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.