How to Delay Investment and Invest for Maximum ROI
We know that the first three of the Five Focusing Steps of any Theory of Constraints (TOC) project, are:
1. Identify the constraint
2. Exploit the constraint
3. Subordinate everything to the constraint
And we know that, used in conjunction with each other, these steps will improve throughput and, ultimately, profit. But did you know that using these three steps in conjunction with each other can also prevent unnecessary capital expense?
Exploiting your constraint will lead to greater capacity which will help delay investment projects designed to boost capacity. Additionally, because we have identified our constraint, we are able to ensure that all investment projects are designed around either exploiting the constraint or subordinating other resources to it. As a result, we can be sure that, when the time comes for money to be spent, we will know how to spend it for best effect.
It’s a point clearly made in ‘The Goal’: Alex Rogo’s company makes a large investment in robots which, although they do improve the performance of the department where they are deployed by 36%,do nothing to increase the overall productivity of the plant. Nor do the robots help reduce operating expense, improve the amount of product shipped or reduce inventory.
Therefore, as readers, we are led to see that the investment Unico made in the robots was not well spent; the robots did not improve overall productivity and there was no discernable ROI. Of course, we know that this is because the robots did nothing to exploit the constraint of the business. Indeed, at that point, Alex had no idea what the constraint of the business was.
Unfortunately, this is all too common a story. Even where the constraint has been correctly identified, it’s important to ensure that it’s being exploited before making investment decisions.
When you have exhausted the first three steps in TOC, you may find that your constraint moves. After all, it did for Alex Rogo. When Unico fully exploited the NCX-10, a new constraint emerged: the market.
When this happens, it’s possible to further delay investment while you realise the benefits of exploiting, and subordinating resources to, the new constraint.
Take, for instance, the example of a grocery store which identified its constraint as throughput through the payments process. It invested in new self-service cash registers to speed up traffic through the payment process. However, this was done before the constraint had been properly exploited.
At peak periods, many of the original cash registers were not being used. Some might have been awaiting repair. In some cases, the appropriately-trained staff wasn’t available. Before any investment in new self-service machines was made, other actions to exploit the constraint could have been effected.
For example: training all staff to use the cash registers; making it a priority for all staff to man the cash registers during peak periods (stopping all shelf-stacking and preparation activities at these times); changing staff rosters to shorter shifts, so hours were heavily loaded during the peak periods; and renegotiating the support contract with their EPOS technology supplier.
Had these changes been implemented, the need to invest in new cash registers would have been removed, since the constraint had moved. By following steps two and three of TOC before making any investment decisions, the business could have saved itself some money.
In today’s markets, where lending is severely restricted following the financial crisis, this has to be a really compelling reason for following a TOC approach.
Delay capital spending?
Know that any capital spending will have a direct impact on performance and profitability, with an optimised return on investment (ROI) period?