Have you ever wondered why some businesses seem to run smoothly while others live in a constant state of chaos? I see this all the time in the field.
Some operations churn along like well-oiled machines. They produce consistently decent sales volume for their space. They can handle all their customer traffic properly. Managers are proactive. Purchase orders are placed and received without issue. Deliveries go off without a hitch. Inventory counts are always right. Accounts payable is current. Financial statements are correct and timely each month. Customer service issues seldom occur and when they do, the customer comes out happy in the end. Employees truly enjoy their workplace. Cash flow is good.
Other operations live by the seat of their pants. They move from fighting one fire to the next. Managers are reactive. They spend their time and energy focusing on the biggest problem of the day. Retail traffic and sales projections are a mystery. Sometimes there are not enough trained salespeople to handle the customer load properly. Other times salespeople just sit around staring at the door. Purchase orders occasionally arrive wrong. Merchandise on the floor is old and inventory quantities are often wrong. Damages occur and customer service issues are a problem. There are many complaints to deal with. Payables get behind. Financial statements and management reports are unreliable. Employees are stressed. Cash flow is poor.
The difference between operations that run smoothly and those that are chaotic is often the number and severity of operational bottlenecks. A bottleneck is a slowdown in business operations in one or more areas. Work piles up in the bottleneck area which negatively affects downstream business functions due to the less than optimal management of workflow.
Bottleneck Example: A client of ours was having trouble serving customers properly because their salespeople didn’t have access to quality inventory information. Salespeople would actually call the warehouse to check on stock availability. Then the warehouse had to physically look for stock and call the salesperson back! Many customers would just leave. The result was that both sales and the warehouse employees had to do more work with fewer sales for the business. Can you guess the cause? It was bottlenecks in inventory control and IT communications. This led to issues downstream in the sales department.
Bottlenecks are caused by productivity constraints. A constraint is some inefficiency in process or ineffective use of resources. The inefficiency in the example above was caused by poor inventory control. Warehouse personnel transferred merchandise across multiple locations without following proper procedures in the store’s IT system. This problem was heightened because untimely and less accurate handwritten and manual key methods were used instead of bar coding which would have reduced human error. The result was a productivity constraint causing a severe operational bottleneck.
Having a smoothly-running operation is a prerequisite for maximizing sales, profits, and cash flow. Better use of resources ensures that fewer costs are incurred. Constraints and bottlenecks on the other hand, add operational costs by causing the application of time and money to the wrong places. For example, if an operation can’t get its financial statements out on time, additional people may be taken off other tasks to meet a processing deadline. If a distribution center can’t find merchandise quickly enough to make promised deliveries, workers need to be hired at additional expense. If product is not being reordered in a timely way causing frequent stock-outs, extra buffer stock is added, driving inventory cost up.
This Theory of Constraints (TOC) was first introduced by Dr. Eliyahu Goldratt promoting the management practice that, “The goal is not to save money but to make money.” The five basic premises for dealing with constraints to improve an organization are:
- Find the constraint.
- Figure out how to “exploit” or improve the constraint.
- Subordinate everything else. Get all other areas of the organization to support the goal of improving the area.
- Elevate the constraint. Execute the improvements necessary to break the bottleneck.
- Review and monitor. If the constraint is still there, go back to step number one.
- If the bottleneck is broken, look to other areas to improve. There is always a constraint to improve on.
Signs To Look For
To assist you in finding operational bottlenecks check for some of the signs listed below.
Signs you may have a constraint or bottleneck that needs attention.
- Too busy to follow-up with customers.
- Lots of idle time.
- Mistakes in data entry.
- Taking too long to enter sales orders.
- Poor or no CRM data: close rates x traffic x average ticket.
- Missing sales goals, repeatedly.
- No sales quotes or old sales quotes in the IT system.
- Lots of split commission sales.
- Excess discounting.
- Few add-ons to sale orders resulting in low average ticket.
- Too much time spent on customer service issues.
- Slow daily cash-out process.
- Unstructured and non-existent sales meeting.
- Poor merchandise mix.
- Stock-outs of hot selling items.
- Poor lead times and transport issues.
- Unfavorable vendor terms.
- Costing issues – merchandise and freight-in.
- Margin drift.
- Merchandise Management:
- Unorganized floor and display issues.
- Missing price points in the merchandise line-up.
- Odd ball pricing.
- No group pricing.
- Too much old, non-selling
- merchandise on the floor.
- Everything is on sale or nothing is on sale.
- Merchandise that is not displayed anywhere, yet in-stock.
- Employees manually hand writing things down and entering data later.
- Inventory out of location.
- Status mistakes.
- Quantity errors.
- Manual or hand written sold tags in the warehouse.
- Re-wrapped merchandise in the warehouse.
Accounting / Management
- Large number of incoming customer calls.
- Backed-up incoming freight.
- High shipping and delivery costs with respect to incoming revenue.
- Returned merchandise.
- Service issues.
- Crowded docks.
- Large amount of undelivered and unscheduled sales orders.
- Slow picking and prep processes.
- Interdepartmental complaints.
- Routine less than full delivery trucks.
- Overuse of equipment and vehicles.
- Poor financial reporting.
- An inaccurate balance sheet.
- Inventory costing issues.
- Over use of spreadsheets.
- Blaming things on IT.
- Delivered sales still showing as written.
- Takes a long time to do commissions and payroll.
- Too much staff for sales volume.
- Month end is always a rush.
- Late financial statements.
- Poor reconciliation procedures.
- Creeping miscellaneous expense.
- High employee stress level and turnover.
- Constant issue resolution and firefighting.
- Poor average profitability overall.
Solutions to constraints must be tailored specifically to your organization. There is no one size fits all. Team dynamics and internal processes will vary from one business to the next. Personalities, abilities, IT, and management structure in your organization should be looked at to determine the best approach.
I believe in focusing on one thing at a time. It could be a mistake for you to try to improve several areas at once. After identifying the best area to focus on, define your strategy. Get all team members on-board. Define the specific tactics you plan to use to accomplish the desired results. Measure your progress, adjust and fine-tune until you succeed. Don’t stop. Keep advancing. The best operations in the world commit to continuous improvement.