Theory of constraints in business and 5 powerful steps to implement it in your company

Companies looking to gain a competitive edge should seek solutions to optimize their operations. They can make it by quickly delivering quality products and services without incurring too much cost. How can this be accomplished? Read our article on Goldratt’s theory of constraints in business!

Theory of constraints in business – table of contents:

1. What is the theory of constraints?
2. Types of bottlenecks
3. Financial data in the theory of constraints
4. Examples of bottlenecks in the e-commerce industry
5. 5 steps to implement the theory of constraints
6. Summary

What is the theory of constraints?

The basis of the Theory of Constraints in business (TOC) is the focus on defining and removing obstacles that arise during the company’s operational processes.

These barriers are called bottlenecks, which we mentioned in an article on lean management concepts. Paying attention to them can help you optimize the costs of your business and facilitate the achievement of strategic goals. However, sometimes entrepreneurs want to introduce continuous improvement practices into every area of the company, which misses the point. When applying TOC, the first focus is on specific problems that generate losses.

Types of bottlenecks

While running your business, you may face various impediments, which can be classified as follows:

• Paradigmatic – refers to the beliefs, habits of management and employees regarding, for example, the course of a particular process;
• Resulting from company policy/legislation – these are orders or recommendations on, for example, the way staff perform their duties, the organization of work;
• Physical – refers to gaps in resources, e.g., lack of appropriate equipment, skilled workers, etc..;
• Market-based – occurs when there is an increase in competition in the market, more supply than demand, or the influence of price on consumer purchasing decisions.

Financial data in the theory of constraints in business

In the search for barriers preventing a smooth process, we should consider indicators that provide insight into the company’s financial situation, such as:

• List of assets and liabilities – includes the company’s property resources that are expected to contribute to financial benefits (assets) and the sources of financing these resources, e.g. equity, borrowings (liabilities);
• Sales or gross margin – that is, the financial resources received from the sale of goods, services before deducting costs, taxes, etc., or the ratio of gross profit to company revenues;
• Operating expenses – costs incurred in connection with the company’s core business.

As a rule, we should take measures that will result in reduced expenses and increased profits.

Examples of bottlenecks in the e-commerce industry

With the development of the Internet and world events, e-commerce business is booming. Starting this type of business is relatively easy, however, similar to other industries – here, too, there are certain limitations.

What should you pay attention to?

1. Website security. Any loss of personal data, information about your customers is a serious threat to building trust and a positive image. Update your software regularly, change your access passwords from time to time (you can use a password manager), and test your passwords once you have the necessary security measures in place. Be sure to install an SSL certificate on your server.
2. Instilling confidence. Related to the point above – the website is the business card of your company. You must make every effort to ensure that users have a positive association with your brand and that their needs are met. That’s why it’s so important to constantly improve your credibility and professionalism. Encourage and simultaneously provide opportunities for quick contact to resolve any doubts – put your company address, phone number, email address in a prominent place on the site. If you have positive reviews from former customers about your services, publish them. Offer several types of payment and delivery so that you can meet the different needs of consumers and make the buying process easier for them.
3. Order processing. Fast and seamless delivery is a key factor in customer service. Logistics solutions, packaging and then transporting products or performing a particular service should be seamless.
4. Returns and complaints. This area, as it were, is integrated with order processing. How the complaint process is carried out and the adherence to the return policy has a decisive impact on the customer’s final opinion of the company’s operations.

5 steps to implement the theory of constraints in business

1. Find constraints in business (bottlenecks). Think about which element in your enterprise may be a bottleneck. Take a personal look at individual processes (e.g., order processing), ask your co-workers for opinions.
2. Optimize the constraint. By solving a problem (constraint), you improve the functioning of the entire process (e.g., reducing inventory, reducing business costs). Follow the principle of kaizen – regular introduction of even small improvements will have a better effect than abrupt, chaotic changes.
3. Align activities and resources to the constraint. The limitation is important for the overall efficiency of operational processes. Therefore, any subsequent modifications should be carried out with them in mind.
4. Strengthen the constraint. Focus on the weakest link and make efforts to mitigate its negative effects (e.g., improving the sales funnel, reducing delivery time).>
5. Repeat the process. Following the idea of continuous development, the whole procedure should become a routine activity in the company. Look for more areas that need improvement.

Summary

Using the Theory of Constraints in business will definitely find areas that need improvement. By doing so, the company can continuously develop by reducing resource waste, optimizing key processes and increasing profits.

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