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When Constraints Collide

When new product innovation and amanufacturing collide

A reader recently emailed me this question and I thought it might be useful to share the discussion:

My organization is constrained in both manufacturing and new product development. Since new product projects should be prioritized based on throughput per unit of constrained resource usage (T/CU), how should we handle that prioritization – which constraint should drive the priority?

Strictly speaking, systems or networks, rarely have more than one real constraint. While each process in a company may appear to have a constraint, these apparent constraints don’t actually affect the company’s throughput (a cash flow measure) – meaning they aren’t real constraints. Because the processes within a company are highly networked, the only real constraint is the global system constraint – the one constraint that limits the companies throughput and therefore provides all of the leverage for improvement.

So to answer the rest of the question, if you don’t have the capacity to meet demand, prioritize based on return per unit of the production constraint. While that answers the reader’s question, it’s worth a closer look at how these real and apparent constraints interact.

First, let’s consider why companies invest in NPD in the first place. Isn’t it to make more money now and in the future? That is the goal. But more specifically, they do so to move the constraint from the marketplace to the production function within the company.

When the constraint is in the market, which is the case for more than two-thirds of companies, there is more production capacity than the market needs and results are limited by market demand. But, when the constraint is inside the company, there are more sales opportunities than production capacity and results are only limited by our ability to fully utilize our constrained capacity.

Since that is a very desirable situation, companies invest in what Peter Drucker called the two essential functions of any business, marketing and innovation, to elevate demand to a level where the constraint is no longer in the market. Innovation does that by creating new and differentiated products to meet previously unmet needs. Marketing differentiates both old and new products along competitive dimensions important to customers thereby generating more opportunities or leads than the competition can.

So what is the role of NPD once the constraint is no longer in the market? Well, in the short run, it only makes sense to subordinate NPD resources to activities that help to better exploit or even elevate the constraint. This reallocation is something I’ve done before by subordinating R&D resources to qualify manufacturing process changes that allowed for higher production and to qualify alternatives raw materials in the case of raw material shortages.

But, and you knew this was coming, the goal is to make money – not only now, but also in the future. While there may be demand for products we make today and therefore ample product order flow, at some point the demand for our current offering will be reduced. Then throughput will fall as we lower prices to prop-up demand. That’s where new products come into the picture to help better exploit existing capacity by creating higher T/CU products as an alternative to accepting lower priced orders. It also provides an alternative to the lower T/CU products in the portfolio.

While NPD is not the constraint in this situation, it does provide an important role in maintaining and growing the constraint. It provides protective capacity. So while subordinated to manufacturing, innovation capabilities need to be regularly elevated in order to better exploit production and to generate new, higher margin demand so that the constraint doesn’t cycle back to the market.

{ 3 comments… add one }
  • Bill February 22, 2011, 7:48 pm

    Mike: Thanks for the interesting article. I agree that if the goal is to make money now and in the future, the company needs to ensure the generation of profitable sales revenue. This means to increase the rate of “fresh money coming from the outside” or Sales Throughput (totally variable margin).

    The 70% of companies that have their constraint in the marketplace cannot increase Sales Throughput as much as they want because either they have saturated the market or, more likely, their customers prefer to buy from competitors. This happens because the competitors provide product-service solutions that satisfy the customer’s needs better.

    The job of the strategic marketing and new product innovation team is to understand articulated and unarticulated customer needs to develop solutions that meet customers’ needs better than the competition. The product-service solution has to either make the customer more money or save the customer more money than the competitive alternatives (increasing customer’s Sales Throughput and/ or decreasing their Investment-Inventory and/ or decreasing their Operating Expenses). In other words this will only work if it makes a positive impact on the customer’s bottom line and if the company can communicate and prove it effectively.

    If the company is successful and captures new business, it is possible to run into capacity issues. When this happens the constrained resource has moved inside the company.

    Moving the constraint resource inside the company, while desirable, could also mean delivering goods late or not being able to deliver as much as the customers want. The consequence can be irritating strategic customers or causing them business losses that destroy valuable relationships for a long time. This situation affects both aspects of the company’s goal: making money now and making money in the future.

    At this point, the application of the Theory of Constraints (TOC) five focusing steps will tend to successively elevate or break the internal constraints, until the bottleneck is moved again to the marketplace, starting a new cycle.

    I see this as a continuous cycle of improvement where the constraint constantly moves in and out of the company in an upward profitable growth virtuous spiral. Do you agree?

    Regards, Bill

  • Michael A. Dalton February 22, 2011, 8:19 pm

    Thanks Bill – In practical application it’s more of a back and forth as you describe. However, movement of the constraint requires policy changes and causes unnecessary confusion for the organization.

    That’s why TOC has evolved from the original idea of breaking constraints to the approach of managing the location of the constraint. In this case, that entails using NPD and marketing to create or find new demand as protective capacity to prevent the market from becoming the constraint.

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