Practical guide for Australian SMEs on reducing manufacturing cost using Theory of Constraints modelling and targeted process optimisation

For Australian small and medium manufacturers, margin pressure comes from rising input costs, labour shortages and the need to compete on lead time and quality. Applying Theory of Constraints (TOC) modelling combined with targeted process optimisation delivers rapid, measurable reductions in manufacturing cost while improving throughput and delivery performance. This guide explains common mistakes, how to align people and equipment, where technology adds value, and a conservative cost‑savings example showing the benefit of engaging the right operational consulting partner.

Why focus on constraints and process targets?

• Throughput > Utilisation: Maximising utilisation of every resource increases work‑in‑progress and lead times. TOC focuses on the system constraint — the bottleneck that governs overall throughput — and improves flow where it matters most.

• Measurable targets: Defining takt time, constraint capacity, buffer sizes and yield targets turns vague improvement efforts into measurable outcomes.

• Faster ROI: Fixing the constraint delivers outsized gains quickly. Follow‑on improvements cascade across the process with lower incremental cost.

  
  

Common mistakes small manufacturers make

• Chasing utilisation for non‑constraint resources: Keeping every machine busy creates inventory, longer lead times and hidden costs.

• Failing to identify the correct constraint: Assuming the bottleneck is a visible machine when the real limit may be labour, material supply, inspection or ERP scheduling logic.

• Weak process targets: No takt time, no buffer policy, and no explicit acceptance criteria for quality and handovers.

• Piecemeal improvement: Small projects that don’t link to the constraint produce limited benefit and often shift the problem elsewhere.

• Poor data and ERP configuration: Incorrect lead times, routings or inventory parameters in the ERP create suboptimal plans and firefighting.

• Underinvesting in people and capability: Lack of operator training, standard work and frontline problem‑solving limits sustainable gains.

• Ignoring change management: Improvements fail if supervisors and operators don’t understand why processes change or lack tools to sustain them.

  
  

Right people, right equipment, right targets

• Identify the constraint using flow analysis: Map value stream, measure cycle times, lead times and downtime. The constraint will have the highest utilisation, longest queues or the most frequent blocking events.

• Set constraint capacity and buffer policy: Calculate effective capacity (including availability and yield) and set time and stock buffers upstream and downstream to protect flow.

• Define takt and standard work: Align production pace to demand (takt time) and document standard work for the constraint and feeding processes to reduce variation.

• Cross‑train and stabilise skills: Ensure operators can cover critical roles at the constraint; implement quick changeover and SMED where applicable.

• Right‑size equipment investment: Buy capacity where the constraint is long‑term; avoid premature capital spend by squeezing waste out first.

• Embed continuous improvement: Daily huddles, visual boards and structured problem‑solving keep focus on constraint health and prevent local optimisation.

  
  

Technology adoption that actually helps

• ERP as a planning backbone, not a band‑aid: Configure routings, lead times, work centres and setups realistically. Use the ERP to enforce buffer policies and protect the constraint.

• Production visibility: Real‑time shop‑floor data (OEE, downtime, WIP levels) focuses attention. Low‑cost IIoT sensors and tablets can plug critical visibility gaps.

• Simple scheduling tools: Constraint‑based finite scheduling or TOC‑informed sequencing produces better flow than infinite capacity schedules.

• Quality capture and traceability: Integrate inspection and rework steps with the ERP to reduce unplanned rework and improve first‑pass yield.

• Document and training systems: Digital standard work, short video guides and checklists accelerate adoption and reduce variability.

  
  

Change management: getting sustained improvement

• Leadership alignment: Executive sponsorship for TOC initiatives and visible targets keeps cross‑functional focus.

• Operator involvement: Use frontline staff in mapping, root‑cause analysis and experiment design; real ownership improves adherence.

• Pilot, measure, scale: Pilot constraint changes on a product family or line, measure throughput, lead time and cost, then scale successful practices.

• Governance and KPIs: Track throughput, constraint utilisation, lead time, first‑pass yield and cost per unit. Use daily/weekly reviews to maintain momentum.

  
  

Conservative cost‑savings example: value of a specialist operational consulting partner Scenario: A

60‑person Australian discrete manufacturer, $12M annual revenue, with chronic late deliveries and 20% excess WIP. The firm pursues a 6‑month TOC and process optimisation project with a specialist partner.

Assumptions:

• Fully loaded labour cost: $95,000/year average ($460/day).

• Current average monthly throughput value: $1,000,000 revenue/month (annualised $12M).

• Baseline gross margin: 30%.

• Excess WIP carrying cost (capital, space, handling): 1.5% of WIP value monthly.

• Current WIP reduction opportunity: reduce WIP by 20% through TOC and flow improvements.

• Expected throughput improvement at constraint: 12% after 3 months of changes.

• Reduction in rework/scrap: from 4% to 2% (half) through standard work and quality capture.

• Operational consulting partner fee (HunterStone‑level): $90,000 for a 6‑month engagement including modelling, shop‑floor redesign, ERP planning changes and coaching.

• Internal implementation cost (staff time): equivalent to 1 FTE for 6 months ($47,500).

Return on investment

• ROI (first year) = $234,500 / $137,500 = 170% return on implementation spend.

• Ongoing annualised benefit after year one (without partner fees) = $372,000 (WIP + throughput + rework savings), delivering sustainable margin improvement.

  
  

Interpretation These conservative assumptions show how focusing on the constraint, stabilising processes and aligning ERP planning produces rapid, material benefits. The largest gains come from increased throughput at the system constraint and reduced rework; WIP reductions free cash and reduce carrying cost. The specialist partner accelerates correct diagnosis, avoids costly trial‑and‑error, and builds internal capability so improvements stick.

Why Hunterstone delivers results

Hunterstone works with Australian SMEs to combine TOC modelling, value‑stream mapping, ERP planning adjustments and hands‑on shop‑floor coaching. The team focuses on:

• Identifying the true system constraint and protecting it with buffer and capacity policies.

• Designing standard work, quick changeovers and visual controls.

• Reconfiguring ERP routings, lead times and scheduling logic to reflect real capacity and buffers.

• Coaching leaders and operators to sustain improved flow and continuous improvement.

  
  

Next steps

Start with a short diagnostic: a 2–3 day value‑stream assessment that identifies the constraint, quantifies potential throughput and WIP gains, and provides a phased implementation plan. Hunterstone can run this diagnostic and produce a conservative business case tailored to your operation.

Contact Hunterstone: www.hunterstone.au — practical operational consulting for Australian manufacturers seeking faster throughput, lower cost and sustained performance.