Understanding How Constraint Theory Affects Business
August 9, 2012 Leave a comment
So you have always loved cooking and have always wanted to open a little restaurant or coffee shop. Now you have achieved your dream and are ready to open up a little restaurant how do you ensure your restaurant will be profitable?
Well one thing to think about to ensure that your new venture is profitable is to be mindful of how constraints limit your ability to maximize your earning potential. For example, every restaurant operation suffers from a constraint on the limited number of tables for customers. A second typical constraint of operating a restaurant is the limited number of meals that can prepared at any one-time.
A restaurant manager must understand that the completion of service to a customer is a completion of the revenue cycle. The steps to this process are (a) customer sits at table and orders meal (b) meal is prepared in kitchen (c) wait staff serves food (d) customer eats food (e) customer pays bill, with this last step the completion of the revenue cycle. A restaurant manager must look at each of these steps and consider how constraints limit the potential to maximize revenue.
Dr. Eliyahu Goldratt, a physicist who became a business management guru, and is best known for his book, The Goal, which laid out Dr. Goldratt’s theory of constraints. The theory of constraints is based on the idea that in every process there is one or more steps that cannot handle the same capacity as the other steps in the process. The step or steps that have less capacity then all the other steps in the process is referred to as a bottleneck by Dr. Goldratt. Each of the five steps identified above, needs to be considered in relation to its capacity and the bottlenecks in the process need to be identified. When I first became aware of the theory of constraints, I was an MBA student and the Chief Financial Officer for a local consumer products distribution company. I was able to successfully apply Dr. Goldratt’s principles to measuring and increasing the speed and movement of product through a warehouse type environment and managing bottlenecks.
So how would the principles laid out by Dr. Goldratt work to ensure profits in the new restaurant operation. Well, as I said, the theory of constraints is about either increasing the capacity or reducing the workload of steps in a process so that demand is equal to the load the bottleneck can handle. So logically, the more customers a restaurant can serve during its operating times the more revenue would be generated. If a resource is underutilized or is a bottleneck this reduces the number of customers a restaurant can service and as such limits the amount of revenue generated. Examples of possible bottleneck that could slow down the flow of customers through a restaurant are the meals cooked in relation to resources available to cook those meals. Let me explain this further, If a restaurant’s menu offers dishes that take longer to prepare as a greater percentage of the total meals offered then more resources need to be devoted to processing these meals then a restaurant that serves a high percentage of dishes that take less time to prepare.
Another bottleneck may be a server or bus boy that is slower than average. In this case, a server or bus boy that is slower than the average of all servers or bus boy’s in the restaurant can slow the movement of customers through the restaurant. Let us explore a situation where a server average rate of service to tables is 5 tables per 15 minute period. The average server at that same restaurant serves 15 tables per 15 minute period. In an average eight-hour working shift, the slower server is costing 10 tables per 15-minute period or 40 tables an hour and 320 tables servicing a shift. The lost revenue suffered by having this bottleneck in your restaurant process can be calculated as follows. Say the average customers per table are four and the average customer bill is $5. So in this hypothetical example the bottleneck identified, in this case the slow server, is costing the restaurant $6,400 per 8 hour shift.
However, sometimes a constraint is also revenue generating. for example, if a restaurant manager believes that customers will buy more foods and /or drinks by staying longer for social purposes, then the additional revenue generated from the customer’s longer stay must be considered against the costs of the constraint.
–Charles Seeman is a financial executive with a passion for and a proven ability to provide strong innovative leadership to any organization. He posses a unique ability to view the organization from a 360º enterprise prospective, a strong ability to adapt to any business environment, and a unique combination of superior technical skills and business management skills that will improve the profitability of any organization. You can connect with him on LinkedIn or email him at firstname.lastname@example.org.