Location of the Constraint
How to Locate the Constrained Resource
The entire concept of constrained resource optimization is centered around the idea that there must be a constrained resource, or bottleneck. Before engaging in such optimization, we must first locate the constrained resource. In a large facility that contains many employees and processes, it can be quite difficult to locate. Consider the following ways to find the constraint:
- Backlogs. Every constrained resource has a backlog of work in front of it, since the resource does not have sufficient capacity to keep up with demand.
- Incremental throughput modeling. If capacity is added to a resource, will the result be an increase in throughput (revenue minus all variable costs)? If not, the resource is almost certainly not constrained.
- Problems. A constrained resource is overworked, and therefore likely to fail. Consequently, any resource that seems to constantly require ongoing management attention is more likely to be a constraint.
- Scheduling. There is usually an ongoing battle over which jobs are scheduled to go through a constrained resource next. Consequently, look for areas in the production schedule where the schedule is constantly being revised.
- Utilization levels. A constrained resource is in use constantly, so it probably has the highest utilization level in the company, and may involve people working multiple shifts.
If management incorrectly decides that a certain resource is the constrained resource, its error will shortly be revealed, for the backlog of work in front of the designated constraint will disappear, while the backlog in front of the real constrained resource will remain. The size of this backlog could even increase if the real constrained resource is downstream from the incorrectly-designated resource, since the capacity of the incorrect resource will have been increased by management, resulting in even more work arriving in front of the real constrained resource.
There are other areas than the production department in which a constrained resource may be located. Consider the following variations:
- Engineering. Any product that is customized will require design work, so a work backlog in the engineering department could indicate that the real constraint is the design staff.
- Procurement. When there is a high level of industry demand for a specific raw material, the sources of supply may not have caught up with demand, so a business may be allocated a raw material apportionment. This issue can be dealt with by redesigning products to avoid using the constrained raw material.
- Sales. In a complex selling environment where there are sales demonstrations, sales proposals, and contract negotiations, a backlog anywhere in this process could be the real constraint. The problem is most evident when lots of new sales prospects are being added, while the same number of sales are being generated from these prospects.
It is also possible to designate a resource as the official constrained resource. This is usually a capital-intensive function that the company does not want to invest additional funds in, or an area requiring a large number of highly-paid staff. In this case, management can focus its attention on proper management of the designated area, with the intent of balancing throughput levels and the cost of the resource.
A discussion of throughput concepts is available on Episodes 43 through 47 of the Accounting Best Practices podcast.