The 5 Steps to Focus - Step 2: Exploit The Limiting Factor

In business, what is focus? The objective or goal of most businesses is to make money – as much as possible now and even more in the future. Every manager and every employee is (or should be) focused in a way that achieves that. My question is: Are all managers correctly focused to make as much money as possible now and in the future?


If I where to ask almost any manager in any business I believe the answer I would get is an incredulous look for such a silly question. Of course that is their focus.


Nevertheless I am quite sure that the majority of managers, while focused, have the wrong focus (sometimes what is called focus is something like focus on everything). Their company’s bottom line is damaged.


(I owe the 5 Focusing Steps to Dr. Eliyahu M. Goldratt)

Optimize the Business – Decide to Exploit the Limiting Factor

Since cost is often a primary concern there is a fair chance that the majority of businesses have, at least apparently, a limiting factor internal to their organisation – a person, a group of people or possibly an expensive piece of equipment. If this is the case, and the goal is to make as much money as possible, then the limiting factor must operate at its maximum capacity to generate Throughput. Throughput is not the production of physical goods – it is the rate at which the business makes money.

Your business needs to decide how the limiting factor should be employed so that it does actually produce for the bottom line.

This sounds obvious, but you will find that parts of the organisation will not know what will cause the constraint to deliver optimally to the bottom line. For example, take operations like synthetic fibre or film production. The gauges of such products will range from the very fine (or thin) to the very coarse (or thick). If the products are sold based on a kilo price they will have very different prices per kilo. Price depends on what you can get on the market; while profitability depends on both that price and how effectively the products sold use the limiting factor. Take the following example. Product A has a price of 1000€/Kg, product B has a price of 100€/Kg. The gross margin (Throughput) of A 950€/Kg while that of product B is only 50€/Kg (Gross margin (Throughput) is price less materials cost (acually totally variable cost).) The limiting factor must run for 100 hours to make 1 Kg of product A, but only 4 hours for product B. Product B delivers 12.50€/hour will product A manages only 9.50€/hour. Clearly product B with the much lower margin makes significantly better use of our limiting factor.

That was a simple example, but what about different materials prices? What about products that do not use the constraint – but do use other resources that products that go through the limiting factor also use? What about feeding the limiting factor; what are the consequences of starving the constraint of work? How much of the limiting factor’s capacity should be committed? Do we even want the constraint or limiting factor to be inside our company?

1. What about Throughput?

With modern ERP systems it is easy to develop the material cost of a product; so there is no real problem to develop the Gross Margin (or Throughput). In fact materials cost is all you need (more accurately it is totally variable cost - like materials - that we need to know). There is no need to allocate labour and overhead. These costs have to be paid for whether or not we produce. Over a fairly large time span they are fixed. If we do make a change to fixed costs the business must consider the consequences this will have on the Throughput of the company. If the cost reduction is smaller than the (potential) Throughput lost then don’t reduce costs. If adding operating expense does not add significantly more Throughput, then maybe you should think again.

2. What about products that do not use the constraint?

These (in an internally constrained system) can be called ‘free’ products. Earlier we preferred the product with the higher Throughput per hour consumed at the constraint. A ‘free’ product does not use the constraint so the Throughput per unit of time goes to infinity! Such a product is very desirable and will usually make a disproportionately large contribution to the company’s bottom line. Care must be taken that such products do not cause the constraint to be starved.

3. What about feeding the limiting factor?

Your limiting factor is the key component in your value chain. If it cannot perform, it will not produce Throughput – Throughput that is lost for the company's bottom line. If any other resource is down for some time there will be no or very little impact (unless this 'starves' the constraint!). Because all resources have more capacity than the limiting factor they can always catch up – there will be no loss to the company.

This being so means the limiting factor must be protected from ‘starvation’ – he, she, it must never run out of work. Due to the uncertainties we all must live with, the constraint needs a certain amount of buffer as a safety net against ‘starvation’. This safety net could be some inventory strategically placed in front of the limiting factor (or starting production with enough time buffer that material arrives at the limiting factor before it runs out of work).

4. How much of the limiting factor’s capacity should be committed?

Everything we have said so far would indicate 100% of the constraint’s capacity should be committed. But, is this really wise? If you commit 100% of the constraints capacity you make an assumption that can probably never be correct. You assume that demand will be constant at the 100% rate. We all know  this would be Utopia!

As the limiting factor approaches 100% capacity utilisation its ability to deliver on time diminishes – in fact its ability will at some point fall off a cliff – work at the constraint becomes chaotic as it tries to fulfil demand that seems to come from all sides. It cannot be done. If you don’t take the right decision (to maintain some 'protective capacity', the market will help you. As your delivery performance deteriorates, your once loyal clients will begin to switch to your competitors. This will continue until you are again able to deliver on time. (Think about the power of 100% reliability - what costs more? Leaving capacity apparently unused; or losing clients due to unreliability? The decision is yours.)

If the process were just a self correcting feedback loop it would not be a problem. However, your poor performance will be remembered. Customers will take quite some time before they return, and when they do there will probably be price pressure. If you are not a monopoly overextending your constraint is a good way to damage your business. The sales organisation, because they are focused on gaining (new) business are a key factor. In most businesses they do not know the limitations of the limiting factor.

5. Do we want the limiting factor to be inside our company?

In point 4 just above it seems clear that an internal constraint is difficult to manage and, if we have one, we must slow down our sales organisation’s efforts to avoid disappointing our client. We must restrict sales to avoid the reputation loss, lost business and price pressure.

The company should take the strategic decision whether or not to have an internal constraint. Except in situations of very high investment costs it would seem to be preferable to make sure the limiting factor is the market. If the constraint is the market, sales will not cause an overload and business growth will not be impeded. The company will still need a mechanism to understand when capacity should be increased so that the constraint remains in the market.

With the constraint in the market the how to exploit decision becomes how can I make sure customers want to buy from us and continue to buy from us. Reliability is one reason. Speed (short lead-times is another. Frequent and rapid new product and improved product introductions will also certain help maintain loyalty. Now we need to figure out how we can do that!

We have our second step on the road to real focus: 2. Decide how to exploit the constraint.

The pictures below are a poor way to exploit. The idea is to get the most Throughput - make the most money. OVERloading is usually not the way. You want 'protective capacity' to be able to take advantage of opportunities that will arise. Without protective capacity you have to pass!

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