To ensure you are creating the most value, you need to focus on solving for the constraint. Therefore, it’s imperative to clearly understand what a constraint is. In this blog, I explain what a constraint is and provide real-world examples.
In my last blog “the weakest link,” I explained that the Theory of Constraints (TOC) is a systems-based philosophy. It states that businesses are systems, which can be viewed as chains. The products or services that businesses provide to their customers are the outputs of those chains. The chains are only as strong as their weakest links or constraints. Therefore, when considering what to improve, focus on the constraints. Improving the strength of a link other than the weakest link does not improve the strength of a chain. Time spent improving non-constraints is not nearly as valuable – if valuable at all – as time spent improving the constraints.
So what is a constraint? Eli Goldratt defined a constraint as “anything that limits a system from achieving higher performance versus it’s goal.”
In continuous improvement efforts, people often make the costly mistake of too narrowly defining what a constraint is. Again, a constraint can be anything. Many people limit their notions of constraints to things that are tangible. An example of a tangible constraint is physical inventory accumulating at a station on a manufacturing line because that station cannot keep up with the flow of the manufacturing process. Another common tangible constraint is technology. For example, an application may not offer the functionality or performance required to fulfill a service and/or multiple applications may not be integrated, making them constraints.
Those are examples of tangible constraints, but there just as many – if not more – examples of intangible constraints. Intangible constraints may take one of the following forms (they are representative and are not exhaustive).
- Weak customer value propositions
- Illogical internal policies
- Inefficient roles and responsibilities
- Poor processes
To bring these to life, I’ve provided a few real-world examples of constraints in banking, specifically lending. For each example listed below, I’ve provided the situation and the complication. As you read them, identify the constraint. Then, assess if it is tangible or intangible.
- Situation: a given market is saturated
- Complication: the bank does not have a compelling customer value proposition to differentiate against competitors and gain market share. It is unable to develop and deliver competitive products and services quickly
- Situation: all loans are underwritten using the same process, regardless of the size, complexity, or risk
- Complication: internally, the bank spends the same amount of resources originating a $50,000 loan as it does originating a $5,000,000 loan. From a customer perspective, they have to provide the same amount of information (often a lot), spend the same amount of time on it (often a lot), and have to wait the same amount of time (often a lot) to get approval and funding for a $50,000 loan as a $5,000,000 loan
- Situation: loan officers spend too much time on lower value tasks, e.g., administrative tasks and some portfolio management tasks
- Complication: loan officers do not spend enough time on higher value tasks, e.g., relationship management and sales activities to identify and qualify more deals. This limits the overall revenue funnel for the bank
My opinion is the above are largely intangible. That said, when many organizations are faced with these real-world situations and complications, they fail to identify the true constraints such as a weak customer value propositions, illogical internal policies, inefficient roles and responsibilities, poor processes. Therefore, they spend time and money solving for non-constraints, and solving for non-constraints is not nearly as valuable – if valuable at all – as time spent improving constraints.
Often, the red herring is technology. For the second time in this blog, I’ll quote Eli Goldratt. He said that “technology is necessary but not sufficient,” which is exactly right. The return on time and money spent on technology may be null – at best – if the true constraints are not addressed, and often times the true constraints are intangible.
I challenge you to think about a business complication with which you are familiar. It could be for your company or a client. It could be past or present. Identify the true constraint. Assess if it’s tangible or intangible. Then ask yourself if you, your company, or whomever are actually solving for the constraint. If not, then you’re probably leaving a significant amount of value on the table.