E255 | Theory of Constraints: Maximising Performance and Profitability with Dr Alan Barnard
Do you know what your main constraint is? What’s holding your business performance back? Our guest this week is an optimisation expert, and he’ll explain how to use the theory of constraints to double net profit without doubling sales, in a conversation that explores the power of identifying and managing constraints to achieve optimal business performance.
This week we learned from Dr Alan Barnard. Alan is a thinker who wears many hats; a researcher, strategic advisor, app developer, and author who resides in the heart of Las Vegas. But what stands out about Alan is his lifelong love for learning and his unique speciality in the Theory of Constraints it’s no surprise he’s a driving force at Goldrat Research Labs, co-founded with the respected Dr Eli Goldrat.
Alan’s journey has seen him propel significant improvements in company performance, taking the likes of Cisco Systems, ABB, and Random House Publishing to new heights. A true advocate for system optimisation, Alan isn’t one to shy away from a challenge—instead, he thrives through finding unorthodox solutions to complex problems, truly demonstrating his ability to help businesses optimise and maximise their potential.
In this episode, Alan discusses how constraints can hinder and possibly fortify your business performance. He says that management attention is probably the only constraint in fast-growing, successful businesses. So, how do you apply it to the right things? Finally, he dives deep into the nuances of system optimisation for maximising performance and profitability.
Download and listen to learn more.
On today’s podcast:
- The power of the Theory of Constraints
- Optimising performance and profitability
- What is the ultimate constraint?
- Why do smart people make bad decisions?
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Applying The Theory of Constraints with Dr Alan Barnard
Dr. Alan Barnard is an entrepreneur, strategy advisor, research scientist, app developer, author, coach, philanthropist, lecturer, podcaster, and lifelong learner. He is considered one of the world’s leading Decision Scientists and Theory of Constraints experts. He’s the CEO of Goldratt Research Labs, which he co-founded with Dr. Eli Goldratt, author of THE GOAL and creator of Theory of Constraints.
Alan’s research focuses on understanding why good people make, and often repeat bad decisions, and how best to avoid or reduce such mistakes. Alan and his team at Goldratt Research Labs have developed a range of award-winning Decision Support Methods and Apps that help organisations and individuals make better, faster decisions
In 2006, Dr. Barnard received the Lifetime Achievement Award from the TOCICO for his lifetime contributions to the TOC body of knowledge and in 2020, he was awarded the honour of being added to the prestigious Marquis Who’s Who List for his contributions to TOC and Decision Science.
He also contributes his time and experience as mentor, advisor and advisory board member to a number of non-profit organisations to help apply the insights and experience he has gained over 30+ years to help NGOs, Government Agencies and individuals achieve step-changes in achieving their goals.
The Theory of Constraints
Back in 2009, Alan co-founded Goldrat Research Labs with Dr Eli Goldrat, creator of the Theory of Constraints and whose book, The Goal, has become one of the 150 most-read of all times. It popularised this idea that when you’re trying to analyse, improve and manage complex systems, rather than do it in every part of the system, a much more effective approach is to just analyse, improve and manage the constraints.
“So you have a goal. The goal dictates what resources you need, and it also dictates how much of every resource you need. You need market demand, you need capacity to meet that demand. You need supply, you need cash, and you need management attention. And whichever resource you don’t have enough of to meet your goal is your constraint, and that will ultimately limit your performance”
Alan says your constraint limits the performance of the whole system. So it’s an incredibly powerful hack to say, I can actually analyse, manage, and improve the whole system just by analysing, managing, and improving the constraint. So that was the powerful idea that Dr Goldrat introduced through the Theory of Constraints. And what Alan and his team do at their research lab is take these core principles, look for new applications, and develop new knowledge.
Alan’s first job was at one of the largest cookware companies in Africa. He had read The Goal and couldn’t wait for the opportunity to apply it. A lot of factories producing cookware, mass production, and production lines, suffered from the common problems that most fast-moving good manufacturers suffer from, which was very poor due date performance.
In Alan’s company, around 30% to 40% of the commitments they were making to their retail clients, were delivered on time and in full, which he says was ‘pretty bad’. They had long lead times. So they were forcing customers to give long-term forecasts ahead of time to be able to manufacture. The other frustrating part, he adds, was when they compared the design capacity of their bottlenecks on their various lines, and compared that to the actual production that was coming out, they were way underproducing the theoretical design capacity of their bottlenecks.
So, why would that happen?
To get close to your maximum capacity, says Alan, you should never be starved or blocked. That’s the only way to get one resource to perform at the maximum, is for that resource to never be starved, blocked or never be down either planned or unplanned maintenance.
“We had these production lines, each production line had a bottleneck. We had to arrange that production line so that that bottleneck was never starved or blocked. And the outcome that we got was tremendous. We essentially doubled the throughput in our factories without increasing operating expenses or working capital. We got our due date performance up to 100%, and we got our lead times dramatically down.”
After successfully implementing the Theory of Constraints in the cookware manufacturing company, Alan wanted to test it in the beverages industry, where operations are much harder to improve due to infrastructure limitations. A 3% improvement in this process plant is considered magical, whereas, in a manufacturing shop, you can easily improve by 20 to 30%. So, he tried the principles in breweries and got dramatic results in what he called Operation Squeeze. That is how to squeeze more capacity from these breweries.
The reason why this was so important is that these breweries cost a lot of money to build, and it’s hard to predict accurately what the demand is going to be. So you often are put in positions where your capacity closely matches the demand, and during peak times, you just don’t have enough capacity to meet that. So you either lose sales or you have to import beer from other regions, which is extremely costly.
“So we created this project called Project Squeeze, which was how to squeeze more production out of these facilities without compromising quality, but enough to be able to meet the peak demand, not just the average demand. And the result was astounding we were getting 10% to 15% more out of these production facilities something that people thought was simply impossible fab so you got.”
And in the late 1990s, Alan started working very closely with Dr Eli Goldratt implementing the Theory of Constraints at Cisco Systems, ABB and later Tata Steel and Random House Publishing.
“It just proved to me how wide of an application there was for this very simple concept that rather than trying to analyse and manage and improve the system by analysing, managing, and improving each part of the system, you can do it by just analysing, managing, improving the constraint of the system.”
The power of the Theory of Constraints
To illustrate how powerful this theory is, Alan explained how it can be applied to a process. Find a bottleneck, and find ways to make sure that you fully exploit the bottleneck and not waste it. So make sure it’s never starved or blocked, and that when there is planned or unplanned downtime, it’s fixed as quickly as possible. And as a result, you can improve flow.
“Where the power of Theory of Constraints really comes in is when you’re applying it at the strategic level when you start looking at your business, and you say, well, where is the constraint in the business? Is it market demand? And if it is market demand, what is the best way of growing market demand? So if that’s a constraint, what are the conditions that if I could satisfy, could achieve that?”
Often, CEOs have a limited assumption that costs are fixed. So, to double net profit they have to double sales. Part of what the Theory of Constraints is all about is to identify leverage points in a system, places where small changes can have big impacts, and that happens when you’re dealing directly with a constraint, says Alan.
When discussing this with a CEO of a publishing company, Alan gave him an example of how it would apply to his case.
Their goal was to double their net profit. Their sales at the time in the US were about $1.5 billion. Net profit was 150. So they had committed to doubling net profit to 300. If you think that the best way to double net profit is to double sales, you’re going to have to launch more new books.
Alan asked the CEO, ’Do you think that a customer cares a lot about the prices that they pay for a book? Do you think that they care a lot whether they pay $20 or $22?’ To which he said he always thought that consumers are not that price sensitive, so probably they wouldn’t care that much.
Then, this is what Alan explained to him.
“If you can get an increase in the average selling price of just 10%, that will increase your sales by 10%. So it will take you that $1.5 billion in sales, that’s another $150,000,000. And that will drop straight to the bottom line because your variable cost won’t go up, and your fixed cost won’t go up. So you can double your net profit by just increasing the average selling price by 10%. And that doesn’t necessarily mean that you increase the price. It just means that you give away fewer discounts or you sell more directly to the consumer rather than through wholesalers or distributors.”
That’s the biggest leverage point. The second part, adds Alan, has to do with volume.
Alan told the CEO that if they can increase their volume by 20% and sell at the same selling price on 1.5 billion, that’s 300 million in sales. That’s another leverage point. A 20% increase in the volume will double your net profit, will be a 200% increase in net profit.
“When you start thinking about the system as a whole. You say, where’s my constraint? It’s in the market. In order to better exploit and not waste that market, I have to figure out a way of better utilizing what I’ve got. What are these ways? What are these leverage points? So it’s a much more strategic way of thinking about the business.”
Attention management: the ultimate constraint
Around the early 2000s, when they were dealing with very big companies more often, they started asking the question, where is the real constraint? What is really limiting the performance of a company like Cisco, Walmart or Random House? What is the ultimate constraint? They realised that if you define a constraint as any resource where the demand will always exceed available capacity, there’s only one resource that will satisfy that condition, and it’s called management attention.
Will the number of things that demand our attention always exceed our available attention?
“We have 24 hours a day, but how much time of available attention do we have per day? That focused time, where you can make progress on the things that are meaningful. It’s only a couple of hours. And it was fascinating to me when we discovered that, and we started reading up everything about this new science of flow is that it’s very similar to achieving flow in a supply chain, right, which is undistracted.”
So, now that we understand that the ultimate constraint is probably the top management’s limited attention, how do we make sure that they focus on only those things that really matter, those few leverage points, high leverage points that can make a huge difference? How do we stop them from doing the many things that are not that important or will only help a little bit?
“That was a profound insight and made a massive change in how we were engaging with companies because now it was okay. So the ultimate constraint is going to be management attention. So our job is to find out what you should focus on. Focus is not just about identifying what to do. It’s as important as what not to do. What must I stop doing? Because it’s just a distraction.”
Thinking in sequence
Alan explains that one way of thinking about constraints is by looking at them in a specific sequence. So, if we’re trying to find what’s the one thing for top management to focus on now that will have a big impact on the goal of the system, when you set a goal for yourself in terms of either making an impact or an income, depending on whether for profit or for purpose, the first question that you should ask is, do we have a clear goal?
By definition, you can’t say what will be a constraint if you haven’t defined a clear goal. The goal is what dictates the resources you need and how much of each you need. Once you’ve got that, the next question is: Is there enough demand for that product or service to meet the goal? And the set of milestones that you’ve set? Maybe you have a five-year goal with annual milestones or quarterly milestones. Do you have enough demand for the product or service to meet that goal? If you say no, then that’s the one thing to focus your attention on.
Then, the next question is, would I have enough capacity to produce and sell this demand to that market? If not, then that’s the one thing. Then the next question would be, do I have enough supply of raw materials or other inputs that I need to produce enough of the product or service to satisfy the demand to meet the goal? If not, then that’s the one thing.
“That’s kind of a way of me thinking about it in sequence. Where it becomes complicated is that when it feels like you’re in chaos, it comes from the point that you’ve committed to such a goal, such an ambitious goal, that you don’t have enough of anything. So the constraint is constantly moving around, and you can’t manage a system that’s in chaos. And unfortunately, most companies are there.”
Why do smart people make bad decisions?
For Alan, the simple answer is that good people make bad decisions for good reasons. When we see a bad decision, we could think that was made by a bad person, and so we should get rid of them. But, another way of approaching it is recognising that this was a good person that made a bad decision based on a bad or limited assumption. What we need to find out is what were those assumptions causing this person to make a bad decision, says Alan.
And you get two types of these bad or limiting assumptions. One of them is to do with the fact that when you’re trying to optimise systems, you have two needs: to survive and to grow. The problem is that often the protection mechanisms that we put in place are having the opposite effect. If you think about a person in a relationship that is distrusting of their partner, that distrust is causing a lot of harm. The same is true in business. Many times the protection mechanisms that we put in business cause the exact problem that we’re trying to prevent.
The other assumption is that optimising systems often require rules that are very counterintuitive from a local perspective.
“If you think about multitasking at the local level tasking is very intuitive. It makes us feel busy when we are able to do lots of things at the same time. It’s very uncomfortable to say no or not now to somebody but it’s the worst possible way of achieving the highest level of productivity both for the individual but also for the company.”
When we make assumptions about reality that are wrong, it causes us to make and repeat bad decisions in a very practical way, concludes Alan.