Eliyahu Goldratt. I Knew It All Along
Key concepts from Eliyahu Goldratt, Ilan Eshkoli, and Joe Brown Lear's bestseller
All companies face various factors that hinder their success and optimal performance. According to the “Theory of Constraints,” these factors can serve as both tools for improving a project's efficiency and barriers to its progress. In their book I Knew It All Along!, authors Eliyahu Goldratt, Ilan Eshkoli, and Joe Brown Lear demonstrate how the Theory of Constraints can be effectively applied in the retail sector.
Five Steps of the Theory of Constraints for Retail
Many followers of the Theory of Constraints still struggle to differentiate between the terms “constraint” and “bottleneck” (a resource whose capacity limits the system's ability to generate throughput). This misunderstanding hinders the accurate identification of constraints in most non-manufacturing environments. In retail, the constraint is not always linked to the limited capacity of a specific resource.
Step 1: Identify the system's constraint
In retail, the primary constraint is the number of customers entering the store.
As the flow of customers increases, so do sales. The significant influence of foot traffic on store revenue is well illustrated by William Dillard’s famous quote: “Location, location, location.”
Understanding this principle is fundamental for all retail promotions and explains why retailers eagerly anticipate special periods like the days leading up to Christmas.
Step 2: Solve the problem of out-of-stock items
It is no coincidence that many discussions at retail conferences, trainings, and in the literature focus on this issue. Choosing the right products, effective pricing strategies, and optimal product placement significantly influence a store's ability to leverage its constraints by encouraging customers who enter the store to make purchases.
Unfortunately, despite the inability to generate sales when desired products are out of stock, retailers often overlook this key factor. This omission undermines many efforts to maximize throughput.
Step 3: Align all decisions with the identified constraints
Retail chains often suffer from misaligned goal hierarchies. As in manufacturing, retail can fall victim to focusing on local efficiency, resulting in supply chains optimized to reduce current costs rather than to achieve end results.
Instead of directing supply policies to minimize stock shortages and excesses, companies often focus on reducing purchasing and transportation costs, leading to bulk purchasing practices that significantly harm throughput performance.
Step 4: Elevate the system's constraint
Reducing stock shortages improves customer satisfaction and significantly reduces frustration.
Faster inventory replenishment allows retailers to adjust their offerings to reflect actual customer preferences at specific stores. This not only optimizes the constraint but also fosters customer loyalty and increases word-of-mouth recommendations, ultimately expanding the constraint by increasing the number of customers entering the store.
Step 5: If constraints are eliminated, return to step one
This is the most challenging step in manufacturing. Improvements in operational processes can shift the constraint to the market, while sales improvements can return it to operations. In retail, however, this complexity is less pronounced. No matter how much we improve constraint utilization or how much we elevate constraints, they never disappear. In retail, the constraint always remains the number of customers entering the store.