We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

Are you externally constrained? Yes or no?

Your company is externally constrained if your company (usually) has the capacity to sell more than it does.

We call it externally constrained instead of market constrained because there a many other factors external to the company which may constrain its ability to sell. For example, government regulation is often an external constraint. Credit availability would also be an example of an external constraint.

Being externally constrained is not inherently bad. In fact, an amount of “protective capacity” is necessary to be responsive to the market, have competitive lead times, and meet due date commitments.

Conventionally, a company responds to being externally constrained by cutting costs, especially people costs by layoffs. In some instances, especially when the company is short of cash, this may be necessary. However, contrary to popular opinion and practice, such attempts to “balance” capacity to sales demand is not good management because it directly causes a chaotic work environment, leading to long lead times and poor due date performance.

Are you cash constrained? Yes or no?

Your company has a cash constraint if and only if you have enough customer orders but your suppliers will not supply you their products and services unless you pay with cash upfront.

Approached conventionally, a cash-constrained company will usually go bankrupt because in the short term, the timing of the cash outflows is more than the cash inflows, and the cooperation of the suppliers and customers cannot be achieved quickly enough to prevent the company from running out of cash.

While it is rather unusual to be cash-constrained, recent economic events may result in customers unilaterally stretching out payables and/or banks restricting credit, so a cash constraint can suddenly emerge.

…to be continued.

Here’s to maximizing YOUR profits!
By Dr Lisa Lang

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