In “Theory of Constraints, for ecommerce companies,” my previous post, I discussed the basics of Theory of Constraints, a system of continuous improvement developed by Dr. Eliyahu Goldratt, a physicist and management consultant. In this article I will describe how we implemented some of the components of that system in my ecommerce company, overstockArt.com, which sells hand-painted art reproductions.
We carry unassembled inventory. We also have a pick-and-pack assembly operation that we call our production department. As with most ecommerce companies, our customers expect us to ship the products (art, in our case) within 24 to 48 hours, which means production can’t have a backlog. Everything must go out the same day or the next. Therefore, even though our production team can easily meet the average amount of orders per day, our challenge was staffing low and high order volume on a daily and weekly basis. Unlike other businesses, which mainly see seasonal changes, for us the change in volume occurs daily.
Many companies use part time employees or pay overtime to existing staff to compensate for the fluctuations. We were guilty of both of those in the past. At some point, we decided that we desired more skilled personnel, which meant having full time employees. We also decided that we must have excess capacity, which meant we would not measure efficiencies by metrics such as production per man-hour or the output of each station. Instead, we measured total production output. Since we do not build finished goods inventory in advance, the output of our production department is true throughput to the customer.
We chose to start applying Theory of Constraints — TOC — with the production department since it was much easier for us to recognize a physical constraint than it is to identify other types of bottlenecks. Using the focusing steps and charting our production process, we identified our packaging area as the constraint. It was convenient as it is at the end of the line. This was the first step in identifying the constraint. The next two steps were to decide how to exploit the constraint, and then subordinate everything to that decision.
There are two ways that you can exploit a constraint without any additional investment and without major effort.
- Build a buffer in front of the constraint so that it’s never out of work.
- Have both management and employees educated to the fact that this is our constraint and this is what controls our throughput so that as a department our production team is focused on making sure this area is always operational.
The next step is to elevate the constraint. At this stage we were looking for better packaging options. We were looking for a process that will keep our art safe — maybe even reduce the number of damages we get from FedEx, our principal carrier — and increase the speed of our packaging process. Once we identified a solution, the constraint was elevated without additional cost and throughput was increased significantly.
At this stage we moved to step five — determining if the constraint was broken. If it was broken, we started the entire process again.
Overall results have been an increase of 50 percent in throughput without an increase to operational expense. The method used to identify core problems or constraints is at the heart of the Theory of Constraints.
Where do you think your operation lags behind? Use the five focusing steps to rein in constraints, improve throughput, and increase profitability.
See the next installment of David Sasson’s “Theory of Constraints” series, at “The value of focus, within Theory of Constraints.”