Doing More With Less with the Theory of Constraints and Capability-Based Planning

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Recently, I re-read a classic but a favorite: The Goal, by Eliyahu M. Goldratt. Goldratt introduces the theory of constraints — a theory that feels particularly relevant right now in 2020, as many parts of the world are faced with a pandemic-induced recession.

Like many organizations, you are probably facing a growing list of constraints as you’re challenged to do more with less. This necessitates two core responses that need a strategic approach:

1. Invest in the right things – you can’t afford to waste your limited resources on the wrong things. Invest in whatever will actually achieve your business goals, whether these goals be increasing throughput, reducing inventory, reducing expenditure, or a combination.
2. Unlock constraints – remove the bottlenecks and constraints limiting you in achieving your goals. Create buffers to invest in the right things.

The theory of constraints provides us with a great thinking process for the questions:

• What needs to be changed?
• What should it be changed to?
• How do you make the change happen?

But what is that concrete approach that will then help us quickly analyze and answer these questions? I believe the solution lies in capability-based planning, also known as capability modelling.

So, let’s explore how we can bring together the theory of constraints thinking model with a concrete capability-based planning approach to help us do more with less.

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What is the theory of constraints?

Goldratt introduced the continuous improvement concepts in the theory of constraints almost 40 years ago, and it’s just as relevant now as it was back then.

The basic concepts are:

• The ultimate goal of a business is to make money, and the premise of the theory of constraints is that there are constraints that limit or inhibit us from achieving this.
• The constraints can be internal or external. Internal constraints are related to people, policies and equipment, which can be measured by throughput, operational expenses and inventory. (This is similar to capabilities, which are all about people, process and physical. We will come back to this later.)
• The key to achieving our goals is to reduce our constraints holistically rather than in isolation; otherwise, we will only surface another constraint elsewhere or move the bottleneck to another part of the chain.
• By taking a holistic and balanced approach, we can increase throughput while also reducing inventory and operating expenses. Therefore, the changes made must take into consideration the combined effect on people, policies and equipment.
• Three simple questions are part of the thinking process, as per above: what to change; what to change to; and how.

When the economy is booming, we fall into complacency and operate without much attention to managing our constraints.

Then, suddenly, demand drops, inventories are high, and operating costs are too expensive.

We need to respond to such a change by tuning our throughput to just sufficient to meet demand, while reducing our inventory and operating costs. There’s less budget for discretionary spend, and less to make the necessary changes. We simply have to do more with less.

So how do we increase throughput by eliminating constraints?

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Capability-based planning and the theory of constraints

A capability-based planning (capability modelling) approach takes a holistic view of the organization, or the area of study, to identify the capability gaps that are preventing or limiting the organization from achieving its objectives.

In the theory of constraints, we identify and alleviate constraints; in capability-based planning, we identify and alleviate capability gaps. A constraint can be caused by a capability gap and vice versa; so, the two concepts are not that dissimilar.

In a capability-based planning approach we:

• Define our drivers and objectives to understand why change is needed.
• Visualize or list all the capabilities for the organization, or area of study, where:
  • each capability represents a building block that describes what it does to enable the organization to function; and
  • each capability building block encapsulates and describes the people, processes (including policies) and physical (equipment) required for the capability to exist.
• Assess each capability to determine whether there is a gap that is limiting us from achieving our objectives.
• Define the actions required to address the capability gaps.

Like the theory of constraints, a capability-based planning approach helps us to understand what capabilities to change; what they should change to; and how to cause the change.

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Combining the theory of constraints and capability-based planning

By combining the theory of constraints and capability-based planning, we can be clear about our goals, focus systematically, think holistically, understand perspectives, and plan visually.

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Clarity – staying focussed on the why

Goldratt posits that the goal of any business is to make money (i.e. increase net profit, increase return on investment and increase cashflow simultaneously).

While this is true for commercial enterprises, it is not necessarily true for organizations such as a not-for-profit providing community services. In organizations like this, the goals may be to increase well-being, while increasing value from assets and cash flow from funding. Nevertheless, one way or another, you will have a set of goals for your organization.

With these goals in mind, you must define the constraints or challenges limiting you. For each, what are the objectives (or outcomes) that must be met in order to address them and ultimately reach your goals?

When you have defined your goals, challenges and objectives, you’ll have a clear understanding of your ‘why’. Now you need to stay focussed on achieving this — losing sight can lead to off-track activities and wastage of valuable resources.

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Systematic – have an approach that is thorough and keeps you focussed on the right things

In the theory of constraints, Goldratt proposed the “Five Focussing Steps”:

1. Identify the constraint
2. Exploit the constraint using existing resources
3. Subordinate everything else to the above decision
4. Alleviate the constraint by investing in additional resources
5. Repeat the above on the next constraint

For capability-based planning, we follow the Jibility Steps^®, which keep you focussed on solving the right things. Importantly, these steps maintain traceability, so that we can clearly substantiate why decisions are made. The six steps are Challenges, Objectives, Capabilities, Actions, Initiatives and Roadmap.

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Having a simple, consistent and systematic approach ensures that everyone is on the same page and focussed on the right things. There’s less chance that your team are undertaking activities unrelated to the approach, thus wasting time and energy on the wrong things.

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Holistic – look at the constraints broadly, not in isolation

An organization is composed of interdependent systems, processes, people, and equipment. Fixing a constraint in isolation can yield a bottleneck or new constraint in another area. Taking a systems-thinking or holistic approach to analyzing and understanding the end-to-end interrelated parts is critical in solving constraints.

In a capability-based planning approach, we develop a capability map of the organization or study area. The capability map provides a holistic view of all the building blocks of the organization from a people, process and physical perspective. We can use a capability map to quickly identify the specific capabilities that do not meet our objectives and therefore are not addressing our challenges or solving our constraints.

Using a capability-based approach, we can answer the three simple questions posed in the theory of constraints:

• What to change
  ‍Identify the capabilities that are required for us to meet our objectives, or present constraints that limit us from addressing our challenges and achieving our goals. These are the capabilities that must be changed. Some are existing capabilities, but have gaps or deficiencies. Others are new capabilities that must be established.
• What to change to
  ‍For each capability that must be changed, we must determine what to change. We can achieve this by looking at each one in the context of the objectives, challenges or constraints and assess what people-related, process-related and physical-related actions are required.
• How to cause the change
  ‍Finally, once we have identified all the actions required, we can formulate packages of work or initiatives. These are collections of related actions that we execute to fix the gaps and deficiencies.

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Perspective – contextualize and prioritize what changes are the most important over a time horizon

So far, we have talked about constraints in our business, but likewise there are constraints in our planning and change execution processes. The same thinking and concepts should apply in how we ensure maximum change execution throughput within the context of maximizing return on investment and reducing inventory.

Having analyzed what to change and formulated a list of initiatives that must be executed, we have to prioritize within the context of value (return on investment) and risks (likelihood of success). We can plot this on a 2×2 grid like the following illustration.

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Using this 2×2, we can determine which initiatives fall within our execution constraints (usually budget or time). The initiatives that are within these constraints are the ones we need to focus on delivering first, because they are likely to deliver the highest value with the lowest risk.

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Plan visually – visualize and communicate how to get there with a roadmap

Finally, the most important step for your endeavor to succeed is to communicate your plan and gain consensus from others; your hard work is wasted without sponsors or advocates.

To do this, create a simple visual showing the steps needed. We call this a strategic roadmap.

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The key to more with less

As we strive to meet our goals, the theory of constraints gives us a great thinking model that is complemented by a concrete approach like capability-based planning. Combining them helps us to secure clarity around why we need change; a systematic approach that is simple and consistent; a holistic approach to ensure coverage; a perspective to prioritize; and a plan that is easy to communicate. All of these elements are key if we hope to do more with less.