In business, you have three primary levers – net profit, return on investment, and cash flow.   A common mistake is optimizing for one of these metrics, which may inadvertently make one or both of the other metrics go in the wrong direction. 

It’s important to view your business as a system, and the system improves when you move the three metrics the right way.

In a warehouse setting, throughput, inventory, and operating expenses are proxy metrics that represent net profit, return on investment, and cash flow, the three levers of a business.

• Throughput: the rate at which the system generates money through sales.
• Inventory: Inventory is all the money that the system has invested in purchasing things that it intends to sell.
• Operating expense: Operational expense is all the money the system spends in order to turn inventory into throughput.

The goal is thus to increase throughput while simultaneously reducing both inventory and operating expense

At its core, manufacturing is a series of dependent events. Ensuring the right interaction between these dependent events is essential for the success of the manufacturing business.

To improve manufacturing, you must optimize for the entire system, not just a local area. The reality is that some resources have more capacity than others, and this needs to be considered when creating efficiencies in the system.

Bottleneck: a resource whose capacity is equal to or less than the demand placed upon it. 

Non-bottleneck: a resource whose capacity is greater than the demand placed on it.

Because bottlenecks are the constraints in the system, if you waste any time on a bottleneck resource, your entire system loses time. 

Utilizing a resource means using a resource in a way that moves the system toward its goal. Utilizing a resource is a productive action.

Activating resources means using a resource, whether or not there is benefit from the work its doing. This explains why activating a non-bottleneck resource is often inefficient – it does not move the system closer to its goal.

1. Identify the system’s constraint.
2. Decide how to exploit the system’s constraint.
3. Subordinate everything else to the above decision.
4. Elevate the system’s constraint.
5. If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system’s constraint.

A manager has the ability to answer three simple questions:

• What needs to be changed?
• What does it need to be changed to?
• How do you cause the change?

Although the 5-step process above can work in any organization, the exact details and application must be tailored to the specific circumstances and challenges in your organization.

The constraints that you face may not always be physical. There could also be intangible constraints, such as attitudes and deeply-entrenched practices from long-standing policies and procedures