’re doing a good job of getting the word out about it with your marketing efforts.
But how you address this problem can make a big difference in your bottom line. Do you need to buy more equipment? Hire more employees or have existing employees work overtime? Or can you get away with redistributing the resources you already have so you can make more product WITHOUT necessarily spending more money?
Let’s look at an example: Princess Capybara sells small bronze-dipped sculptures of famous dictators. People like to use them ironically as bookends.
Her sculpture of Mussolini was recently mentioned in a popular magazine and sales have really taken off! In fact, the Mussolini sculpture is now on backorder.
In this post we briefly touched on the idea of Opportunity Cost: basically, if you have people who want to buy your product and you don’t have any product for them to buy, you are throwing away money! In this case the calculation is not as grim as it was in that article: since you’re not making the product, your “official” loss is only the profit you would have made by selling the product. But, if you’re a new company, you’re also hurting your reputation. You appear unprofessional; also, prospective customers may not be patient enough to wait for your product to become available and you miss the opportunity to impress them and make a lifelong customer. So you need to take this seriously!
Back to the bronze-dipped sculptures
But let’s return to Princess Capybara. She has a mold in the shape of each dictator. Her employee Rhonda uses the mold to cast the sculpture, unmolds it and then mounts it on an industrial dipper to apply a surface treatment that makes the sculptures look REALLY COOL.
The dipper can dip 4 sculptures at a time. Since Capybara Entreprises has only one mold for each dictator, normally Rhonda molds one of each (all 4 at once) and then loads them one the dipper. When the dipping and cooling are done, Capybara’s other employee Raoul unloads the sculptures, polishes and packages them for shipping.
This system works well enough but recently they can’t make the sculptures fast enough! How can Princess Capybara scale up her production – should she make more molds? Buy another dipper? Hire more employees?
Luckily, there is a framework for thinking about this problem and it’s called the theory of constraints. First popularized by Elyahu Goldratt in his in his business novel The Goal, (which is available as a graphic novel*) The Theory of constraints explains that the way to maximize your operation’s productivity is to focus on your goal (in a for-profit company that would be making money) and look at what is the biggest constraint to achieving that.
So in this case the question is, what is Princess Capybara’s constraint? We know it’s not sales and marketing. At a high level, her constraint is production capacity. (How many items she can produce in a certain amount of time, like a day or a week.) In the next post of this series, we’ll get into how to identify the specific aspect of her (and your) production process that is the biggest constraint.
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Challenge for this week: read through the above and understand why being able to scale up your manufacturing as inexpensively as possible is going to be important. Do you have any questions about opportunity cost? Do you have any lingering doubts as to whether this really matters?