Theory of Constraints – Overcoming Supply Chain Issues
What’s your construction company’s weakest link? Identifying and addressing the constraints that are holding your business back, one by one, is they key to long-term success. This week we’re talking about the theory of constraints: how to apply it to your business and how it can be used to address the supply chain issues many of us are still facing today.
Topics we cover on this episode include:
- Theory of constraints basics
- The story of Herbie and performance gaps
- Parkinson’s Law
- Why you should focus on your weakest link first
- How to minimize buffer time on your jobs
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Rob Williams, Profit Strategist | IronGateESS.com
Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | McWins.com
TRANSCRIPT
[00:00:00] Rob Williams: Welcome to the Contractor Success Forum! Today, we’re discussing the theory of constraints and overcoming supply chain issues. On the Contractor Success Forum, we discuss financial strategies for running a more profitable, successful construction business.
I am Rob Williams with IronGate Entrepreneurial Support Systems. We have Stephen Brown with McDaniel-Whitley bonding and insurance agency. And we have a Wade Carpenter with Carpenter and Company, CPAs.
So today, what is the theory of constraints and how is that helping us with all these crazy supply chain issues that we’re having these days?
[00:00:47] Wade Carpenter: Well, just to kind of introduce it, we did a podcast a couple months ago about the supply chain issues and a construction trade organization heard it. And they asked me to come in and speak to their group in end of June here. And, you know, I started thinking about all the issues that we had.
Last time we focused on the costs and obviously there’s delays and things like that because people can’t get materials. And some of that is still going on. There’s probably a lot of that still going on. Some of the costs have stabilized, but you know, people are still having issues trying to get their projects done. And we’ve had some things like, I got a contractor out at the airport that can’t get enough concrete. It’s a $3 million job and, he can’t get enough concrete to finish the job. He’s having to do it 40 yards at a time.
What is the theory of constraints?
[00:01:33] Wade Carpenter: In developing this thing, I started thinking back to, the theory of constraints actually came up in a book, or it was coined by Eli Goldratt back in 1984 in a book. It talks about the bottlenecks in a company. And a lot of it has to do with manufacturing, stuff like that. But part of what we want to talk about today is applying it to construction. And it’s sometimes a little tough to make that leap. Rob actually hired Eli Goldratt back in the well, you can tell me when it was, but when you had kind of a manufacturing and crews. Rob, you want to tell us anything about that experience with him?
[00:02:14] Rob Williams: It was great. We had them and we had a few other people, but Eli, we had all his tools. He had the Goldratt Institute. So we had classes that we could give our crews and we had videos and we had all kinds of materials but going in there, they just taught us more and more about constantly how to identify that weakest link, that constraint that’s holding up the factory. And that’s all you really need to focus on. Not all, you’re going to focus on everything, but that’s what you’re going to focus on. We wasted so much time improving areas that were not our weakest link and they didn’t speed us up.
So identifying first and then focusing on improving that weakest link, it multiplies your improvement together. Their goal was usually how can you be 10 times more whatever the measurement was. And that’s impossible. We can’t increase 10 times. But over about a year, you really could. It was amazing.
I think the biggest thing was taking our time when we started this factory. It would take us like two months to get these designs until it was a house framed in the field. And we got it down to about three hours. Not three hours to get it to the field, but three hours to get it into the factory.
It was at least 10 times. That would probably be 20 times faster. Because you just keep working on identifying and then solving that constraint and improving that one thing that you focus on, that’s going to give you the most improvement.
There is always a weakest link
[00:03:44] Stephen Brown: So there’s always a weakest link?
[00:03:47] Rob Williams: There is always a weakest link, isn’t there, Wade? Do you want to explain that?
[00:03:51] Wade Carpenter: I think what I’ve seen, and maybe you experienced, there’s a difference between a controlled environment in manufacturing, which is usually what he focused on, and the chaos sometimes that is a construction job.
[00:04:04] Rob Williams: Yeah. Well, answering Stephen’s question, there’s always a weakest link because as soon as you improve your biggest constraint, well then there’s another weakest link. If you have a hundred links, you fix the weakest link, well, the second weakest link is now your weakest link. Or maybe you created a new weakest link by whatever you just fixed.
So yes, there’s always a weakest link.
[00:04:29] Stephen Brown: The point is, the objective here is not just to identify the weakest link and get rid of it, but it’s to work around it?
[00:04:39] Rob Williams: Well, yeah, you could work around it. It’s to improve that weakest link typically, but it could be working around it if you’re stuck. Yes. That could be one way to improve it. But Kaizen is the thing. And in Japanese that means constant improvement.
So in the United States, a lot of people have coined the term can I, which is constant and never ending improvement. So it never ends. You never become lean. You constantly improve.
[00:05:06] Wade Carpenter: Does that make sense, Stephen?
[00:05:08] Stephen Brown: Yeah, I got it.
Giving away margin for revenue
[00:05:09] Wade Carpenter: Okay. Okay. Well, like I said, let’s kind of bring this back to the supply chain issue if we can. And I know we talk a lot on the podcast about people giving away margin for revenue. So if I was to give you a situation, and this is kind of like in reverse, but sometimes they will want a higher revenue job that has a lower gross profit.
But let me give you a scenario and you guys just don’t overthink this, but let’s say you have a choice. You’re a small contractor, you have one crew and you can choose one path or the other. So first path is we could take this one job that’s going to take 12 months to do, it’s $1.2 million, and it’s a 20% gross margin. Or you can take a path of, we’re going to take three $100,000 jobs that only make 17%. And it would take four of those to make a $1.2 million job. So logically speaking, which one would you choose, guys?
[00:06:09] Rob Williams: I’d say the big job with the bigger margin. That’s what logically, it seems like to me.
[00:06:15] Stephen Brown: That’s what I would say.
[00:06:17] Wade Carpenter: We talk about the Sweet Spot and, sometimes we focus so much on the margin and what Goldratt– I’m going to bring this back to the supply chain. But what Goldratt said was that, what’s the throughput? So what if I was to tell you, assuming we could finish one a quarter, whatever, 13 weeks would be the equivalent of finishing that in one year. So what if I was to tell you, on the small job, the $300,000 job, what if we could finish it in 11 weeks? And we could do one and roll back in, what would that do to your profit?
[00:06:52] Rob Williams: 11 times 4, 44… Well yeah, well that would be a lot faster. You’d make more money in that amount of time, then you’d still have some time. So yeah, because if you only had a 15% difference in margin, 17 and 20, but you had 20 something percent difference in time. So yeah, so that then I’d like those small jobs.
[00:07:12] Wade Carpenter: Well, you have to do the math, but if you do the math on the scenario I gave you, you could actually make the same, if we could turn these every 11 weeks. Now, if we went down to 10 weeks, we would actually make about 10 and a half percent more gross profit, or we could take five weeks off during the year and then make the same gross profit. If we bring that down to nine weeks, then the profit goes up about almost 23%. And we could take almost 10 weeks off and make the same profit as that same, that $1.2 million job. Does that make sense, guys?
[00:07:47] Rob Williams: It does. And that time off, that, that does remind me, that has something to do with like deer season, doesn’t it?
[00:07:54] Wade Carpenter: Yeah.
[00:07:56] Rob Williams: You used to have to do that in the winter and the slabs and they’re not getting anything done. They probably make more money by taking time off and going away for deer season. Cause they don’t get jack done in the field anyway with all the mud and everything else.
[00:08:12] Wade Carpenter: Well, I hope that kind of illustrates it. Time is money. But unfortunately with the supply chain, they’re pushing them out longer and trying to get the stuff and everybody’s going over time and trying to get the materials to finish. And we’ve talked about some things like late completion penalties and things like that.
But just to kind of bring that back to it. Let me ask you guys another question, because I came out to Memphis not quite a year ago to see you guys and Rob came and picked me up at the hotel from his office. So if I was to ask you, how long would it take to get from your office over to my hotel, to come get me?
[00:08:50] Rob Williams: 30, 40 minutes.
[00:08:52] Wade Carpenter: Okay. So it’s interesting. You gave me a range. So, why did you say 30 to 40? You gave me a range?
[00:08:59] Rob Williams: Well, we had the three busiest intersections between my office and your hotels. So it could be either one of the best drives if it was Sunday, or it could be a horrible drive if you want me to pick you up at five o’clock.
[00:09:13] Stephen Brown: Yeah, Wade, don’t there anymore.
[00:09:15] Rob Williams: What are you doing staying at that intersection? That’s a busiest intersection–
[00:09:19] Stephen Brown: Call us first.
[00:09:20] Wade Carpenter: Okay, well, I’ll do that, but you know, but if it was as opposed to rush hour traffic, what if it was Sunday morning? You were coming over
[00:09:29] Rob Williams: 15 minutes. I can get there in–
[00:09:30] Wade Carpenter: 15 Now it’s interesting. You told me 15 minutes now, but originally you said 30 to 40.
[00:09:37] Rob Williams: Yeah.
[00:09:38] Wade Carpenter: And so–
so
[00:09:39] Rob Williams: It’s the average, but yeah, it’s not — .
The Herbie story and performance gaps
[00:09:41] Wade Carpenter: Probably an average. But you know, think about the fact that like your subcontractors, they build in a margin of safety because they say, well, how long is it going to take to do? Well, seven weeks. Well, it could take, you know, four weeks if they got in there. Or if things go wrong, it could be 13 weeks or whatever. A lot of times we will build in a margin of safety and there is a buffer between, especially if we’re a general contractor, we’re waiting on other people.
You know, Goldratt has a story in the boy scout hike where he’s kind of relating where they’re trying to get from Point A to Point B before dark with fifteen boys. And they start off and, they get slowed down or whatever. And he’s trying to keep everybody together because he’s the only chaperone there. And a couple of the boys are way ahead of everybody else and then there’s another, somebody gets behind.
this story–he’s named Herbie, he’s a big fat kid that, he slowed everybody down. And there was a huge gap between these other boys and Herbie, and then everybody behind him couldn’t get around Herbie. So, that’s where we have a gap between other people and then they slow the other pieces of the puzzle down. Does that make sense?
[00:10:57] Rob Williams: Yeah. Yeah. So they would all hurry up and then they would have to wait for the slowest link over there, Herbie.
[00:11:04] Wade Carpenter: Right. Also in the story he talks about like his son stopped to adjust his backpack. Even though he was one of the faster kids, he had something going on. Well, everybody behind him couldn’t get around him. Well, he fixes his backpack and catches up, but then everybody behind him is playing catch-up. They have to run twice as fast. And that’s what happens in construction is that we have somebody waiting on something, whether it’s the weather or, materials or, inspector or whatever gets in the way, then one gets behind and then, one week can be turned into four weeks by the time you’re done with the project.
[00:11:42] Rob Williams: Yeah, I guess you, then you got to fix that situation.
[00:11:45] Wade Carpenter: Right. But you know, Goldratt talks about the gaps between each boy in the story as a buffer. And you have a buffer between different pieces of the construction project. Right?
[00:11:57] Rob Williams: Yeah.
[00:11:58] Wade Carpenter: And so how are we going to manage that when we’re constantly having issues with, we can’t get the materials, we can’t, you know. Any thoughts on that, guys?
[00:12:05] Stephen Brown: I just had a customer of mine, had a weakest link, turned out to be an employee that wasn’t doing their job and didn’t order the materials on time. It put the project, a year project back seven months before they found out what was going on. And then they had to get their hands on a lot of materials that were hard to get, they had to pay more money for them. They had to get a better quality grade then specked out an order to get the job done. And they kicked it. And they’re in liquidated damages because of it. But at least the owner’s happy and they know they’re getting the job done. And they’re going to have the job punched out finished first week of July. And that year project’s run about five months over. But that weakest link was their employee, not just supplies.
[00:12:56] Wade Carpenter: I’m wondering if this project manager was getting punched out because–
[00:12:59] Stephen Brown: The project manager, uh, retired.
[00:13:02] Rob Williams: Yeah, right.
[00:13:03] Wade Carpenter: Okay.
[00:13:04] Rob Williams: Well, what I did–
[00:13:05] Wade Carpenter: –of doing it, huh?
[00:13:06] Rob Williams: What I just heard Stephen say there is they found the weakest link and that’s kind of the big step. You’re constantly finding that weakest link. It just took them too long to find it. So yeah. Be aware to always be looking for that weakest link if they–
[00:13:22] Stephen Brown: Well, this had normally been a great project manager.
[00:13:25] Rob Williams: Yeah. Yeah.
[00:13:26] Stephen Brown: So they didn’t, they just assume they did need to look after him.
[00:13:31] Rob Williams: Yeah. So yeah, identifying that and what Wade was just saying in the story is identify that weakest link. So you identify that. And I don’t know if you’re going to take the story, the Herbie story a little further.
[00:13:42] Wade Carpenter: Well, I think, we can leave that for another day, but there’s a lot of things that, you know in today’s world, if we’re waiting on things, we need to be talking to ourselves and our suppliers immediately. It’s like, what’s going to hold us up? What are we having trouble getting? And those kinds of things. And whether we buy it early or whatever. We can kind of get into that.
Parkinson’s Law
[00:14:03] Wade Carpenter: But one of the things that we talk about all the time on this podcast in relation to Profit First is Parkinson’s Law. If you guys remember, Parkinson’s Law, it really applies to any resource, but originally it applied to the concept of time. So, if we’re given two months to do a job, we’re going to get it done in two months typically. Or if we’re given two weeks to get that job done, or two days, magically things get done.
And we see it all the time on construction projects. Last minute we’re scrambling to do all these things and everybody kills themselves at the end. But, if you don’t have that buffer in there, you’re going to be constantly chasing your tail. So we can talk about that. But, I think Parkinson’s law is the fact that, people are gonna, if you give them so long to do a job, they’re going to take that long.
So just like your story about taking 30 to 40 minutes to get to my hotel, well, they possibly could get it done in 20 or 25 if they scheduled it right.
[00:15:01] Rob Williams: Yeah, and Parkinson’s law, it’s yeah, whatever time is there, they’re going to typically take it up. But then yeah. Squeeze that in there and see if they can do it and focus on that right link. Making sure you’re picking and identifying that right link to work on and then seeing how you can shorten that time up.
Why you should focus on the weakest links first
[00:15:20] Rob Williams: As you were talking, I was thinking about the typical reaction I would get from either our superintendents and crews. They said, oh man, I’m going to get everybody 5% faster and this job’s going to go 5% faster. I’m like, no, the numbers don’t actually work up that way. It’s still only gonna be going faster than as your weakest link. And then you’re just going to have all this downtime in the other people.
So work on those weakest links and get them maybe 10% faster. And you’re going to be a lot better than improving everything equally across the board if they’re not part of the schedule constraint that needs to be improved. Does that make sense?
[00:16:02] Stephen Brown: I think it does. And I think in that story about Herbie, the boy scout and the hike, it was my understanding that the scout mater, Wade you called him chaperone, but here in Memphis we call them Scoutmasters. But anyway–
[00:16:19] Wade Carpenter: The scout master abandoned him. He was out sick.
[00:16:23] Stephen Brown: But no, I’m just messing with you. But anyway, what I’m saying is they had an objective to get to the camp site at a certain time and they identified the weakest link. And turned out he had way too many supplies. They divided up in the backpack. They moved him to the front of the line. And just that little bit of tweak got the job done.
[00:16:48] Rob Williams: That’s right. For so little bit of effort, I think in the story, you can actually, it like tripled their speed. It was going to take, I’m making up this part, you know, it’s going to take six hours. Then they got there in two hours. But just for that simple five minutes of rearranging them.
[00:17:04] Wade Carpenter: And the thing about construction is, there’s so many moving parts. And, boy it’s just really tough to make that leap sometimes. And you don’t know where the things are. So can we spend the last few minutes talking about some of the things we possibly could do? Because, you know, Goldratt– We focus on cost accounting and he doesn’t say we shouldn’t be doing cost accounting, but he’s saying we should use the cost accounting that we do to look at it a different way and he calls it throughput accounting.
How to minimize buffer time on your jobs
[00:17:36] Wade Carpenter: So that’s a story for another day, and maybe we can do a whole episode on that. But what do we do about the supply chain? How do we speed it up? I made the point about Parkinson’s Law. And one of his points in one of his other books is like a Gantt chart. We say this subcontractor’s gonna do this today. They work against us because we built in the safety and we’re trying to catch up. How can we recapture some of that buffer?
What he says is well, especially if you’ve got liquidated damage issues, maybe you go to your supplier and say, if you can get this done in nine weeks instead of 12, then I’ll give you another 2% profit. But also as part of that, let’s say, I don’t know, the slab’s got to get done. And then, somebody has got to come in next to, you know, masonry or whoever’s the next supplier.
What if the first person comes in and says, we’re going to be done in two weeks. So we’re going to tell the next one in line, they think they’re going to be done in two weeks. And then one week we tell them. And then two days before. And, just tell them, you want this extra profit, we’re going to give you some heads up, but you got to get in there when we need you. Things like that can bring that buffer time down because they’ve probably got their people committed on something else.
[00:18:49] Rob Williams: And identifying and again, making sure that person, which in that case, that was our bottleneck was from the slab to the framing. That was one of our big bottlenecks. Yeah. You identify that that is the part that needs to be fixed, if you can do that.
And you were just saying about the supply, I had a guy 12 to 18 months of lead time for his material. And you just made me think about that. It’s like, okay, was that really, 12 to 18 months? Or could he have FedExed it for something else and gotten it in two months? Who knows, but if that was his bottleneck and was it really 12, 18 months, or were they just telling him that to cover, like you said?
[00:19:29] Stephen Brown: And isn’t it interesting that nobody knows when the supply chain issue’s going to loosen up? This is what’s going on right now with the construction industry. They can predict it and everything, but, I read an article that just a lot of it depends on all the storage containers that are stacked up at the Los Angeles shipyard. And the ships are told don’t come in and drop your stuff off because we don’t have space and room for you.
Communicate with suppliers and subcontractors on the issues that might cause delays
[00:19:58] Stephen Brown: There’s a lot going on there. So everybody’s going to, you call and you order some pipe, they’ll go, well, it’s gonna be six to nine months before I get it. Whoa, no. They know they can’t do business that way. The pipe suppliers. They’ve got to you a more definitive answer than that. And then you call a sub and you say, I really need you. We’ve got everything lined up. I’ll give you a bonus if you can move up your work. And they say, okay, I’ll do it. Or no, can’t possibly do that. Then you got to figure out another angle of attack, right?
[00:20:31] Wade Carpenter: Right. Well, you brought up the next point, but you know, if you’ve got like all these subs behind you and then go to either the suppliers or the suppliers to the subs and say, what are you having trouble with?
Because exactly that point, I may have brought this up on the podcast before, but I had a multi-family contractor that was held up $900,000 final draw because they couldn’t get this one fire protection, like part that was specified, so they could not get the CO. Stuff like that that’s sitting on– so, right now we really need to go and talk to all of our subs and our suppliers and say, where are we having trouble getting this stuff? Because they had no clue as to how long it was going to take to get these specific fire protection parts. That’s another thing I would tell you, immediately that, go do that if you’re in the middle of a project. Make sure something’s not going to hold you up.
[00:21:25] Rob Williams: Yeah. Yeah, because there are people, especially when originally the ships were stacking up there. I had one client, scaffolding manufacturer– or actually friend. And during that I was really worried about him, cause this stuff’s coming in from China, and he was stressed out.
And then next time I talked to him and he was like, oh no, we, yeah, we got it figured out. This guy’s real ing– actually. I don’t know what he did and how the heck he got it when nothing was coming in over there. But he figured out a way to make it happen in just a couple of weeks, a lot faster. And it wasn’t from doing that. So he knew that was his bottleneck and he fixed it and doesn’t really matter how he fixed it. He knew that one thing was it, and he was aggressive and he didn’t take that for granted that was the answer and then just accept it. He found a way to make it happen when there were all these other people that are just stuck and said, no, we can’t do anything about it.
Well, somebody’s figuring it out. And that probably makes other people’s even take longer. So be one of those guys that’s figuring it out. Don’t be the passive guy that’s just sitting and putting his hands up.
Time is money – for owners too
[00:22:35] Wade Carpenter: That brings one more point and I know we probably need to wrap up and I’m not making all my points today, but, time is money also for the owner. So like in that multi-families, they could not rent out the apartments. Or in the case of a developer or a home builder, whatever, they can’t get any cash until they finish it. So there’s money tied up at the bank. They’ve got money tied up in future income for these apartments, so we’ve got to remember that.
And in that case that I told you the story, the owner went back to the engineer, architect, I’m not sure, that specified this particular thing in the fire protection system. Got them to change the specs. And then they went to the inspector and there was stuff that was sitting on the shelf that they could use. And it was substantially the same.
But just by talking to them, time is money for them too. And sometimes we got to think about, how do we shorten the chain? So I guess we’re kind of out of time and I may need to wrap up, but, I hope this has made some sense to everybody. I’m loving the topic, kind of, as I’m developing. I’d love to gives
[00:23:35] Rob Williams: few of these.
[00:23:36] Wade Carpenter: Yeah. I’d love to give this talk again to any other trade organizations out there. I think it’s a great timely topic for your members.
[00:23:43] Rob Williams: Oh, yeah, that’s great. Yeah. So how would they, this is a quiz question here. If somebody is like interested in that, where would they go? How would they find out? Stephen, do you know where they would go to contact us?
[00:23:58] Stephen Brown: Contractor Success Forum. We have–
[00:24:00] Rob Williams: Dot com? Or oh yeah, go ahead.
[00:24:02] Stephen Brown: Yeah. And it’s Contractor Success Forum, not contractors.
So,
[00:24:07] Rob Williams: Oh yeah.
[00:24:08] Stephen Brown: Look it up that way.
[00:24:09] Wade Carpenter: I think we’re on all the, Apple and Spotify and all those.
[00:24:12] Rob Williams: Yeah. And is anybody on LinkedIn? Have y’all ever been on Linked–yeah, LinkedIn? So where did they go for that? We’ve got a forum.
[00:24:20] Stephen Brown: LinkedIn homepage.
[00:24:22] Rob Williams: Yeah, we get the homepage and we’ve got it a little discussion place there.
So yeah, Contractor Success Forum, type it in LinkedIn, you find us, discussion, ask us questions. We should ask them some questions and maybe get some answers. Wade Carpenter, where would they go? They want to hire you for one their trade associations to do a talk?
[00:24:41] Wade Carpenter: Just either contact me through the webpage there or CarpenterCPAs.Com would be great.
[00:24:46] Rob Williams: All right, man, that would be a heck of a topic. Cause I know everybody’s got all these meetings right now and because hotels, everybody are coming back and they’re meeting, they’re having all these events. So, that’d be a great resource for our listeners and their trade organizations to have Wade come speak about that.
Oh, wait, by the way, who are we? Stephen Brown. McDaniel-Whitley bonding and insurance agency. Wade Carpenter, Carpenter and Company, CPAs. And I am Rob Williams. IronGate Entrepreneurial Support Systems. So thanks you guys for listening to the Contractor Success Forum, and we’ll see you at the next episode.
Have a great day.