In these financially challenging times, producers are doing everything they can to squeeze every ounce of excess expense out of their operation, maximize every production efficiency, capture every marketing opportunity possible, and, overall, be more on top of the game.

Today’s dairy business is management-intensive, and today’s progressive and professional dairy producers are approaching their work with all of these objectives in mind.

There are tons of information and many resources out there to help producers analyze and manage each of these areas of the business. So it is almost ironic that a management theory developed in 1928 is, in my view, more relevant today than ever before. In modern management textbooks, it is called the “Theory of Constraints.” But it has its roots in a 1928 principle called “Liebig’s Law.”

Liebig’s Law, or the Law of the Minimum, was first developed in agricultural science by Carl Sprengel and later popularized by Justus von Liebig. The law states that growth is controlled not by the total of resources available, but by the scarcest resource – the limiting factor. This concept was originally applied to plant and crop growth, when agricultural scientists found that increasing the amount of plentiful nutrients in the soil did not increase plant growth. Only by increasing the amount of the most limiting nutrient was the growth of the plant or crop improved.

Fast-forward to today’s business management teachings and you have the Theory of Constraints, popularized in a book called The Goal by Eliyahu Goldratt. According to the Theory of Constraints, every organization has, at any given point in time, at least one constraint which limits its performance relative to its goal. A constraint can be internal or external, a machine, a person or managerial, like a policy or procedure.

Remove constraints for better performance
Bring that principle onto today’s management-intensive dairies and ask yourself, “What is my primary constraint?” For continuous improvement of your business, Goldratt encourages managers to decide how to deal with the constraint and increase the constraint’s capacity, therefore improving the overall performance of the business.

I’ve applied this to my business. Finding and eliminating constraints has significantly improved our performance (and increased my enjoyment as a manager). We now apply this theory to our customers’ businesses as well, helping them find constraints in their ability to manage opportunities and risks.

The Theory of Constraints can apply to your milking parlor, your feed ration or your crop enterprise. Perhaps you have one person or team whose productivity holds back an entire process from being the best it can be. There may be one element of your feed ration that, if not managed judiciously, hinders the capacity of the whole ration to work effectively. And of course, as Liebig identified, crop enterprises are only as successful as the most limiting nutrient in the soil.

The Theory of Constraints not only applies to production management; it can and should also be applied to financial management and marketing. Having spent nearly 30 years in the commodity business, I have seen just about every kind of constraint hold back producers from being better marketers.

For example, I have seen some producers spend a lifetime in a quest to learn more and get better at marketing their crops. Much of the time, these efforts are futile, because so much effort is put into learning about the market outlook – trying to better understand what is happening in the markets – instead of identifying and dealing with real constraints: how to make marketing decisions, how to implement the decisions and how to put structure and discipline into their marketing to support the financial goals of the operation.

Record-high feed prices and the painful collapse of milk prices has led producers to re-evaluate and elevate the importance of marketing in the management of their operations. Learning from our crop producer friends who have been dealing with commodity markets regularly for years, dairy producers have a real opportunity to set themselves up for success.

Constraints limit marketing success
Perhaps you are very knowledgeable about the fundamentals of milk pricing. Maybe you are excellent at making decisions and laying out a proper milk marketing strategy. That’s great. But if you lack the discipline or the time to pull the trigger to execute this strategy, your milk marketing expertise is all for naught, and your balance sheet is going to feel the effects.

Evaluate your marketing process the same way you evaluate your feed rations and your crop enterprise and all the other segments of your dairy operation. Methodically look at it, figure out what you are good at doing, and focus on trying to improve your most limiting constraint.

• If you already understand the supply/demand fundamentals of milk, spending more time learning about it and studying is not going to improve your marketing.

• If you need more flexibility in your market decision-making but you do not understand futures and options, that may be your constraint and you need to focus your time on increasing your knowledge, or hire professionals to supplement your expertise in that area.

• If you are very knowledgeable but you never seem to get the job done because you lack discipline, work to develop habits and put discipline in your marketing, such as writing down what you are going to do days and weeks in advance, or work with a professional that will actually implement and follow your instructions.

• If your most limiting resource is time, consider spending less time studying the markets and more time executing and getting the job done. If this is not a viable solution, consider professional advisers who can bring the decisions and alternatives to you; then you simply have to approve them.

From a marketing standpoint, these are just a few potential constraints and a few of the possible solutions.

What is holding your business back from achieving its goals? The Theory of Constraints can be applied across all of your enterprises and processes. To save yourself a lot of frustration and wasted energy, find your most limiting constraint and focus on that limiting factor first until that is no longer your primary constraint. PD

Scott Stewart
President and CEO, Stewart-Peterson
scotts@stewart-peterson.com