What you’ll learn to do: Determine the profitability of making changes to a constrained resource
A constraint is anything that keeps you from getting more of what you want. What if you only have so much space to use? Or your machines can only run so many hours of the day?
Every company can identify at least one constraint, so it comes down to a manager to do some analysis and find out how to best use the limited resources available. A constraint can also be a bottleneck in the system. Perhaps you have five machines in your production line, but one of them does not keep up with the one before it. This can be a constraint too. Maybe you have two products that use the same piece of equipment at some point in the process, but it can only run for 24 hours a day, right?
How do you make the decision as to how to use a constrained resource? We need to analyze the best way to use the constrained resource. It may not be the product with the largest contribution margin to your net income. We have to look closer, and identify the usage of the constrained resource to find the answer.
Constrained resources can also happen in a retail business, since there is only so much floor space.
Let’s look at some examples of constrained resources and how to figure out how best to use them.
Let’s first watch this video and listen to an example: