Viable Vision: Transforming Total Sales into Net Profits

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Author: Gerald I. Kendall

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Read the Reviews “Viable Vision: Transforming Total Sales into Net Profits is a book for anyone responsible for increasing the profitability of their business. Gerry Kendall combines the theory with real life examples of its power to transform complex problems into clear, common sense executables that will increase the profitability of your business. If you think the complexities restrict the future success of your business, then you’re about to be enlightened.” —Patrick J. Bennett, Executive Vice President Covad Communications “As senior managers we seek but seldom find the silver bullets that will lead to exponential growth for our companies. In Viable Vision, the author wonderfully presents proven tools with actual business cases that when applied will identify the invalid assumptions preventing our organizations from clearly seeing the significant opportunities that lay before us.” —Paul G. Waring, Jr., Corporate Controller Williamson-Dickie Manufacturing Company “Elements of the Theory of Constraints have been very successfully utilized to generate sustainable improvements over the last decade. Viable Vision: Transforming Total Sales into Net Profits highlights how these tools can be leveraged at the strategic level of business. It is a real opportunity for most of us to better understand and simplify strategy.” —Yvon D’Anjou, President Alcan Primary Metal Group, Quebec South & USA “In Viable Vision, Gerry Kendall drives home the point that the more complex the problem, the simpler the solution must be or it will not work. By applying TOC principles as a CEO, I have achieved organization alignment and successfully transformed a utility, a utility services company, and a regulator and took a telecom company public. Viable Vision: Transforming Total Sales into Net Profits expands the understanding of TOC principles and provides simple solutions that work.” —Kim Allen, MBA, P.Eng., CEO/Registrar Professional Engineers Ontario

V

iable ision Transforming Total Sales into Net Profits

V

iable ision Transforming Total Sales into Net Profits

Gerald I. Kendall, PMP

Copyright ©2005 by Gerald I. Kendall ISBN 1-932159-38-X Printed and bound in the U.S.A. Printed on acid-free paper 10 9 8 7 6 5 4 3 2 1

Library of Congress Cataloging-in-Publication Data Kendall, Gerald I. Viable vision : transforming total sales into net profits / by Gerald I. Kendall. p. cm. Includes bibliographical references and index. ISBN 1-932159-38-X (pbk. : alk. paper) 1. Sales management. 2. Marketing—Management. 3. Corporate profits. 4. Corporations—Growth—Management. 5. Organizational effectiveness. I. Title. HF5438.4.K46 2004 658—dc22 2004018021 This publication contains information obtained from authentic and highly regarded sources. Reprinted material is used with permission, and sources are indicated. Reasonable effort has been made to publish reliable data and information, but the author and the publisher cannot assume responsibility for the validity of all materials or for the consequences of their use. All rights reserved. Neither this publication nor any part thereof may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher. The copyright owner’s consent does not extend to copying for general distribution for promotion, for creating new works, or for resale. Specific permission must be obtained from J. Ross Publishing for such purposes. Direct all inquiries to J. Ross Publishing, Inc., 6501 Park of Commerce Blvd., Suite 200, Boca Raton, Florida 33487. Phone: (561) 869-3900 Fax: (561) 892-0700 Web: www.jrosspub.com

Table of Contents

Preface ....................................................................................................... ix About the Author ..................................................................................... xi Acknowledgments ................................................................................... xiii Web-Added Value™ ................................................................................ xv Part I: The Premise for a Viable Vision Chapter 1. Improve! .................................................................................. 3 Chapter 2. Viable Vision .......................................................................... 9 Part II: The New Frame of Reference Chapter 3. Moving from Complexity to Simplicity ............................... 23 Chapter 4. A Simpler Frame of Reference for Decision Making .......... 31 Part III: Chapter Chapter Chapter Chapter Chapter Chapter

The Components of a Viable Vision 5. Marketing .............................................................................. 6. Operations ............................................................................. 7. Distribution: From Push to Pull ........................................... 8. Project Management ............................................................. 9. The Supply Chain ................................................................. 10. Information Technology: Necessary But Not Sufficient ....

Part IV: Chapter Chapter Chapter

Making It Happen, Now and in the Future 11. Buy-In: Overcoming the Layers of Resistance ................... 97 12. Strategy ............................................................................. 107 13. Executing the Paradigm Shift ........................................... 113 vii

43 51 61 71 81 87

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Viable Vision: Transforming Total Sales into Net Profits

Bibliography ........................................................................................... 121 Appendix A: Viable Vision Financial Examples .................................. 123 Appendix B: More Viable Vision Examples ......................................... A Distribution Company ....................................................................... A Drip Irrigation Company ................................................................... A Hospital ..............................................................................................

127 127 130 131

Appendix C: Other Mini Examples ..................................................... Marketing ............................................................................................... Operations .............................................................................................. Distribution ............................................................................................ Project Management ..............................................................................

133 133 136 137 138

Appendix D: Companies Applying Goldratt’s Theory of Constraints ........................................................................... 141 Index ...................................................................................................... 147

Preface Executives are being fired in record numbers, failing to achieve the demands of their boards and their shareholders.* Most companies today do not appear to have the correct roadmap to their vision, which means that their vision is not viable and the efforts of their most precious resources are often wasted. How can this be, with so many highly educated people running businesses and so much literature about improvement available today? This book suggests that executives and managers are applying the wrong approach to managing complexity. However, before accepting another approach, any person would want to understand what is wrong with the currently accepted practice. Today’s practices are sacred cows that are not easily slaughtered by intuition or experience. It is counterintuitive why these worshipped approaches so often fail. This book carefully describes the problems with common practice today, before proposing a different and much simpler approach for any improvement effort. As the saying goes, a smart person learns from his or her mistakes. A wise person learns from other people’s mistakes. It is only my humble opinion, but I believe that this book will make you wise for three compelling reasons: 1. It is based on over twenty years of applied science. I know of very few concepts that have been tested so thoroughly in real life. 2. It offers executives what human nature strives for but rarely finds: simplicity in the middle of all the complexity. Every executive I know * According to USA Today (April 1997, page B1), 163 of the Fortune 500 CEOs were fired between 1992 and 1996. In an article on April 8, 2002, USA Today quoted a study by outplacement firm Drake, Beam, Morin stating that 57 percent of the 367 large corporations surveyed had replaced their CEOs in the past three years. ix

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is challenged today to rally his or her people around a credible improvement effort. Simplicity is the key. 3. It provides the correct, tested frame of reference that drives people in companies to work willingly and happily together. Finally, the CEO and senior management no longer need to be referees between the silos in their organizations. No matter how big or small your company or what industry you are in, I believe that you will find the concepts relevant and practical. The 200 companies referenced in Appendix D, which have applied the ideas and publicly stated results, range from $5 million companies to $50 billion companies. Manufacturing companies, utilities, insurance companies, banks, hospitals, software developers, government agencies, and many other types of organizations are represented. You will recognize the names of many of the large companies, but that in itself does not mean that these concepts will work for you. What makes this book and its concepts useful is that they boil down to simple common sense. But as Mark Twain observed, “Common sense is not very common.” The past twenty years of experience in this improvement methodology has proven, over and over again, that common sense is often very counterintuitive. Some of the metrics that seem to make perfect sense for companies today are driving them to stagnate rather than improve. This book is backed up by dozens of books, videos, and self-learning materials that provide much more detail about solutions, logistics, and all of the human behavior aspects of improvement efforts. What has been missing over the years is something that ties all the detail together. Executives and managers now have a proven roadmap to follow towards a Viable Vision — a way to make net profit equal to current sales within a few years. Please be wise. Gerald I. Kendall

About the Author

Gerald I. Kendall, PMP, is Principal, TOC International and a noted management consultant, public speaker, and facilitator who has been serving clients worldwide since 1968. His background includes extensive experience as a strategic planner and systems, sales, marketing, and operations executive with an international focus. He has worked with small and large multinational firms, as well as government and notfor-profit organizations, to better manage cultural organizational change issues. Gerald is an expert in strategic planning and project portfolio management, with a topdown approach. Recent clients include Telstra, British American Tobacco, Raytheon, Babcock & Wilcox, Alcan Aluminum, Covad Communications, Tessco Distributors, and Lockheed Martin, among many others. He is certified by the TOC International Certification Organization (www.tocico.org) in all six disciplines of Theory of Constraints and is a graduate and silver medal winner of McGill University. He is a member of the Project Management Institute. Gerald is the author of Viable Vision, Advanced Project Portfolio Management and the PMO, and Securing the Future: Strategies for Exponential Growth Using the Theory of Constraints. He is also the author of the chapter on Critical Chain in Dr. Harold Kerzner’s book, Project Management, A System’s Approach, 8th edition, and is currently authoring a chapter on Project Portfolio xi

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Management for the American Management Association’s text on Project Management. Gerald lives in Navarre, Florida. When he is not watching the dolphins, you may contact him at [email protected].

Acknowledgments There is one person who put an extraordinary amount of hours and love into the writing of this book. That is my wife and partner over these past ten years, Jacquelyn. As one of the worldwide experts in our improvement methodology, Jackie made sure that the content was accurate and correct. Wherever the words and the message are clear and to the point, you can absolutely thank her. To Eli Goldratt, you have my respect and undying appreciation for responding to my original idea — a short, to the point Theory of Constraints (TOC) book for executives. Your support and direct help in looking at the different premises for the book were critical to me to keep the idea alive and thriving. Your decades of selfless dedication and your constant loyalty to the principles of TOC are a beacon to me and so many people worldwide. There were many people who knowingly and unknowingly became my test subjects, to try out the material and get a reaction. Jordan Kendall, a manager at Deloitte Consulting, had his ear and eyes bent for several hours to test the subject of Viable Vision. Only family could tolerate such nonsense! Bob Casey, Bob Reardon, Mike Walters, and Kevin Calame from Lockheed Martin; Pat Bennett from Covad; Bob Barnhill from Tessco Technologies; Tali Masbaum from Realization; Terrance Moore from Jasos Group; Paul Waring from Dickies; Yvon D’Anjou from Alcan; Mike McKay from TIPS; and Stewart Witt of Goldratt’s Consulting Group all received some work-in-process chapters from the book and provided comments. Guy Brill and Oded Cohen of Goldratt’s Consulting Group gave excellent advice as the book was getting started. I am indebted to Alan Barnard of Goldratt’s Consulting Group for his contribution of the three spreadsheets shown in Appendix A. To Wendy Maxwell of Goldratt’s Consulting Group, you helped more than you know. xiii

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Some of the experiences shared in this book would not have been possible without the support and confidence of Steve Hardy, Managing Partner of Hardy Management Consulting. In a strange way, I owe at least the timing of this book to my 88-yearold mother, Bea Kendall. She has been nagging me all year, “So Gerald, when is your next book going to be finished?” Hey mom, it’s done! Quit nagging me, OK? Gerald I. Kendall

Free value-added materials available from the Download Resource Center at www.jrosspub.com

At J. Ross Publishing we are committed to providing today’s professional with practical, hands-on tools that enhance the learning experience and give readers an opportunity to apply what they have learned. That is why we offer free ancillary materials available for download on this book and all participating Web Added Value™ publications. These online resources may include interactive versions of material that appears in the book or supplemental templates, worksheets, models, plans, case studies, proposals, spreadsheets and assessment tools, among other things. Whenever you see the WAV™ symbol in any of our publications, it means bonus materials accompany the book and are available from the Web Added Value Download Resource Center at www.jrosspub.com. The free downloads available for Viable Vision: Transforming Total Sales into Net Profits consist of Viable Vision planning spreadsheets, an executive guide to project portfolio management, and a valuable list of resource organizations. These documents are available from the Web Added Value Download Resource Center at www.jrosspub.com/wav. If your operating expenses stayed fixed, how much of an increase in sales would it take to turn your current total sales into net profits? One generic Viable Vision planning spreadsheet provides a skeleton framework for any organization to do its own analysis. The other two spreadsheets provided are examples from cases discussed in the book — the cable company and the drip irrigation company. The Executive Guide to Project Portfolio Management is a 19-page white paper that provides the latest research and advice on this topic. It includes an executive overview of two key components of the Viable Vision — Critical Chain Project Management and the new 4×4 process. xv

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The valuable list of resource organizations that have implemented components of the Viable Vision is in an Excel spreadsheet format. This spreadsheet contains over 200 companies that have implemented and achieved measurable results using the Theory of Constraints. The spreadsheet indicates the source of the reference, including many web sites and the application areas implemented. It also has country of origin. Many of the references include comments and presentations made by clients.

Part I The Premise for a Viable Vision

1 Improve! “We want to put our organization on a process of ongoing improvement; we cannot do that while allowing common nonsense to govern people.”

“When I do an analysis of a company, I am satisfied only when I clearly see how it is possible to bring the company to have, in less than four years, net profit equal to its current total sales.” I know of just one person in the world who would not only make such an arrogant statement but also mean it, and he was sitting in my hotel room in New York City. Dr. Eli Goldratt,* an innovative thinker who is known to have invented breakthrough solutions to industry problems, is someone I deeply respect. But even smart, respected people sometimes make totally outrageous statements. Eli and I spent the entire week in New York to discuss how to move companies much more quickly towards exponential improvement using a powerful concept that he termed “Viable Vision.” During the week, my emotions bounced between skepticism and excitement. My excitement took over when I realized that even if I could not bring every organization to have net profit equal to sales within four years, the premise was sound. Viable Vision, with its unique approach to customers and markets, would move any organization towards an improvement level that was beyond anything I had * Goldratt is the author of the multimillion-copy bestselling book The Goal and several others, including Critical Chain, Necessary But Not Sufficient, It’s Not Luck, The Haystack Syndrome, and The Theory of Constraints. 3

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ever thought possible before. It reminded me of what the quality movement had done for Japanese companies in the 1980s, except this concept went even further. But here I was, two weeks later, facing someone far more skeptical than I was. Jordan is a senior manager at one of the world’s largest consulting firms. His company once had a huge practice in implementing technology (mostly enterprise resource planning systems), but over the past few years, the practice slid rapidly downhill. Even worse, many of the clients complained that their tens of millions of dollars spent on consulting and technology had failed to yield any bottom-line benefits. Jordan’s job was to find new ways for the worldwide practice to deliver real bottom-line value to clients. His initial response to Eli’s premise was, “For the average company, you are talking about more than doubling profits every year! Most CEOs I know would laugh at such a statement. A lot of companies that I’m working with today are thrilled when they get a 10 percent increase in profits. Is Goldratt serious?” “Yes,” I said calmly. “He is 100 percent serious.” “He must be working with companies that have a cure for cancer or some revolutionary new technology,” Jordan offered, but I just shook my head. “Jordan, he is talking about doing this even in smokestack industries.” We both sat silent for a couple of minutes. I knew that Jordan could accept what Eli said in the context of one company with some unusual breakthrough, but not as a generic approach. Finally, Jordan asked me for an example. “But Gerry,” he cautioned, “Please make it a struggling company.” He was obviously not interested in hearing about a case where the answer was obvious. I understood his concern, but at the same time, I was a little annoyed by his motherly warning to use a generic example. I began with the first real case that Eli had described to me, “OK, let’s take a case that Eli has just finished analyzing. It’s a Spanish company that produces power cables and sells them to major clients, like a railroad or an electric utility. In fact, they find most of their business by bidding on major projects.” Jordan said dubiously, “It sure doesn’t fit every case I know. But we have some clients that sell to projects.” Undisturbed by Jordan’s doubts, I continued: “The competition in this industry is fierce. This company has suffered tremendously in the past two years from prices going down, to such an extent that they are barely breaking even.” Jordan told me that in the past few years he had heard these same complaints repeatedly from many of his clients. During the long cycle of economic prosperity in the 1990s, companies within a growth industry built additional capacity, to satisfy not just current demand but also future growth.

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Then the bottom fell out. The economic downturn resulted in a tremendous excess capacity that forced a price war between competitors. I paused to check. “Tell me. Is this case good enough for you?” “Yes and no,” he answered. I could tell that Jordan felt uneasy about the example. He continued: “I agree that there are many companies like the one you described. But if Eli substantiates his claim that these companies could double their profit every year by some major new invention or by replacing bad management, then I don’t think that the example would be relevant to our clients.” I was not offended by Jordan’s skepticism. “Jordan, you’ve known about Goldratt and about my work using his methodology for many years. You know that the methodology is intended for any company, not special cases. I’ll tell you exactly what Eli found in his analysis and you’ll be the judge. This company has good management. They have succeeded in cutting costs. They have put improvement initiatives everywhere. They have achieved shorter product lead times than their competitors. They knew that they needed to find more customers, so they bid in more regions than ever before, even when their chances of winning were relatively low. By the way, they were not the cheapest solution in the market and they were still winning 30 percent of all their bids.” “What about new products?” Jordan inquired. “They put some effort into developing new cables, but this is not an industry like high technology where you are likely to hit some major breakthrough. With power cables, a success story is a new cable that generates another 2 or 3 percent in revenues. And with all their efforts, they were still barely breaking even, which was better than some of their competitors who were losing their shirts.” After covering every other improvement approach Jordan could think of, he said, “I can’t see any apparent way out for this company, other than hanging on and waiting till the economy comes back. But you’re telling me that with this company, Eli proved his claim? You’re going to show me how Eli found a practical way to make their net profit equal to total current sales in four years, without the economy getting better? OK, I’m listening.” At this point, I could tell that Jordan was sincerely willing to hear Eli’s analysis. But Jordan also told me that he was hoping that there would be something very unconventional or very unique about this company. Otherwise, the implication was that his firm and many of the CEOs they had worked with over the past ten years might have missed a major opportunity to improve. I explained how Eli began his search for a solution. “Any company that has only 30 percent market share and excess capacity should first look in their current markets to increase sales. The answer has to come from providing

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more value to the customer. But the big question is: With a product like power cables supplied to projects, where is this value? It can’t come from reducing prices.” A price cut is the easiest thing for a competitor to copy, provided that the competition has the margins and cash flow to sustain the war. But Jordan wanted to understand why Eli was so sure that reducing prices wouldn’t help at all. I explained, “What do you think the cost of the power cables is, relative to the cost of construction of the new train line or putting electricity into a whole neighborhood?” Jordan guessed, “Probably a small fraction of the total project cost?” “Precisely,” I responded. “In fact, this is true for many customers in any industry who purchase materials for a project. If several suppliers have equivalent products at almost the same price, what impact does the price of your product have on winning a deal?” “For the purchasing agent it could be a factor, but as far as the project manager is concerned, unless there is a huge difference in price, it doesn’t help,” Jordan answered. “Correct!” I exclaimed. “So if you rely on winning many bids only by being cheaper than the competition, your chance of doubling your profits is about as great as the chance of finding a snowflake in hell. But in your answer, you did identify the right focus — the project manager. Many project managers complain bitterly about lead time, especially for products where the specifications often change at the last minute.” Jordan interrupted, “Gerry, wait a minute! You told me before that the cable company already had excellent product lead times. Don’t the project manager complaints contradict what you said?” “C’mon, Jordan. You know that every project suffers from last-minute changes. In large projects, the project manager comes under tremendous pressure to renegotiate delivery schedules and sometimes even specification changes with their vendors. At the same time, management is still holding the project manager accountable to the due date. “Even though this cable company is above the industry average in lead time performance, we’re still talking months. But changes in cable specifications happen shortly before the cable delivery is due. No cable company in this industry can turn its operation on its head every time a customer calls with last-minute order changes. So order changes are accepted, but with a long delay in the delivery. Now can you imagine what the project manager has to contend with?” “I know from my own experience,” Jordan interjected. “If the power cable is critical and it is delayed, the entire project is delayed. My clients, like shipbuilders and steam generator manufacturers, tell me that such material

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delays can easily cost a project a delay of weeks and millions of dollars in terms of lost revenue or cost overruns.” “Correct,” I said. “So what must the cable company tell their project management customers to close this deal?” Jordan offered, “The project manager must be allowed to finalize the cable specifications a short time before the delivery due date without any penalty whatsoever. Of course, the cable company must commit to delivering within a much shorter lead time.” “You are so right,” I exclaimed. “And if you go and promise this to the customer, will they buy from you with no reservations?” I had learned from Eli that simply solving a customer issue, even with a breakthrough, is not enough to close a deal. If the supplier’s promise is to cut lead time by 10 percent, the buyer probably would not have serious second thoughts. But this commitment to deliver in less than half of the industry standard lead time lacked credibility. Jordan answered, “No, Gerry. Any salesperson can promise an aggressive due date with good intentions, but as a project manager, I would not put my credibility on the line strictly on a salesperson’s promise.” I was pleased with Jordan’s answer. “True, so what must you do, over and above your promise, if you want to make this offer compelling?” Jordan was stumped, so I revealed Eli’s answer, one that I had used successfully in other cases. “You must offer, in writing, to pay your customer penalties if you are late on delivery. But there is a big catch!” I remembered how uneasy I was when Eli shared the rest of this answer, so I watched carefully for Jordan’s reaction as I spoke. “If you offer to pay a 10 percent penalty based on the cost of the cable, it will show very little commitment to the project manager. Remember, the damage to the project is not according to the cost of your material, but rather according to the delay of the project. So you must offer to pay a much larger penalty, recognizing the damage to the project. Offer to give up 100 percent of your profit on the order and the project manager will believe you are serious.” Jordan speculated that to any project manager such an offer is probably like a dream come true! This company would win many more bids with this approach and doubling profits was a definite possibility. Even better, the company could take the same successful offer and use it in other geographic areas. He could see the probability of meeting Eli’s claim, but he also suspected the same huge financial risk that I saw initially. “Gerry, the only way that such an offer is possible is to figure out how to address the lead time issue. And that is far from a triviality.” “Fine,” I concluded. “I agree. The logistics must work perfectly the vast majority of the time. I will show you all that. But first, I have a question about this case: Why couldn’t this company find the answer for themselves? The

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answer does not rely on anything unconventional. Yet so many companies look at their situation as tremendously complex. The key…” “Gerry,” Jordan interrupted, “Before we get into all that, I must tell you that I’m not yet convinced that Eli’s claim can be applied to most companies. I admit that you’ve given one generic example for companies that sell to projects. True, there are many companies like that, but I have many clients that don’t fit that mold. Do you have another case?” “Of course!” I answered. “I have several. But I will only share another case if you promise to discuss my question after that!” Jordan also wanted to understand why his clients and his firm of thousands of management consulting experts overlook such opportunities, so he agreed.

2 Viable Vision “Within any complexity, there is an inherent simplicity that governs the throughput of any organization.”

I started to describe the second company as a different power cable company. “Gerry,” Jordan immediately interjected. “Please don’t give me another story about a cable company.” Ah, I thought, the arrogance of some consultants! But at the same time, I wanted to have Jordan’s full input on these cases, so I listened to his concern. Jordan continued, “To me, one real test is to see if these concepts work in a very complex business. But to convince me, I need you to identify an exponential growth opportunity in a different industry and a different part of the supply chain.” “Jordan, so far the concept has been proven in over 80 percent of the dozens of different companies examined. Another example I’m thinking about covers three parts of the supply chain: manufacturing, distribution, and retail. Does that meet your criteria?” Jordan answered, “Partially. When I think of complexity, I think about constant changes in products with a great deal of unpredictability, cutthroat competition, different channels and markets, the web...” I interrupted Jordan with the example that I thought would meet his criteria. “This company is a large U.S. distributor in the communications industry. Their sales are growing, but their profits are flat, so they are working ever harder to generate the same profit. They sell over 25,000 unique products, 30 percent of which are obsolete every year. The life of some products is less than six months.” 9

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“It sounds like wireless communications to me,” Jordan responded. “Right on!” I agreed. “But it’s more than that. It’s everything from cell phones to products for networks, such as cables and modems, to all of the components used in building communications towers. Many of the suppliers are in Europe and a lot of the manufacturing is done in Asia. This distributor already has an excellent value proposition. They strive to be the one-stop supplier for their customers, they complete 90 percent of their orders in one to two days, and they allow returns so that their customers do not get stuck with obsolescent stock.” “What is their market share?” Jordan asked. “Less than 10 percent,” I quickly replied. Jordan was perplexed. “If they have such an excellent value proposition, how come their market share is less than 10 percent?” I conveyed my immediate reaction to Jordan to see if he had the same perception. “Just having an excellent value proposition does not always translate to sales. The value proposition does not sell itself. Sometimes, the salespeople are not sufficiently trained to sell the value,” I emphasized. “You’re absolutely right,” Jordan stated. “That bothers me with many of my clients. So is the answer just a matter of properly training the salespeople?” “Partly,” I explained. “This client is focusing a lot of effort now in sales training. I know it will help, but I expect they will only add about 10 percent to sales; not the kind of growth to bottom-line profits that Eli described. Their value proposition is not so compelling that it is beating the pants off the competition.” Jordan agreed with my prediction, so I continued. “A value proposition keeps you in business, but it is not the same as having an offer to the market that is too good to refuse. Furthermore, prior to opening the tap of orders, you must be able to follow through by having logistics in place to match the marketing and sales efforts. Otherwise, you can end up generating a lot of orders and running out of capacity to fill them. So before I reveal such an offer and the logistics, I want you to understand more about their situation. The first step in this process was to identify the organization’s biggest constraint.” Jordan had read something about constraint management, so he asked, “Do they have the capacity to handle more orders or are they limited in expansion by their internal facilities?” “They just added another huge distribution center,” I said. “Overall, they have the capacity to handle many more orders.” “And what about cash?” he asked. “Many distributors are in the same boat,” I lectured. “Cash is a precious commodity. This new distribution center consumed a lot of spare cash, but

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they have no difficulty meeting payroll. They aren’t using their entire line of credit, but they don’t have an abundance of cash.” Jordan speculated, “Then to achieve exponential growth, it sounds like they must find a leverage point in the supply chain and probably in the market. And they must be able to take advantage of that leverage point without having to use a lot of cash.” “Exactly,” I concurred. “They could always grow by opening up new warehouses, but it would not make their net profit equal to current sales in four years. And with current inventory levels, it would be a major cash drain.” Jordan asked, “What kinds of customers do they have?” I continued, “This distributor has several different types of customers. One of the biggest markets for communication products is large companies and government organizations. Most of those companies buy similar goods repetitively. The distributor also sells to people doing projects, such as IT departments installing a new network or contractors building some communications towers. Their third major market is retailers — stores selling communication products to consumers. The competition is cutthroat. Every time there is a downturn in the market, the manufacturers start to sell direct, competing with their own distributors.” “How many suppliers are they dealing with?” Jordan asked. I answered, “Hundreds. And every week, the salespeople get requests from customers for products that they do not carry. Some of these products are not available from current suppliers, so the procurement group gets pressure all the time to source new products. The distribution center manager is going crazy trying to find space to put all these new products.” “Wait a minute!” Jordan interrupted. “I thought you said they just added a new distribution center. How can they be running out of space?” “I said ‘overall’ they have excess capacity. The new distribution center is in the western U.S. and is serving that part of the country. The original distribution center is busting at the seams with all of the new products. Five years ago, they had half as many products! At the same time as this distribution center has trouble finding space for the new products, over 20 percent of their SKUs have not moved in over six months. Now you can understand why I call it a very complex business!” Jordan told me that I was right. We talked about how this distributor tried to deal with all of the suppliers individually to improve terms and to ensure that commitments were met. But with limited procurement staff and increasing numbers of suppliers, this was becoming more difficult. They also generated a large number of exception orders every day. These came about when dealing with changing supplier lead times and fluctuations in demand in many of the SKUs. On top of that, there were constant sales requests for new products. The resulting complexity was overwhelming.

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What I described to Jordan was a constant fight between sales and the distribution center. Every time sales lost an order, they pointed the finger at the distribution center for not having the product available in time to meet the customer demand. In turn, the distribution center manager pointed his finger at procurement for not getting new supplier relationships set up on time and for not holding existing suppliers accountable to their commitments. Procurement, in turn, blamed sales for not selling the company’s value proposition and not convincing customers to substitute stocked items for requested items. Every alternative Jordan thought of to help this client, such as stocking many more SKUs or working with all the suppliers to improve terms and performance, had huge complexities. Ignoring customer demands for new products also had serious negative implications for the company. Finally, Jordan said, “Their management team must be very discouraged. They sound like very bright people, but from what you’re describing, they’re working harder all the time just to stay even, which has to be extremely frustrating!” I must have shouted my response, because people sitting near us began to stare nervously. “That’s why Eli looks for a valid way to make net profit equal to today’s revenues within four years. A company must have a Viable Vision that the CEO and the top management team can get excited about!” “Viable Vision?” Jordan muttered, with a big crease on his forehead. “Is that like the ideas for reducing lead time in the cable company case?” “Not just ideas!” I countered. “How is the company going to reach such a high goal? What is the mechanism? What will make your offer to the market too good to refuse? Why won’t your competitors be able to copy it easily? What logistical changes must be part of the solution to achieve it? How will you start to get the fruits within six months, not five years from now? What does each functional area have to do to help achieve the vision? Do you see how much energy this will drive from the top management team, if they can all agree on such a Viable Vision? It replaces the hope and prayer that the economy will change soon or that customers will start behaving predictably! It aligns the management team towards an exciting goal, with the common understanding of everyone’s role in the process.” I continued with Eli’s description of how to approach this Viable Vision. “The company has the internal capacity to handle more orders, but they do have a space problem in one distribution center. That is relatively easy to fix. The first thing to do when you find yourself in a hole is to stop digging. Trends show the items that are not moving or those where demand is fading. So with this distributor, the first step was to make sure that their buyers did not blindly reorder these items when the minimum quantity was reached, as their ERP system was telling them. The nonmoving items in the warehouse

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were either returned to suppliers or liquidated. Within a few weeks, they had freed up 20 percent warehouse capacity and some cash.” Jordan said, “That was an obvious first step.” When you give a consultant an answer, it is always “obvious” to them. But if it were so obvious, why did the distributor not do it? The answer lies in the metrics driving each functional area.* However, I decided to save that discussion for later. I ignored Jordan’s comment and stated, “Let’s begin with this distributor’s three markets. Before we talk about compelling offers to these markets, you must make sure that they are not wasting what they have.” Jordan interjected, “What do you mean by wasting?” I explained, “As a distributor, whenever a customer comes to your door and you don’t have what they want, they will go elsewhere to find it. If it happens more than once, then there is a good chance that you have lost a customer for a long time. After all of the marketing and sales effort to get a qualified prospect to your door, I call it a waste to let them leave without closing the deal.” Jordan speculated, “I understand. Do you know, on average, how many of their 25,000 items are in stock on any given day?” I had the figures at my fingertips. “Of the 25,000 items that they list in their catalog, they actually commit to stock about 17,000, of which about 15,500 are typically in stock.” I told Jordan that based on our experience with similar situations, this distributor was probably losing about 30 percent sales potential per year due to these stock-outs. “With their average 20 percent gross margins, this client would have another $20 million on their bottom line, a quadrupling of net profit, if they were able to keep more of their popular items in stock.” “But they’re never going to be 100 percent perfect!” Jordan protested. “True, and that is not our expectation. It is typical for a distributor to be out of stock on 5 to 10 percent of their SKUs. This is usually due to traditional methods of ordering to a forecast that never comes true and replenishing stock when the current stock level hits a minimum.** The other serious mistake is batching orders. Batching orders means adding delays to order times. (This distributor’s procurement area also had so many exceptions to deal with, they were not able to identify and focus on the biggest threats to throughput.)” “How else can you do it?” Jordan asked.

*See Chapters 3 and 4 for a discussion about metrics. ** See Chapter 7 for a further explanation. See TOC Insights into Distribution in the bibliography for a very detailed explanation.

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“It’s true that we need some kind of forecast or calculation to determine the initial stock levels for each SKU. From that point on, we want three things: 1. We want every part of the supply chain to react very quickly to changes in end consumer demand. 2. At the same time, we want to reduce inventories across the supply chain dramatically and 3. Create an incredibly compelling offer to the three markets I described earlier.” “Let’s start with the distributor’s first market, the corporate clients who buy repetitively. What would make a corporate client favor this distributor over another supplier with the same brand of product and pricing?” Jordan answered, “Most corporate buyers that I know of are driven by cost and availability. That’s where their metrics come from, especially when they are buying a brand-name item.” “Everything you said is correct,” I responded, “but you still didn’t answer my question explicitly. This distributor is carrying about seven weeks worth of stock. They have availability 90 percent of the time. They are not the lowest-price distributor, but they are reasonably competitive. So what will you offer corporate customers other than competitive pricing, warehoused inventory on most items, and fast order turnaround?” Jordan sat silently for a few minutes, pondering this question. Finally, he responded, “I haven’t got a clue.” I told Jordan about how complex the communications industry was, from the point of view of the high-technology people supporting it and the corporate buyers supporting their high-technology customers. “Buyers are always complaining about last-minute orders from their users and either having to pay priority shipping charges or looking for products, finding shortages everywhere, and having to wait for delivery beyond their user’s needed date. Either way, the buyers get killed on their corporate metrics.” “It sounds like these buyers are really caught between a rock and a hard place,” Jordan said. “Of course,” I agreed. “So why not put the inventory of their most commonly purchased items on their site on consignment. As soon as they take an item, the P.O. is issued automatically and the item is replenished. Their priority shipping charges are eliminated. Their lead time is zero. You react immediately to changes in consumer demand. And by only stocking according to what they are using repetitively, you are coming much closer to matching inventory to demand. Would this offer be compelling enough to drive more new customers and more buyers within existing corporations to your client?”

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Jordan had no hesitation in agreeing. “But what is stopping any other distributor from doing the same thing or copying this approach?” My answer was, “My experience is that competitors are slow to replace their existing practices to the extent that even simple ideas, if they involve policy changes, can maintain a competitive advantage for more than five years. This approach, although it is a minor change in logistics, is a major change in policy. The first reaction that any distributor will likely have to this idea is, ‘Are you crazy? My margins are already so thin. I cannot afford to give clients my stock on consignment. I will lose my shirt from theft and from not getting paid.’” Jordan asked, “Aren’t those valid concerns?” “For sure,” I said. “That is why the logistics for maintaining and replenishing the inventory must be simple and work perfectly. That is all part of what makes a vision viable. And I’ll explain those details later. But what I am saying is that the competitors will not even get to the stage of trying to figure out the logistics to see if it can work. From my experience, they get hung up on the policy change and abandon the idea at that stage.” Jordan accepted the answer, although I could tell he was somewhat skeptical about competitors catching on and copying the solution. What he needed to do was read some case studies to see that even for solutions implemented in the mid 1990s, the competitors were still not copying the approach.* The next market segment I explained was the retailers. In the wireless industry, retailers suffer from too much of the wrong inventory and frequent stock-outs of the most popular products. My comments to Jordan were, “You can save these retailers substantial money on inventory carrying costs and reduced obsolescence. However, I believe that the biggest impact that this distributor will have on their retail clients is on their store’s throughput. The distributor can have a big impact on the retailers’ top and bottom line.” Jordan shared a major reservation he had. “If you’re going to tell me that the distributor needs to ship more frequently, I do not agree. I did a study on that last year and found that in many cases, this costs the distributor a lot more money, which is not offset by a reduction in the distributor’s carrying costs.” “Your analysis is correct, but the conclusion is not. There are two key additional elements to consider. First is that the distributor does not necessarily have to ship more frequently. What changes is the configuration of the shipment. Instead of shipping large quantities of a few products, the distributor ships smaller quantities of a larger variety of products. If the retailer is * See Gerald I. Kendall, Securing the Future, St. Lucie Press, Boca Raton, FL, 1997; Gerald I. Kendall, Advanced Project Portfolio Management and the PMO, J. Ross Publishing, Boca Raton, FL, 2003.

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ordering the right products, this will reduce stock-outs, which will increase the retailer’s throughput.” “OK, I agree,” Jordan said. “But you have not refuted my conclusion that the distributor should not ship more frequently.” “True,” I agreed. “However, in your analysis, you said that you compared increased shipping costs to savings on inventory carrying costs. You must also look at the increase in throughput across the supply chain that would come from more frequent replenishment. The impact on throughput usually far surpasses the inventory carrying cost saving. There are actually six different ways that throughput is increased from a pull system, a system that replenishes exactly what the end consumer bought. I am not going to get into all of those now.”* I explained to Jordan that one key is to have the retailer cut artificially large order quantities, orders that are intended to cover weeks or months of supply. To do this, the distributor must convince their retailers to order frequently. Amazingly, it is far simpler for the retailer to order items daily than to order once every month or two. The simplest pull system I have ever seen implemented is to order, every day, exactly what you sold yesterday. For retailers who do not have computer systems where these transactions are captured automatically, the process was set up by having the store fax or phone their orders daily to their supplier. In one case, the stores simply faxed their sales slips to the supplier. I continued, “This distributor does not necessarily ship daily. However, they ship so that the retailer has replenishment stock on the way within a few days of their order. Therefore, the retailer rarely stocks out, and when it happens, it is only for a very short period of time. In effect, at any point in time, the retailer has a much smaller quantity of each SKU’s stock in their store, but enough to satisfy the usual fluctuations in short-term demand and enough to cover the transportation time. They may also have some orders being filled at the distribution center and one or more orders on the way in the transportation system. The total inventory in their store is cut in half and the total inventory in the supply chain also goes down, usually by more than 25 percent. This distributor is now 100 percent responsive to customer demands, instead of pushing months of stock on their retailers. With this pull system in place, the distributor doubles their turns and increases the retailer’s performance at the same time.” Jordan thought about this approach and finally asked, “What makes the retailer believe that they will really benefit from this?” “Excellent question,” I remarked. “First, the distributor makes an offer to the retailer that is too good to refuse. They guarantee that the retailer will cut their inventory of existing items in half. Second, the retailer must un* The six ways to increase throughput are detailed in Chapter 7.

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derstand the logistics enough to see that despite their store inventory going down, their sales will go up. There must be a compelling presentation by the distributor’s sales force to achieve this. Of course, with less inventory needed to protect sales, the retailer has cash freed up which can be used to add product variety, one of the keys to increasing throughput exponentially. For this, the distributor has an excellent answer for the retailer — other products suitable for retail.” Jordan pondered this for a few minutes. As we talked in further detail about the logistics,* he was not able to find any flaws in the logic. For the third market segment, the customers doing projects, he could translate the offer we discussed previously for the cable company. Jordan had one other serious issue that was bothering him immensely. “What about the suppliers? Many of them are so unreliable.” I explained, “It is far too complex to try to deal with all the suppliers or even to deal with 100 suppliers. The simple answer is to examine the distributor’s historical transactions, say for the last six months, from the point of view of lost throughput due to stock-outs. Note each time a supplier is stocked out, for how long, and how much throughput was lost. With this approach, we identify the top suppliers that the distributor needs to influence to have the biggest impact on their throughput. It is usually at most a couple of dozen suppliers. Out of those top suppliers, the distributor can pick any five and start to work with them. But armed with proper audit information, there is a major difference in how the distributor can approach them. The distributor shares with their supplier the actual audit figures of how much throughput was lost due to unavailability of stock. My experience is that when a supplier sees the figures, they are highly motivated to work with you to solve the problem. But even if they cannot immediately respond, there is one thing this distributor can start doing immediately with suppliers.” Jordan waited impatiently for my suggestion. “The distributor can ask their top suppliers to accept daily orders. Our experience is that almost all suppliers have no problem with this. Now the distributor, using the same replenishment principals as with the retailers, can cut their inventory significantly. By establishing a pull system with their top suppliers, the distributor has a smaller quantity of inventory per SKU in house, some orders being processed by the manufacturer, and some orders on the way in the transportation chain. With this approach, order lead time is cut from several weeks to days.” One thought struck Jordan and he asked, “Gerry, wouldn’t all of this be much simpler if it were all handled by a totally integrated computer system between suppliers, distributors, and retailers?” * See Chapter 7 for further details and TOC Insights into Distribution in the bibliography. Also see Appendix A, financial examples.

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I thought carefully about this, since so many companies are disappointed in their IT systems. “Jordan, I’m sure you’ve seen the years of effort it takes for companies to implement one ERP system in one company. What do you think happens when you try to fully integrate systems between a distribution company and one of their suppliers, especially when in tough times, they have competed with each other, each with their own policies and measurements? It’s so complex. It reminds me of the story of the genie on the beach. Did I ever tell you that story?” Jordan shook his head. “A man was walking on a beach in California and found a lantern. He rubbed it and a genie came out, very hostile. The genie said, ‘People have disturbed me three times this century. I am sick and tired of it. However, since I’m here already, you can have one wish, but it better be very simple.’ After thinking for a few minutes, the man told the genie that he had dreamed his whole life of seeing Hawaii, but was afraid of flying. He also could not travel by boat because he got very seasick. Could the genie build a bridge from California to Hawaii? The genie was furious. ‘Do you know how long that bridge would be, how many supports I would have to lay across the ocean, how complex it is to do something like that? I told you to give me something simple.’ The man thought some more and said, ‘OK. For just once in my life, I would like to understand my wife.’ The genie looked at him and quickly replied, ‘Two-lane or four-lane?’” Jordan laughed as I concluded, “Goldratt’s distribution solution aligns the supply chain. It is by far simpler, with much faster results, than fully integrating computer systems. And if they need such a setup in the long run, the distribution solution gives them the cash flow, time, and profits to fund it.” Thanks to Eli’s work, I had shown two examples where it was totally feasible and practical to bring a company to reach net profit equal to current total sales within four years. The examples applied to any company with market constraints that sells either to projects or through distributors. Jordan could extrapolate the approach to other companies suffering from not enough sales. Suddenly, Jordan reminded me about something I had started to say earlier. “Gerry, you asked before why these solutions were not obvious to the executives of these companies.” I answered, “Today many executives operate with a belief that the way to attack complexity is to break a system down into manageable parts. With this belief, the movement to look for independent improvements in each functional area is very common. I see this reflected in Lean, Six Sigma, and other approaches used to reduce variability everywhere — a mammoth effort. These techniques are excellent. My question is, can we apply them with much less effort and get far better results?”

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In both Viable Vision examples, the companies reduced waste to a huge extent. However, in both cases, it came naturally with the elimination of the excess inventory that was blocking throughput. This would also have reduced obsolescence dramatically. I continued. “Eli’s assumption, the one that he uses to find the answers in all cases, is that within any complexity, there is an inherent simplicity that governs the throughput of the organization. You cannot break the system down into parts to find this simplicity. In fact, the opposite is true. To get a huge jump in performance very quickly, we must look at the entire organization as one system. That is necessary to find the biggest leverage point for improvement. Then, to exercise the leverage, we must focus all functional areas in a common holistic improvement effort towards the Viable Vision. If you don’t have a Viable Vision, then what you have is a bunch of improvement projects.”

Summary and Next Step Most organizations today address complexity by dividing an organization into small, “manageable” pieces (functions, subdivided into departments) and seeking improvement in each piece. Since most functional areas are cost centers, they naturally focus on reducing cost within their local area. Rather than improving the organization, this approach often leads to huge problems. To achieve the magnitude of results described by Eli Goldratt, we must establish a Viable Vision using a new frame of reference to manage the organization. The new frame of reference deals with complexity by finding the inherent simplicity, the leverage point. The guiding assumption is that improvement in the throughput of any system is governed by very few factors. These few factors are what drive the inherent simplicity. If you accept this assumption, then the big question is, “On which factors must the entire management team focus all of the improvement effort to get the best results?” The foundation for this approach is built in the next chapter.

Part II The New Frame of Reference

3 Moving from Complexity to Simplicity “The more complex the problem, the simpler the solution must be or it will not work!”

Introduction Most organizations deal with complexity by breaking down their organization into functional parts and demanding that each part figure out how to improve itself. For ease of reference, I will call this the “silo” approach. Before we rush to replace this approach, we must understand why this silo approach blocks the achievement of a Viable Vision and often fails to improve the organization as a whole.

IMPROVE! One of the most dreaded words in today’s management vocabulary is expressed as a command: IMPROVE! The reaction is often: ◆ ◆ ◆

I am totally overwhelmed fixing problems from the last improvement effort. Leave me alone. Or… What do you want me to do, fulfill my operational responsibilities or work on improvement projects? I do not have time to do both. Or… Not again! Here comes another program of the month. 23

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With these typical reactions, any executive launching even a minor improvement effort is rarely greeted with enthusiasm. As managers everywhere find themselves in fierce competition with other functional areas over the resources needed to execute their improvements, it is no wonder the command to improve intensifies cross-functional battles! Even when a manager successfully completes his/her part of an improvement project, he/she comes face-to-face with other functional areas and other organizations (suppliers, distributors, retailers) that did not do their job. This diminishes or totally negates the results. The cross-functional tension is not limited to improvement efforts. It penetrates the very heart of day-to-day decision making and the judgment of management effectiveness across an organization. Here is one real-life example: A procurement manager was told “improve.” He decided to reduce the cost of the raw materials the organization was purchasing. He implemented a switch from imported goods to much less costly local suppliers in several key areas. The manager claimed to have saved 70 million Thaka annually in material costs, the Bangladesh equivalent of US$1.3 million. With production lines unable to meet customer demand, the production manager in the same company calculated that material problems were costing the company well over $80,000 in lost throughput per day. At that rate, the annual savings in procurement were eaten away every two weeks. You can imagine that the relationship between these two functional areas was not exactly lovey-dovey.

The Additive Rule These cross-functional conflicts are driven by the silo approach, where the organization measures each silo on improvement independently. If you are a cost center (e.g., procurement, production, engineering), improvement naturally means a focus on cost reduction or greater efficiency within your silo. In this frame of reference, costs are seen as obeying the “additive” rule. The costs of each silo, added together, equal the total cost of the organization. Therefore, managers see any cost reduction in their area as “good,” since they see a direct translation to cost savings for the company as a whole. In this frame of reference, improvement efforts are spread everywhere to attack cost and waste throughout the organization. This approach would work beautifully if you had unlimited resources and if costs really obeyed the additive

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rule. We already know every organization has limited resources. What about the additive rule? It is true that if you freeze an organization in time and look at the cost of each department, these costs will add up to the total costs of the organization at that moment in time. Therefore, costs do obey the additive rule. However, thinking back to the procurement example above, the opposite is true about changes in cost. Changes in costs do not obey the additive rule. The example clearly illustrates that a cost improvement made in one functional area often has a significant impact on other parts of the organization and even on other organizations. In most organizations, managers do not understand completely and therefore do not consider the impacts of their actions on all other parts of the supply chain. Yet without this understanding, it is impossible for managers to make consistently good decisions. But the ultimate effect is worse than having occasional bad decisions. Using the additive rule as their framework, functional areas are being encouraged to operate like silos. It becomes nearly impossible for the organization to even recognize, let alone harness, a leverage point where all functional areas pull together, as the examples below illustrate.

Cost Accounting: Antileverage As Johnson and Kaplan wrote so elegantly in their book, Relevance Lost, “An ineffective management accounting system can undermine superior product development, process improvement and marketing efforts.”* I will only add that it will also undermine the ability to implement cross-functional leverage to improve. It is essential for top managers to understand and to change their measurement system as part of achieving a Viable Vision.

Cost Accounting Distortion Example 1: Judgment of the System as a Whole One of the distortions of cost accounting is how it measures the performance of the system as a whole. As just one example, ask yourself why companies in so many industries, such as communications, automotive, and computers, continue producing at a high rate, long after the end consumers stop buying. One reason is that cost accounting measures the production silo on efficiencies, encouraging them towards high utilization of their resources. The higher the machine and labor utilization, the greater the efficiency reported. Cost accounting also lists the resulting excess inventories as “assets” on the

* Thomas H. Johnson and Robert S. Kaplan, Relevance Lost, The Rise and Fall of Management Accounting, Harvard Business School Press, Boston, 1991, p. 4.

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company’s financial report. Cost accounting then reports these burdensome inventories as artificially higher company profits, by reducing the cost of goods sold.* Also, when one company in the supply chain, such as an automotive manufacturer, is able to pass its inventory off to the dealers — the next link in the supply chain — in the short term, the cost frame of reference makes its results look good by recording these transfers as sales. However, unless the end consumer has bought, no one in the supply chain has sold. Inventory in the supply chain may be well beyond the level needed to satisfy end consumer demand. The fact that the inventory was recorded as “sales” in the manufacturer’s P&L is totally distorted. It is the manufacturer who must now provide incentives to consumers, reducing its own profits and the dealer’s profits and cutting into sales of the next model year. In reality, the entire supply chain is actually worse off than before; the opposite of the way the current frame of reference, cost accounting, reports it! Today, whether a company uses traditional cost accounting or its popular replacement, activity-based costing, the distortions of allocated costs still apply. These distortions represent another failed attempt to deal with complexity by breaking down a system into smaller parts and trying to optimize within each part. The distortions are so subjective that there is a popular joke in the accounting profession. When you ask an accountant, “How much does this cost?”, the accountant answers, “How much would you like it to cost?” This text does not put blame on the accounting profession for distortions. Accountants continually look for better ways to help managers make more effective decisions. Rather, we are simply pointing out the distortions imbedded within current systems.

Cost Accounting Distortion Example 2: Judgment on Make/Buy Alternatives Cost accounting, as a way to manage complexity, can lead a company to believe incorrectly that outsourcing will be more cost effective. This has happened both in outsourcing some manufacturing and also outsourcing of services such as IT. With cost allocations, a company looks at the “cost” per manufactured part, for example, as the actual cost of raw materials plus the

* By a distortion of cost accounting, when a company has more inventory at the end of a reporting period than they had at the beginning, the cost of goods sold (which includes the difference between starting and ending inventory) appears to decrease artificially.


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allocated cost of labor and other overheads. The more you allocate, the better the outsourcing alternative looks. Often, cost allocations are made very subjectively, without really understanding the impact on the organization as a whole. For example, when a manager decides to transfer the manufacturing of a part to an outside supplier, many of the allocated costs do not, in reality, go away. If 10 percent of a worker’s time is allocated to producing a part, and that part is subcontracted, does the worker lose 10 percent of his or her wages? Not at all. Does 10 percent of the depreciation on the machine producing the part disappear? No way! What about the heat, electricity, and other operating expenses of the plant? While there may be some decrease, it usually is nowhere near what has been allocated to individual parts. At the same time that some of the allocated costs are not realized as savings, the subcontractor is charging much more than the raw material cost to supply the part. Much of the “savings” are pure fiction! In effect, in many cases, the subcontracted part costs more and, at the same time, reduces flexibility and profit. However, the effects can go much further than this immediate negative impact on profit. Consider what happened to some U.S. companies who decided to outsource their manufacturing to the Far East. The lead time for products and services went up, so inventories in the supply chain increased dramatically. In some companies, the lead time increase meant that they were less responsive to consumer demand. The resulting shortages of some popular products meant that they eventually lost customer sales and, at the same time, got stuck with huge inventories of less popular products. Leverage was diminished. Similarly, cost accounting can distort judgment on investment in new equipment, judgment of profit centers, and judgment on product line profitability.* A company will be distracted from a Viable Vision quickly if they continually make bad decisions driven by poor management accounting support.

A Simpler Frame of Reference: Throughput and the Few Factors Governing It To implement a Viable Vision successfully, senior management needs to do more than remove distortions, even though that step, in itself, is extremely important. Senior management needs a way to leverage its resources by

* There is a detailed discussion of these distortions in the self-learning tool TOC Insights into Finance and Measurements by Eli and Rami Goldratt (see the bibliography).

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finding the right place to concentrate improvement efforts and a more effective way to deal with complexity. In this holistic frame of reference, the ability to generate or improve throughput is compared to a chain, which is only as strong as its weakest link. To generate throughput, every part of an organization must do its part. Marketing must create a demand for the product or service. Sales must close the deal. Procurement must arrange for materials to be delivered on time. Engineering must design a practical product. Production must produce the finished goods with good quality in time to meet the customer expectation. Transportation logistics must work perfectly. If one of these elements fails, throughput is zero. But to improve throughput, you must find and do something about the weakest link. Strengthening a link that is not the weakest does not increase the strength of the chain and does not help generate more throughput. Therefore, this intense focus on the leverage point, the weakest link, is the opposite of the cost frame of reference, where managers operating under the additive rule look in every local area for improvement. To illustrate, consider this real-life example of a financial institution. This company knew that to improve, it needed to close more new mortgages. Cash was available. There was no shortage of customer applications. Where was the biggest leverage point? Each mortgage application was reviewed and approved by a mortgage specialist, underwent standard verifications, was analyzed by the underwriters, and finally closed. However, many customers withdrew their applications after waiting for days without an answer. Out of all the functional areas involved with mortgages, the biggest leverage point turned out to be with the underwriters, where most customer applications were stuck for three weeks or more. The big surprise was that the company did not need more underwriters. Local efficiency policies (the old frame of reference) for utilization of the underwriters’ time had them badly multitasking their time between many applications. Once the company understood where its leverage point was and the devastating impacts of its local efficiency practices, it was able to streamline its procedures easily to underwrite an application in two days rather than three weeks. But imagine what would have happened to this organization if instead it had advertised to get more customers filling out applications.

Finding Simplicity is Increasingly More Important Today’s environment is much more complex than several decades ago. In the 1980s, markets were more stable and product life was much longer. PC networks and the worldwide web did not exist. Today, there are many more


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factors to consider when analyzing the effects of any action. Today, more than ever, managers feel compelled to deal with increasing complexity by breaking down organizations into smaller pieces. Because of this, the risk of misunderstanding the effect of one’s actions is much higher now than it was twenty years ago, even at the CEO level. The risk of misunderstanding increases as you move down the organization’s triangle. Typically, each lower layer of management has a narrower view. This increasing complexity also reproduces the effect of the silo mentality across a supply chain. Each company within a supply chain acts like a silo, often believing they are at odds with other parts of their own supply chain. Consequently, they ignore the horrible ramifications of their actions on other links.

Summary and Next Steps Senior managers need to implement a more effective, much simpler framework to align every part of a supply chain to achieve the Viable Vision — a framework that removes silo mentality. In this framework, managers will clearly, easily, and accurately predict the outcomes of any decisions they make and any actions they take. The new frame of reference must prevent the kinds of bad decisions and distortions that we described above. To IMPROVE to this level, every senior manager must overcome four major challenges: 1. Identify the biggest leverage point for improvement, not within your silo but within the overall organization. Only such a leverage point can bring your organization to have net profits equal to total current sales within four years. 2. Define what each part of the organization must do to exercise that leverage. 3. Remove the distortions by developing a deeper understanding and measurement system among all managers of the cause-effect ramifications of their decisions across the supply chain. 4. Develop the logistical systems to alert the entire senior management team to the early warnings necessary to prevent disaster in their dayto-day operations. This will enable their major focus to remain on achieving the leverage. The remainder of this book is devoted to providing practical answers to help you overcome these challenges.

4 A Simpler Frame of Reference for Decision Making “Too often, sophistication is just a disguise for ignorance.”

For the most part, top management teams use a holistic frame of reference (such as net profit or return on investment) to make decisions. However, this fact does not mean that the lower levels of the organization do the same. In fact, as soon as an organization is divided into components and measured by component, the nonholistic actions begin. In order for a Viable Vision to be implemented, the new frame of reference must: 1. Identify the huge leverage point 2. Connect every action and every decision at any local level to the impact on the company as a whole 3. Remove the distortions The new frame of reference described below has been implemented in many companies across the supply chain. It has been applied to marketing, production, engineering and project management, distribution, and company strategy. In a study conducted by Mabin and Balderstone* of dozens of reported cases, the following mean improvements were noted: * International Journal of Operations and Production Management, Spring 2003. 31

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◆ ◆ ◆ ◆ ◆

Lead time: 70 percent Due date performance: 44 percent Inventory reduction: 49 percent Revenue improvement: 83 percent Profitability improvement: 116 percent

So the first recommendation is: Move away from the super sophisticated, complex cost allocation systems to a much simpler frame of reference. This chapter describes the new framework, while succeeding chapters illustrate its application in every key area of the supply chain.

The Five Areas of Judgment To be effective, the new frame of reference must act like a compass to guide managers, at any level, to make good decisions as indicated in the following five major areas of judgment: 1. Judgment of the system as a whole. We must remove the confusion. Our new frame of reference must help managers judge the impact of a decision in their local area on the company as a whole. It must clearly identify, for example, where inventory is an asset and where it is a liability. It must drive each member of a supply chain to sell through the supply chain, not to one member of the supply chain. 2. Investment. One CFO said that his company would have been better off if it had taken every investment made in the previous five years and put the money in the bank at the lowest rate of interest. Another CEO said, “The cost side of every investment comes true. The benefits rarely do.” In reality, an investment is only a tangible benefit to the business owners if additional products can be made and sold, or real costs can be eliminated. The new frame of reference must make it easier to understand whether or not these outcomes will materialize. 3. Profit center. Many organizations turn a part of their company into a profit center. Companies do this to judge whether a group of products or services is worthwhile, to discourage waste, or to encourage a service level and cost structure that is competitive with outside sources. For example, many IT departments are set up as profit centers. Here, I must be blunt. When one department, acting as a profit center, allocates its costs to other departments who have no control over those costs, it is no surprise that the profit center induces criticism, resistance, and illogi-

A Simpler Frame of Reference for Decision Making

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cal behavior. Since when does the IT department have a bank account to collect profits? A profit center puts various parts of the organization into an automatic win/lose situation. Profit centers use cost allocations to justify their charges and increase their “profit.” The more they “charge,” the more “profit” they make. The more their internal customers “pay,” the more they lose. It is hard to believe that these people work for the same organization. The sad result is that all this happens with no increase in the company’s bank account. The new frame of reference must encourage measurements on real profit centers and discourage the nonsense associated with artificial profit centers. 4. Make or buy. Suppose that you are managing a plant that is under pressure to reduce costs. Should the plant outsource some of its production to another “cheaper” company-owned plant? Should it outsource to local suppliers or overseas? One controller of a large apparel manufacturer explained that when it outsourced production from the U.S. to Mexico, it counted on Mexico being viable for only five years. After that, it expected changes in U.S. laws to allow it to import the goods from China, at 30 percent less direct cost. Many U.S. “manufacturers” no longer manufacture anything. I am not implying that this is good or bad. Rather, the new framework must give managers a good understanding of what the real effects on cost and throughput will be for the entire company in a make or buy decision. Will quality deteriorate or improve? What will happen to lead time and what effect will this have on customer sales? 5. Product cost/profit. How is it possible for a company to cut a moneylosing product and end up worse off than before? In a company that makes more than one product, managers allocate overhead costs to each product to judge whether or not each product is profitable. However, when a product is discontinued, many of the overhead costs do not go away. Managers often use a forecast of a product’s sales, in combination with the above cost allocation distortions, to calculate product profitability and thereby justify product line decisions. Calculating product cost based on forecasted sales is about as reliable as long-term weather forecasting. If the forecast is wrong, the assumptions about product cost are wrong and the resulting decisions are wrong. In my experience, forecasts are wrong about 100 percent of the time.

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OE

I

T

Figure 4.1. Three Global Parameters for Management Decisions.

The New Frame — Part I: T, I, and OE In the new frame of reference, there are only three global parameters needed to measure the impact of any management decision at any level (see Figure 4.1): ◆ ◆ ◆

Throughput, T Investment, I Operating expense, OE

Throughput (T) is the rate at which the organization generates goal units. In for-profit organizations, goal units are expressed in dollars. Throughput is calculated by taking the revenue received from customers in a given time period and subtracting amounts paid in raw materials and direct expenses to outside suppliers for each product or service sold. Every dollar of throughput generated is money that is left in the company’s bank account after paying raw material vendors. Since throughput is a “rate,” you can express it per hour, per week, etc. Note that throughput is not recognized until money has been received from the customer. In order to generate throughput, a company makes an investment (I), both in terms of capital (buildings, equipment, computer systems, etc.) and in terms of inventory (raw materials, work in process, finished goods). The money that the organization spends every month to turn investment into throughput is called operating expense (OE). This money includes salaries, depreciation expense, costs of supplies, heat, electricity, rent, etc. From these three global parameters, two derivatives are: ◆ ◆

Net profit = Throughput – Operating expenses [NP = T – OE] Return on investment = Net profit divided by investment [ROI = (T – OE)/I]

Driving Change in Behavior by T, I, and OE Using the new frame of reference, managers, judging what actions to take, will use the impact on T, I, and OE as their guide. If they are recommending a decision and have no idea what the impact will be on the company in terms of T, I, and OE, then how dare they make such a recommendation?


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There are now many documented examples that illustrate the simplicity, guidance, and power that this new frame provides.* In the example discussed in Chapter 3, a procurement manager made a decision to replace overseas materials suppliers with cheaper, locally available materials suppliers, using cost savings as his frame of reference. The savings were US$1.3 million. In the new framework, this manager would be required to calculate the net impact of his decision on T, I, and OE for the entire company, not just the OE savings for procurement. How could a procurement manager possibly estimate, in advance, what the impact of a change in materials would be on production? Since this decision impacts both operating expense and throughput, the procurement and operations managers would need to conduct tests with the new materials to assess the impact before the final decision is made. The real-life calculations for this example were: Impact on throughput Cost of raw materials decreased by $1.3 million Lost revenues due to material problems $82,800 per day, based on production tests: ◆ Revenues decreased by $29.8 million per year ◆

Impact on operating expense Waste increased by $4,000 per day, based on production tests: ◆ Operating expense increased by $1.44 million per year Carrying cost on $200,000 reduction in inventory saving, @10 percent: ◆ Operating expense reduced by $20,000 per year Impact on investment Switching from imports to local suppliers requires new testing equipment: ◆ Investment increased by $35,000 total ◆ Raw materials inventory can be reduced by $200,000 If the decision is executed as described in Chapter 3, the following summarizes the expected results (note that the delta symbol below means “change in”): ∆T = $1.3 million – $29.8 million = –$28.5 million

* For example, see Statements on Management Accounting #4HH, Institute of Management Accountants, Montvale, NJ, 1999; Thomas Corbett, Throughput Accounting, North River Press, Great Barrington, MA, 1998; Victoria J. Mabin and Steven J. Balderstone, The World of The Theory of Constraints, St. Lucie Press, Boca Raton, FL, 2000.

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∆OE = $1.44 million – $0.02 million = $1.42 million ∆I = $35,000 – $200,000 = –$165,000 In the example, even though investment in inventory was reduced by $165,000, the devastating impact on throughput and operating expense means that this would obviously be a bad decision if implemented as is. However, the procurement manager had a great idea to begin with — to procure materials locally, reduce lead time, and reduce cost. The idea has some horrible negative consequences if executed without cooperation from operations. When operating in silos, it is guaranteed that decisions will be executed without considering the negative consequences on the company as a whole. In the new frame, understanding the global impact on T, I, and OE across the company, the procurement manager will work to find local suppliers that he can bring up to current standards. He will see part of his mission as minimizing the impact of any transition on production. He will not be measured on local improvements in isolation. As a result, he will not be satisfied until global improvement is achieved.

Insufficient for a Viable Vision But this new frame of reference is not sufficient to implement a Viable Vision. There are countless opportunities to improve and fix things, much more than there are resources available. We could use the simpler frame of reference of T, I, and OE to look for improvements everywhere and still go bankrupt in the process, because our markets are deteriorating or for some other legitimate reason. Simply removing distortions is not good enough. Therefore, we must answer the next big question, “Where must we focus our resources to get the biggest leverage on company results?” The fatal mistake that organizations made years ago, when the Total Quality Management movement was popular, was to apply the TQM process everywhere. Other popular improvement philosophies are making the same mistakes. Most of these methodologies are correct, but only when applied to the right problems.

The New Frame — Part II: The Five Focusing Steps In the early 1990s, some of the big American automotive companies were losing billions of dollars per year. They had been hit by Japanese domination


1. 2. 3. 4. 5.

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IDENTIFY the system’s constraint. Decide how to EXPLOIT the system’s constraint. SUBORDINATE everything else to the above decision(s). ELEVATE the system’s constraint. If in a previous step, a constraint has been broken, GO BACK to 1.

WARNING: Do not let inertia cause a system’s constraint.

Figure 4.2. The Five Focusing Steps.

of the market, by the economy, and by several other factors that reduced their market share. Around the same time, a book describing a new process, Business Process Reengineering, cited a huge success in one of the big three American automotive companies. By re-engineering its accounts payable department, the company improved performance and reduced head count from several hundred to several dozen. The dollar improvement was cited as about $50 million, less than a 2 percent impact on the multibillion dollar losses that same year. This company’s biggest problem was not in its accounts payable department, however; obviously not, because the billion dollar losses continued. What is not so obvious is that the resources invested here (significant IT effort, the use of the top project managers in the company, plus major crossfunctional effort) damaged the improvement effort in the company’s real constraint area. And the reason that it is not obvious is because the effort did yield some positive tangible results for the accounts payable manager’s budget. As stated in Chapter 3, a chain is only as strong as its weakest link. The automotive company had spare capacity. Its weakest link was in the market, not in accounts payable. Increasing sales was the biggest leverage point to improve bottom-line results. To have a powerful process of ongoing improvement, Goldratt identified five focusing steps (see Figure 4.2). An organization’s leverage to improve is governed by the strength of the weakest link. Therefore, the first step in the improvement process must be to IDENTIFY the weakest link. In the automotive industry, simply identifying the weakest link in the market, while an important first step, does not yet improve a thing. There are two ways to deal with a constraint. One way is to try to get more of it, by throwing money at the problem. For example, in the automotive industry, in the face of poor sales, we frequently see massive advertising campaigns,

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rebates, and 0 percent credit offers. This is often followed by more huge losses or at least downward pressure on profits. This is an important lesson when dealing with a constraint. It is vital to remember that cost is not less important than throughput. So before rushing to throw money at the constraint, Goldratt advocates the second way of dealing with a constraint. He deliberately sequenced step 2 in the process — decide how to EXPLOIT the system’s constraint. Step 2 says that when the constraint, in this example a customer, walks into your showroom, do not waste it! Exploit means to squeeze everything you can out of the constraint. If a customer wants a customized car that is not on the lot, and the manufacturer has considerable excess capacity, do not waste the capacity producing cars that no one wants. Decide how to exploit; find a way to produce the customized car that the customer wants and guarantee to have it delivered to the door in three weeks, not twelve weeks. In order to exploit the constraint, the other links in the chain must support the EXPLOIT decisions. Step 3, SUBORDINATE everything else to this decision, requires every department to bend over backwards to support the EXPLOIT decisions. We do not want to hear about manufacturing efficiencies any longer and we do not want precious project management resources tied up for months on the accounts payable project. The constraint is in the market, not in manufacturing and not in accounts payable. For now, it is OK for manufacturing and accounts payable to operate inefficiently, if it helps to subordinate to the above decision (providing that the end result, in terms of T, I, and OE, is greater). This is not a fictional example. There is one automotive manufacturer who did exactly these steps in the mid-1990s with excellent results. Step 4, ELEVATE, means improve. In this step, we often see companies investing in more resources, faster machines, new geographic markets, new products, or making other capital investments to break their constraint. However, we have seen many, many cases where simply by executing steps 1 through 3, the constraint is broken. If the automotive constraint is in the market and we do steps 2, 3, and 4 correctly, we get more sales. We do these steps a second time, with some new decisions on how to exploit the constraint, and once again we achieve more new sales. Then we try it again and we fail. What happened? We were so successful in increasing sales that the constraint has moved to operations. Step 5 puts a company into the process of ongoing improvement, by having us GO BACK to step 1. Since we have not yet seen a company making infinite profits, we assume that every company always has a constraint. Therefore, when a constraint is broken, the next question is, “What is the new constraint?” In fact, the correct approach is to ask, ahead of time, “What will be our next constraint?”, so we have the necessary lead time to plan for it and avoid problems.


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Putting T, I, OE and the Five Focusing Steps Together Earlier, we described the five areas of judgment required for making decisions. With the entire framework now in place, we will illustrate how it works to change bad decisions into good decisions. Before, with departments operating as silos, any investment in new equipment could be justified by finding enough costs to allocate, costs that in reality would never be “saved,” but looked good on paper. We will throw these distortions into the garbage can forever and use the new framework to examine equipment investment. We now have the ability to judge the real impact that new equipment will have on throughput by following steps 1 and 2 of the Five Focusing Steps. An investment in a constraint area that will dramatically increase throughput often yields much higher return on investment than an investment that only impacts operating expense. That is the power of identifying a constraint. We still need to evaluate the investment, so the first question to ask is, “What is the change in throughput that we expect from this investment?” Second, “What is the change in operating expense?” Since new equipment usually has depreciation expense, maintenance contracts, parts, tooling, and other operating expense increases, the change in operating expense should be easy to identify. New equipment might also impact overtime expense or even labor expense positively or negatively. Third, “What is the change in investment?” We calculate the return on investment by following the simple formula, with no cost allocation distortions whatsoever: ROI = (∆T – ∆OE)/∆I Step 3 provides an astonishingly good guideline for judging the impact on investment. In the automotive company example described above, the subordination of the sales organization to the decision meant that, for a short period of time, there were less sales recorded. The manufacturer stopped pushing cars onto dealer lots. As inventories decreased, the net impact was billions of dollars of reduced investment in cars on dealer lots. In this case, the manufacturer was wise enough to realize that even though the inventories were on the dealer’s books, they were the manufacturer’s headache until sold.

Summary and Next Steps We now have a way, finally, to overcome the distortions of cost accounting. The new frame of reference — T, I, OE and the Five Focusing Steps — is

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the beginning of a new language for all of management and a powerful base for a Viable Vision. The examples cited in this chapter just begin to illustrate the full power and understanding needed to identify your biggest leverage point for improving your organization. Since about 70 percent of all companies today have their constraint in the market, our next chapter will describe how to apply the new framework there. But if your constraint is not in the market, you might have other questions, such as: ◆ ◆ ◆

After fifty years of critical path methodology, why are 74 percent of all projects delivered either late, over budget, or not within scope? How do we finally squeeze some tangible return on our IT investment? How do we overcome the classic distribution problem, shortages of product in one geographic area while simultaneously there are surpluses in another?

Do not worry. All of these questions and more will be dealt with using the powerful new frame of reference. If you prefer, feel free to skip to the chapter that describes where your current constraint is. However, in the market, the analysis is astonishing. Many companies are wasting the work that they have already done to find customers. That is the subject of the next chapter.

Part III The Components of a Viable Vision

5 Marketing

“Marketing — Spreading the corn so the ducks will want to come to your field. Sales — Taking a gun and shooting the sitting ducks. If the ducks are not sitting in your field, don’t blame sales!”

In most companies today, you will not find marketing, according to my definition. Instead, you usually find a host of tasks such as sales support, sales training, advertising, collateral development, promotion, and others. Labeled as marketing, these tasks do not come close to accomplishing the vital role of marketing. Further, if the real problems of the markets are not addressed, the company ends up wasting its sales effort. About 70 percent of companies today are constrained by the market. This means that if the organization had more orders, the supply chain capacity exists to fulfill them. If there are not enough ducks sitting in your field, you must look deeper than your sales training, advertising, and promotion programs. Successful marketing should bring a lot of ducks into your field, with glue on their feet! Why are not enough customers in your markets attracted to your corn? Even for those companies who have enough orders today, think about how easy it is for competitors to copy or leapfrog technology today. Consider how horribly misleading many industry sales forecasts have been in the past ten years in industries as unrelated as steel and aluminum, high technology, travel, healthcare, and others. No industry today is insulated from shockingly rapid deterioration unless… unless you follow the steps outlined in this chapter. 43

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Why So Many Companies Have a Market Constraint The silo approach has companies focused so inwardly that many companies today are wasting real prospects. To explain, most companies focus on their product features to such an extent that they are blinded to what really matters to customers in their various markets. They look at all of the costs and effort involved in engineering, manufacturing, and bringing a product to market. They allocate indirect costs from all of the overhead departments to figure out a “fair” price for their product. To the supplier, a “fair” price becomes the sum of its allocated and real costs plus a reasonable profit margin. This perception of value based on cost becomes imbedded in rigid pricing policies, in feature-rich technical literature, and in training given to salespeople. But unless you are in a monopoly situation, the perception of value that counts at least as much as the supplier’s is the customer’s. This perception of value is based on what problems the product or service helps customers overcome in their environment and the resulting benefits. The greater the problems the product overcomes, the greater the perception of value. Marketing’s job is to increase the customer’s perception of value of the product, compared to all competing products in the market. Furthermore, marketing must price products according to this value and not according to artificial pricing based on cost allocations (i.e., not based on supplier perception of value). With higher perceived value by the customer, pricing can be increased. To accomplish this, marketing must focus on something much more important than product features, by using the Five Focusing Steps.

The Five Focusing Steps in Marketing For 70 percent of all companies, we already exercised step 1, IDENTIFY. Our constraint is in the market. Before throwing money at finding more prospects, which is step 4 (ELEVATE), let us not waste what we already have — good prospects. To do that, we must follow the steps in sequence. To EXPLOIT, we must overcome the distortions that the supplier perception of value imposed on us in the past.

Decide How to Exploit the Constraint, Do Not Waste Prospects If marketing has succeeded in attracting the right ducks to your field and sales cannot close them, the organization must determine why not. In many or-

Marketing

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ganizations, the automatic incorrect reaction is to replace salespeople and managers without a deeper analysis. Based on supplier perception of value, many companies believe that their product is worth the price without having a marketing approach to prove the value in the customer’s eyes. Without a correct marketing approach, salespeople may take “pot shots” at customers using product features as their ammunition instead of focusing on the prospect’s problems. Once you try to shoot a sitting duck and miss, the duck is no longer sitting. It has flown away to some other field. The correct answer to shooting the sitting duck will come from analyzing a valid sample of those customers who said “no.” Using the Pareto Principle (80/20 rule) and simple surveys, marketing can quickly document the reasons why the majority of prospects are not buying. At a minimum, EXPLOIT demands that you have excellent due date performance, short lead time, and satisfactory quality (good enough to meet customer expectations). This is the first place to look to determine why customers are not eating your corn. Step 2 will be the first response to the new understanding gained above. For example, if many prospects responded that they would have bought from you, but your lead time was too long, then marketing has a legitimate basis to decide that lead time is key to closing more deals with existing prospects. One real-life example of such an impact is an aircraft maintenance company. This company’s “supplier perception of value” was that they had an investment of hundreds of millions of dollars in hangars, sophisticated equipment, international licenses, and highly skilled personnel to do the complex work of taking apart a wide-body aircraft, converting it from passenger to cargo, testing, and reassembling every part. The company was price competitive, but in a cutthroat industry, that did not help close enough deals. When it looked at the criteria for “customer perception of value” and why it lost so many deals, the key criterion was lead time. To exploit the constraint, the company reduced average lead time from twelve weeks to two weeks, using the techniques described in Chapter 8 (Project Management). When a company tells a customer that its 747 only has to sit in a hangar for two weeks instead of twelve, the customer has just received a gift of ten more weeks of 747 revenue. 747s, unlike rental cars, are worth a lot more than $60 per day. As a direct result, the backlog of work increased from three months to one year. This new client perception of value meant that the customers were willing to book their services one year in advance to use this company over any competitor. Unfortunately, all too often, improvement techniques are applied everywhere rather than targeted to exploit the constraint. For example, one distributor decided to apply Six Sigma to reduce the waste caused by product obsolescence. Without consideration to their market constraint, the inventory management people examined their order processes. To move closer to the

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Six Sigma goal, one action they decided on was to reduce the quantity on hand of all major products. Their assumption was that obsolescence in their industry could not be predicted, so the smaller the inventory they held, the less obsolete product they would be stuck with. After several months of effort, they reduced obsolescence — an annualized saving of 20 percent of the $4 million obsolescence cost, or $800,000 per year. At the same time, the VP Sales was screaming “FOUL!!!” because of stock-outs. In one month that the VP Sales closely measured the impact, the stock-outs resulted in lost gross sales of $3.9 million. At their average profit margin of 27 percent, this amounted to over $1 million lost profit, per month! The use of T, I, and OE and the IDENTIFY and EXPLOIT steps prevent this kind of nonsense. When this same distributor revisited its actions using the Five Focusing Steps, the IDENTIFY step showed that their constraint was clearly in the market. To EXPLOIT, the company needed more of the right inventory. The next step, SUBORDINATE, allowed this company to exploit its constraint while simultaneously reducing obsolescence.

Subordinate to the Above Decisions In the distribution company mentioned above, when implementing this step to help address the market constraint, the inventory management people changed their approach and negotiated deals with suppliers to return obsolete inventory. Some of the resulting saving of $2.25 million was used to stock more products, resulting in greatly increased sales. They found the inherent simplicity within their complexity and made it work beautifully. In executing step 3, operations, engineering, distribution, and finance functions must take actions to ensure that prospects are not wasted. Often, these actions are counterintuitive. Knowing how precious a customer is when you have a market constraint, every department must follow the physician’s credo: “First, do no harm.” Do not make it harder for customers to buy. In operations, subordinate means having the logistics in place to ensure that due dates are consistently met in short lead times. In distribution, subordinate means having just the right stock everywhere in the supply chain in time to match consumer demand. In engineering, it means getting products designed and developed faster than ever before. The same principles apply in finance and other departments. Each of these requirements merits a chapter in this book. In the face of a declining economy, before implementing the Five Focusing Steps, the distribution company discussed above had its credit department implement a tighter credit policy. The salespeople had to spend double their time on the phone with new customers, gathering much more extensive

Marketing

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credit history. Approving credit applications went from an average of two days to six days. Remember, the constraint is in the market. In order for the finance people to evaluate the credit decision, they must ask the questions: ◆ ◆

What is the net impact on T, I, and OE of this procedural change? Is there a way to get the benefits of the change without the negative effects?

In order to subordinate to the constraint, finance must ask: ◆

How can our department help the company generate more sales?

In this situation, to subordinate to a market (not cash flow) constraint, finance should find ways to do credit procedures more quickly, without harmful consequences, to help ensure that precious new customers are not wasted.

When You Need More Customers, Elevate with a “Mafia Offer” Often, a company can start to achieve a Viable Vision through the EXPLOIT and SUBORDINATE steps. However, when a company runs out of prospects, it may need to move to the next step. Step 4, ELEVATE, brings more ducks to your field who are drooling over your corn. In today’s global economy, these ducks fly all over the world or worldwide web, looking at many different cornfields, before making a decision on which fields to pursue. A marketing function must ask, analyze, and address the answers to the question, “What problems do the clients in our markets have that no one in the industry is addressing?” This question is the core of market research. The big surprise is that many times, to address these problems, the company does not need to invent or re-engineer products, as the following example shows. When a marketing person can access senior customer management and learn about the business through this approach, the resulting analysis often leads to a huge competitive advantage. In the analysis performed on the distribution company, which carries over 15,000 products in the wireless communications industry, I found several different markets with unique problems. One market is customers who are buying items for a project, such as building a communications tower or implementing a network. The project managers for these projects are in a similar situation to those described in Chapter 1 (last-minute changes, but with the desperate need to not suffer the lead time consequences of those changes). So without modifying any of its product offerings, but by changing

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some logistics, offering the products within a much shorter lead time and offering to pay a penalty based on damage to the project, this company has an incredibly compelling offer to its project customers. The same distributor also sells wireless products through retail chains. Since these retail chains can buy the same products from other distributors at similar pricing and service levels, the marketing analysis must determine what the real problems of the retailer are and try to solve them. Retailers have two serious problems: too much inventory of some items and missed sales due to shortages of other items. In fact, one of today’s keys for successful retailing is to target a much larger variety of products. The greater the inventory of each product that the retailer carries, the less shelf space they have available to support product variety. In this distributor’s case, the solution is very straightforward. Using a pull system of inventory replenishment described in Chapter 7, Distribution Logistics, the distributor guarantees that the retailer will cut existing inventory in half while decreasing shortages. Today, many retailers order goods in large quantities infrequently to receive quantity discounts, to meet minimum order quantity policies of distributors, and to have lower freight costs per item. But retailers do not know exactly what the supply and demand will be for any specific item; 100 cell phones of a particular model might have represented a two-month supply last year, but this year that same 100 cell phones might represent a six-month supply. To avoid the negative effects of oversupply of some items and shortages of others, the distributor removes per-order quantity discounts and per-order freight penalties and lets the retailer order what was consumed in the previous period. Such offers, when supported to the extent exemplified in the chapters on operations and distribution logistics (Chapters 6 and 7), are too good for a prospect to refuse. Remember, no one else in the industry is solving such problems. That is why Goldratt termed this a “Mafia Offer.” In most cases, the companies that implement such an offer are not changing their products. They are definitely not changing their prices. Rather, they are changing policies and practices that have become imbedded by all suppliers in their industry, policies that drive customers crazy. Every industry has such rooted policies. For example, in the airline and car rental industries, the frequent-user award programs all have policy restrictions (dates of use, ability to use awards to upgrade, etc.) that prevent the customer from fully enjoying the award. Hospital buying groups in the U.S. (called GPOs, General Purchasing Organizations) drive hospitals crazy with policies that restrict them from going outside of the agreed products or suppliers. These concepts even apply in 100-year-old smokestack industries (e.g., steel and aluminum).

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These changes to rooted industry policies are much harder for competitors to copy than changes in product features. Today, many companies can reverse engineer a competitor’s product in hours or days. But companies are blocked from changing rooted policies. They see those policies as the only way to operate their business. When this concept was originally introduced, Goldratt predicted that a company would gain a two-year competitive advantage. However, we have seen several cases where the competitors have not responded in five years. While the “Mafia Offer” is a very powerful marketing tool, there is another key marketing strategy for the long-term health of any company. That strategy is segmentation.

Segmentation A market is considered segmented if and only if the price and quantity of a product sold in one market is not impacted by the price and quantity sold in another market. Therefore, segmentation is not simply filling a niche in the market. A vital rule of this strategy is to segment your markets, not your resources. This gives you the flexibility to shift resources between segments at your will. No company can predict, with any reliability, what every single one of their existing competitors might do at any point in time. Further, no one can accurately predict when a new competitor or product, perhaps from overseas, will enter your market and devastate you. The idea for long-term health is to operate in enough independent segments (e.g., fifteen to twenty) such that, while some segments may be unexpectedly declining, others are simultaneously moving up. This protects the organization’s revenues and stability, as well as insulates its employees from market turmoil. In the distributor example, one way for the company to segment is to do so geographically. Another way would be for it to distribute new product for one market and repair parts for the aftermarket. A third way would be to distribute products from a completely different industry whose fortunes rise and fall independently from the wireless communications industry. The companies who apply the two ideas (“Mafia Offer” and segmentation) achieve a competitive advantage lasting, typically, two to five years without a roller coaster ride in revenues and profits. It puts the company in a position to create more demand than it has capacity to fulfill, letting it pick and choose its customers. This gives the company enough predictability to ensure employee security and satisfaction and avoid the negative spiral of repeated downsizing.

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Inertia When the market constraint is broken (and it will definitely be broken with a valid “Mafia Offer” and segmentation strategies), you must now execute step 5, GO BACK to step 1 and identify the new constraint. But be very careful. When the constraint is in the market, the decisions to exploit and subordinate introduced new rules that may no longer apply when the constraint moves. For example, suppose the distribution company breaks its market constraint by cutting lead time in half. With more sales, it becomes capacity constrained internally. Step 5 has one other caution as you go back to step 1. Re-examine, carefully, all existing rules and make appropriate changes. Do not let inertia become your constraint. For this company, if it keeps the rule of promising all project customers a two-week delivery time on all products, it will start defaulting on promised delivery dates and then lose customers for life. So in going back to step 1, the new rule becomes “make lead time promises based on capacity.” As a result, the quoted lead time might be between two and five weeks, depending on capacity. However, the lead time, when considering capacity, will be met 100 percent of the time. The company maintains its reputation for reliability, by not letting inertia become its constraint.

Summary and Next Steps The shift from providing sales support to executing strategic marketing with “Mafia Offers” and segmentation requires the marketing function to learn and apply new skills. This powerful approach removes the market constraint, usually within less than a year. If you implement this approach and still have a market constraint, you may need to speed up your product development cycle. The revolutionary approach to achieve cycle time reductions of 25 percent or more, called critical chain, is discussed in a later chapter. Next, we will show you how the same Five Focusing Steps, in combination with T, I, and OE, simultaneously bring simplicity, control, and exponential improvement into operations. The companies that implement this approach no longer claim that problems such as machines breaking down or vendors delivering late are preventing them from having control over their production environment. The operations logistics solution described in the next chapter also answers the important question, “How do I overcome the silo mentality to have operations support a Viable Vision?”

6 Operations

“Tell me how you measure me and I will tell you how I will behave. If my measurements are not clear, no one can predict how I will behave — not even me!”

The managers at the steel plant claimed that they lacked the production capacity to produce all of their orders on time; 40 percent of the orders were late. The VP showed me the start of the process, where the caster takes hot, molten steel and forms it into blocks that are then rolled to desired thickness. The metallurgical properties of the steel can be altered and the steel block rolled into different thicknesses and sizes to meet different client requirements. I walked through the plant and saw work in process everywhere. Outside, the huge storage yards were full to capacity with rusting steel coils. Unfortunately, unlike wine, steel does not improve with age. The VP giving the tour pointed across the horizon, where the flames from their competitor’s melting furnaces could be seen. He said, “We don’t have enough room in our yards to store all the rolled coils, so we’re renting space from that competitor and from quite a few warehouses within a fifty-mile radius.” The company was averaging two and a half inventory turns per year. I wondered why it would produce all of this product and let it sit around rusting for half a year. In this same plant, the VP Sales told me that a customer, the tuna industry on the west coast, had placed an order six months ago for the steel to make the tin cans. The company was late in delivering this order. Since the metal coming out of this first plant could be transformed through two other plants 51

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to tuna tins in just a few days, I asked, “How could this order be late if the client gave you six-months advance notice?” With a straight face, the VP answered, “Because of the caster. We didn’t have the capacity to produce this order on time.” His answer made no sense to me. I know that if you have excess inventory, you have excess capacity. Most of the inventory that this company had produced was not needed by customers in the short term. So it sat for months in the yards, rusting away. In reality, this company had huge excess capacity, yet the managers literally avoided producing the inventory that some customers wanted. The intriguing question is why did these very smart managers take actions that defy common sense? Before explaining the root problem underlying this and other behaviors blocking the goals of operations, I will tell you my interpretation of those goals.

The Current Reality of Operations In generic terms, “operations” describes the sequence and interaction of processes directly involved in the production of a product or delivery of a service. In a manufacturing company, we are talking specifically about the production function. As another example, in a bank that provides mortgages, the operations function includes the tasks performed by the underwriters, the mortgage loan processors, and the approvers. No matter what operations environment you consider, there are three primary goals: 1. On-time delivery (according to the original promise date to the customer) 2. Short enough lead time to meet or exceed customer expectations in your industry 3. Competitive product or service (in all respects in which operations has an impact — cost to produce, quality, etc.) People who have never worked in operations often wonder why it is so hard for managers to achieve these goals. All you need to do is ask some of these managers. Even in repetitive manufacturing, where the same products are produced hundreds or thousands of times per year, operations managers have no shortage of complaints: ◆ ◆ ◆

Machines break down unexpectedly Vendors deliver late The raw material does not meet quality specifications

Operations

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People do not show up to work on time (or at all) The union refuses to cooperate Customers change their minds

The full list of complaints in real-life environments is much longer and all of these complaints are valid, but do these complaints really explain why it is so hard to meet production goals? To help managers find the correct answer to this question, Goldratt created a “paradise plant,” where none of these problems existed. Operations managers were thrilled when they heard about it, since they believed it would be easy to make a profit in such a plant. Yet out of the thousands of operations managers who worked in this plant, almost all of them failed to make a profit using their traditional approaches. (In case you have not guessed, the paradise plant was a computer simulation.) There were no tricks in the computer simulation and the plant depicted in the simulation was much simpler than any real-life situation. So, how can you explain these failures, when none of the common complaints existed? The answer starts to emerge as you watch the behavior of the managers running the simulated plant. At the same time as they are trying to meet the customer due dates, they see workers standing idle. Their focus and their time shifts frequently between keeping their workforce busy and trying to get product out the door. Managers see both needs as legitimate. When everyone is working, managers believe they have a better chance to produce more. The more they produce at each work center, the better off they believe the company will be. What the managers do not fully understand is that in trying to keep workers busy, two huge negative effects result. One effect is that the workers create a pile of work in process that is not needed to meet immediate customer needs, just like in the steel example. Second, since these workers are busy in one production area making pieces that are not needed for customers, their managers overlook the fact that they were needed in another process to meet real customer demand. Why did the managers overlook this vital need? It was because the workers were busy, which the managers interpreted as “good” according to one of their measurements. Operations managers have difficulty figuring out the best way to manage their resources, because “Murphy” thrives in operations by creating many unexpected problems. The more problems the operations people face, the more complex they see their environment. Operations managers believe these problems are killing their resource utilization and budgets, both of which are key operational measurements that they believe are tied to all three operations goals. Driven by operational measurements, managers attack this complexity by trying to address the disturbances everywhere. They try to reduce machine breakdowns. They try to hire better employees. They put a quality improve-

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ment program into effect everywhere. They look for vendor material improvements. Wherever the biggest fire exists, managers will put their efforts. Yet in spite of all of these efforts, operations still struggles to meet all goals. These operational measurements are somewhat different in each plant. For example: ◆

◆

◆

In the steel plant described earlier, the production planner, the daily scheduler, the foremen on all shifts, and the executives used identical terminology to describe the success of operations — tons per hour. In order to meet this prime operational measurement, everyone worked to maximize the tons per hour. Personnel involved in making decisions about what to produce chose the fast products at the expense of the slow products. Since it is faster to roll molten steel to two-inch thickness rather than one-half inch, we begin to understand why the tuna can order was late and why most of the rusting coils sitting in the yards were thicker than average. Further, in the steel industry, the setup time to change a product configuration was several hours. To avoid too many setups, which reduced tons per hour, they would produce much more than was needed to satisfy immediate market demand. So not only did they produce the two-inch plates that no one wanted, they produced them in enough quantity to satisfy their grandchildren. In the tobacco industry, the measurement is quantity of cigarettes produced per shift, on each machine type. There are two major processes in each manufacturing unit. The “maker” creates the individual cigarettes using tobacco, wrapping materials, and filters. The “packer” packages the cigarettes into packs and cartons. Since they are being measured in each process on the number of cigarettes produced per shift, you often see maker operators allowing bad cigarettes to flow through to the packer, even though the defects could easily be detected at the maker. You also see packer operators avoiding muchneeded maintenance and cleaning to maximize their shift production, making the problem worse for the next shift. A company in the home construction industry produces windows. The glazing area stood idle a lot of the time, yet managers called this area their biggest bottleneck. Goldratt describes observing this kind of plant as like “watching a snake that swallowed a goat. You can see the large batches of windows moving from one department to another, just as you can see a goat moving through the snake’s body!” In this plant, the glazing area either had a huge batch of windows to work on or they had nothing to work on. Big batch sizes were used to get “efficient” production at each work center.

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The common theme through all of these stories is the primary efficiency measurement that drives the behavior of people in operations. These local efficiency measurements are intended to encourage cost-effective operations, but often innocently have the opposite effect on the system as a whole. What we have just described is that operations managers are caught in a dilemma. They must constantly fight to reduce waste — unnecessary overtime, scrap, poor production volume. They try to do this with local efficiency measurements, typically on utilization of people or machines, or production volume per time period. To meet the efficiency measurements, they produce in large batches, produce items with shorter setup times, produce to meet shift quotas at the expense of preventative maintenance, or produce in greater quantities than needed to meet immediate market demand. I have seen dozens of variations on this theme. At the same time as they are focused on efficiency, managers are struggling to meet customer due dates and increase flow. In order to meet a due date, they find themselves overriding the efficiency measurements, not once or twice, but over and over again. The assumption that has existed in operations for decades is that local efficiency measurements are essential to reduce waste and meet production goals. Underlying the efficiency measurements is the assumption that any resource standing idle is a waste. When there is a setup in operations, the machines are standing idle, so it is regarded as a waste. When people are waiting for some event in production (maintenance, work flowing from another center, etc.), it is considered a waste. The assumption is predicated on a definition of waste. In production, “waste” is often equated to a resource standing idle. This “waste” is measured at a local level, according to local impact. We are hit again by a variation on the invalid additive rule described in Chapter 3, the sum of the local efficiencies adds up to global results. When you consider this assumption relative to the system as a whole, it is horribly wrong. In the steel company example, the caster ran full out, seven days per week, twenty-four hours per day. The result was an extra $750 million of rusting inventory. The operations managers also tried to run every other facility in the plant as close as possible to 100 percent, a further waste. The assumption that “a resource standing idle is a waste” is invalid. In fact, the following proof shows that it is desirable to have most resources standing idle from time to time. In every operation, there is a chain of processes linked together to produce the end product or service, as shown in Figure 6.1. Although not always sequential, there is a general direction of flow. In this example, we will start by trying to utilize one resource, Resource X, to 100 percent. In this case, 100 percent means six units per hour. To minimize waste in our system, we

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1

2

3

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5

6

End Product

6/hr

FLOW OF MATERIAL Figure 6.1. Is a Resource Standing Idle a Waste?

have balanced our processes so that every resource produces at the rate of six units per hour. But what does “six units per hour” mean? It is an average rate. To achieve that average, sometimes the machines produce at greater than six units per hour and sometimes they are down and are producing zero units per hour. If Resource 3, the resource that feeds Resource X, goes down, Resource X would run out of materials and stop producing. So to meet our goal of 100 percent utilization, we are very clever and put a bucket of work in front of Resource X to protect it from any fluctuations in the upstream processes. Now, when Resource 1, 2, or 3 goes down, X continues to work. The bucket of work sitting in front of X is partially depleted. When those upstream resources start producing again, they will continue to put work into the bucket. However, because their capacity is six units per hour and X is drawing out of the bucket at the identical rate, the bucket never gets refilled to the top. By the third or fourth interruption in the upstream processes, the bucket is empty and X is idle. This means that in order to use just one resource, Resource X, to 100 percent, every other resource must have greater capacity than X (protective capacity) in order to be able to refill the bucket! But there is another huge implication. If you put in that protective capacity, and all resources use that capacity to 100 percent, they end up creating more inventory than X could ever use. This inventory will sit on the shelves gathering dust — a total waste. Therefore, those resources must have protective capacity, but must not use 100 percent of their capacity except when needed to recover from a problem. We have now shown, for any operations function, that the assumption that “a resource standing idle is a waste” is completely erroneous. While the example is scientifically valid, operations needs much more than a scientific proof of the decades of flawed logic. Operations must have a complete solution that helps managers to meet their due date requirements while simultaneously minimizing waste (inventory, capital, or people). We will use the Five Focusing Steps to derive such a solution.

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Operations Using the New Frame of Reference The logistics solution derived from the Five Focusing Steps is called Drum, Buffer, Rope or DBR for short.* We start with step 1, IDENTIFY the system’s constraint. When you consider how the operation behaves over a period of several weeks, where is the biggest bottleneck? What resource, more than any other, governs the throughput of the entire operation? Where do you find work waiting the most? Where will the expediters go first to find a stuck order? These are the kinds of questions that identify the constraint in operations. If you gather the collective intuition of the expediters, schedulers, and managers, this question can be answered very quickly. Goldratt calls the operations constraint a “drum.” This term came from the analogy of a drummer in the army some centuries ago, who set the pace to which all the soldiers marched. The drum’s capacity determines how much throughput we can generate for the entire operation. Therefore, an hour lost at the drum is an hour lost for the entire operation. Step 2 says we must decide how to EXPLOIT the system’s constraint. Remember that exploiting means that we must not waste the precious drum resource. It is certainly a waste if the drum sits idle waiting for work that is needed to meet customer demand. So to exploit the drum, we will make sure that there is always a “buffer” of work in front of the drum. By doing so, the drum will not be affected by disruptions in flow of work from upstream operations. That is, our goal is that the drum will not be accidentally starved for work due to upstream disturbances. How big should the buffer be? The buffer is expressed in time, not quantity, since units of work are often not uniform in time required by the drum to process the work. The buffer is a shock absorber for upstream disturbances, so it is set to give managers enough time to investigate and overcome major disturbances. As a rule of thumb, we suggest cutting the current lead time in half — not a bad improvement to begin with! For example, if the current amount of work (on average) in front of the drum today is enough for two days, cut the buffer to one-day’s work. To exploit a drum, you need a detailed schedule for the release of materials at the first operation in the workflow. For example, if we think it will take about ten hours for material to flow from the starting process to the drum, and we want it at the drum at 10 AM, we will schedule materials to be released to the starting process at midnight. This is called tying the “rope.” In order to ensure that work flows through the plant in time to meet the due * For a comprehensive description of the DBR solution, see TOC Insights into Operations and Production the TOC Way in the bibliography.

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date, we tie the release of materials at the first operation to the time it is due to be in the buffer at the drum. Creative supervisors, operators, and managers often make other decisions to exploit the constraint. For example, they often decide to make the constraint a #1 priority for maintenance. They are also careful to make sure that the drum process is fully covered during breaks. Step 3 requires everyone to SUBORDINATE to the above decisions. This means that maintenance will drop what they are doing and rush to the drum if it is down. It means that quality experts will strive to find material and work-in-process problems before they arrive at the drum. Procurement will do their best to ensure that materials meet specifications required to get better drum performance. Shop floor workers will stagger breaks to make sure the drum resource is not idle. The supervisor of the drum resource will monitor the work flowing to the drum to ensure that it is not being held up by extraordinary circumstances. At the same time that there is a detailed schedule tied to the drum resource, there are no detailed schedules for the other work centers. Everyone’s lives just got much simpler. The entire production line is in a relay race to flow work as quickly as possible through the plant, which means flowing it quickly to and through the drum. They adopt a work ethic that is like a relay runner. When they have work at their station, they process it as fast as they can and pass it on to the next work center as fast as they can. Batch sizes are reduced to help work flow more quickly from one work center to another. When a work center has no work, it does not produce unneeded product to stay busy. Instead, it stays ready, like a relay runner, to grab the baton and start needed work as soon as it arrives. If there are multiple jobs at the work center, the priority is determined by the time each work order is due at the drum. Buffer management is the approach used to monitor workflow and to take action before a major disruption occurs. It also records reasons for the buffer becoming seriously depleted. Using the Pareto Principle, management assesses what caused the most buffer penetrations in the previous weeks and then applies a suitable technique to reduce the cause of the penetration. For example, if the main cause of buffer penetration was materials arriving late from a certain vendor, there is now a focus for procurement. As the situation improves, the buffer can shrink — we do not need as large a shock absorber for the disturbances. As the buffer shrinks, so does the lead time. We now have a POOGI (Process of On-Going Improvement) for operations. Further, this DBR approach provides the control valve to ELEVATE by adjusting operations capacity as market demand increases. You simply expand the drum capacity, remembering also to ensure enough protective capacity in all other resources to support the drum schedule.

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My experience with a window manufacturer exemplifies the typical outcome. Before DBR and the Five Focusing Steps, they were planning to ELEVATE by adding an entire second shift; the existing shift had run out of capacity to meet market demand. After implementing the IDENTIFY and EXPLOIT steps of the DBR solution, they found they had excess capacity without a second shift. DBR and buffer management will tell you when and where you will need to ELEVATE. Production using the DBR methodology has yielded an average 70 percent improvement in lead time, while increasing due date performance as documented in the previously referenced study by Mabin and Balderstone. At the same time, waste has decreased. Using the new frame of reference, we have a leverage point and much greater simplicity in managing operations.

Summary and Next Steps Every organization has some capacity limit to their operation, some constraint that determines how much product or service they can flow to the market. But often, organizations do not identify and exploit it. Without this process, organizations try to manage operations by measuring every resource on how efficiently it is being utilized. This common practice has big negative effects. All resources are encouraged to work to their full capacity. As a result, many resources perform work that does not generate throughput for the company, but instead increases inventory and other expenses. Once you have increased your control and capacity in operations dramatically, you must take actions in other areas to translate this capability into major profit growth. If your organization has a distribution or retail component, or sells multiple products repetitively to customers, the chances are excellent that the right distribution approach will be critical to a successful Viable Vision. The distribution solution necessary for a Viable Vision is explained in the next chapter. If you do not have any distribution channels, your next biggest consideration might be speed to market for new product development or faster execution of engineering changes or quicker IT implementation. In fact, no matter what area the constraint lies in, you will need superb project management. Fortunately, the new frame of reference has been applied to cut project durations by at least 25 percent and more. Chapter 8 describes the critical chain, an astonishing, holistic way of planning and executing projects that is taking the world by storm.

7 Distribution: From Push to Pull “McDonald’s has so many inventory turns, there is a high probability that the hamburger you are eating was mooing yesterday.”

The average life of a golf club is nine months. In bowling, specialty balls have a life of less than six months. Many medical products, including surgical rubber gloves, have a life of less than two years. We are not talking about shelf life or the product physically decaying. What we are describing is the perception created by the entry of new or replacement products, making existing products seem obsolete or not as valuable. No wonder distributors and retailers hate carrying large amounts of inventory! At the same time, retailers and distributors have the opposite paranoia — not having enough inventory and losing a customer sale. Handled correctly, shorter product life is a golden opportunity to enhance everyone’s sales and profits. But as you will see, in distribution, the old frame of reference (local efficiency) encourages mountains of unneeded inventory in the supply chain while simultaneously perpetuating shortages. A distribution system managed holistically will increase throughput of the entire supply chain in at least six different ways, as described in this chapter. Often, the potential impact on business volume and profits is greater from throughput increases than from reductions in inventory. Thank goodness the distribution solution does not force a choice; increased turns, increased throughput, and decreased inventory occur from the same holistic approach. 61

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The Current Supply Chain Frame of Reference Driven by local optima, manufacturers push inventory into the distribution channel as soon as it is produced. Cost accounting rewards them in the short term by reporting the inventory movement as sales and profits on their books, even though no consumer has bought. The inventory has moved from the manufacturer’s docks to the distributor’s warehouse. The longer the inventory sits in the distributor’s warehouse, the higher the risk of obsolescence, the greater the carrying costs for the distributor, and therefore the lower that distributor’s profits. For the distributor, profit is directly tied to the number of times it can turn the inventory. So the manufacturer, the distributor, and each subsequent link keep pushing the inventory until it reaches the retail shops (if this link exists) and/or the end consumer level. In a supply chain burdened with too much inventory,* much or most of the inventory sits at the retail level, while little or no inventory is at the manufacturer’s plants. At the same time, customers who visit a retail shop often cannot find the specific item they are looking for. Why do some retailers carry so much inventory, if it just sits in their store much of the time? Why do they tolerate costly obsolescence, high carrying costs, and still have customers walk out of their shops without the desired goods in hand? To answer this question, I will link this retail behavior to manufacturer and distributor policies and practices. Many manufacturers and distributors offer quantity discounts on a perorder basis. Also, many of these same manufacturers and distributors have freight policies and charges that penalize the retailer for smaller orders. Since most retailers compete with other shops close by that sell similar goods, the retailer needs a similar cost basis to stay competitive in price and margins. Therefore, retailers place large orders with manufacturers to gain better perorder discounts. As a result, retailers have much larger quantities of goods on hand than they need to cover immediate consumer demand and replenishment time. With this inventory on hand, even as consumer tastes are changing or as manufacturers replace existing products with new products, retailers are pushing their existing inventory on the consumer. You can see this phenomenon in the car market, in computers, cell phones, etc. Knowing the new product is coming, the retailers rush to get rid of the old products at fire sale prices or with special deals, anxious to avoid obso* This is just one form of an unhealthy supply chain. Another form was described in the last chapter on operations, where the steel manufacturer had almost a billion dollars of rusting inventory sitting in its yards, while customer demand went unfulfilled.

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lescence. By doing these mass promotions, the retailers kill the market for the new product and their profit margins. Many of the consumers who might have bought the new product are now in possession of the older one. There is another devastating effect to a supply chain that operates this way. By pushing most of their inventory to the retailers, the manufacturers and distributors have distanced themselves from changing trends in their markets. In many cases, with several months of inventory tied up at the retail and wholesale level, it takes manufacturers and distributors several months to see consumer demand changes reflected in orders to them. The lower the number of turns at each level in the supply chain, the longer it takes for manufacturers to understand and react to trends. There is one other very negative effect. At the same time that excess inventory abounds in the supply chain, customers come to buy a product and often do not find it. Yet many times, the very product that is short in one store is sitting in abundance on a shelf somewhere else in the supply chain! This happens because of the practice of pushing large quantities of each SKU towards the retailers, in a manner that does not match end consumer demand. In this world of local optima, manufacturers keep on producing and shipping goods to distributors, sometimes “threatening” the distributor with higher prices or loss of exclusivity if the distributor will not accept the goods. Distributors do the same with their retailers, until the supply chain is completely clogged with goods that consumers are no longer buying. By this time, significant damage has been done. There is too much inventory in the system and the part of the supply chain that has the most inventory suffers the greatest consequences. Retailers go bankrupt. Distributors lose money. Manufacturers… well, just look at what happened to Lucent, Nortel, and so many others.*

Applying the Five Focusing Steps To apply step 1 (IDENTIFY the system’s constraint) in distribution, you must look throughout the distribution channels and ask yourself what, more than anything else, determines how much throughput the channel can generate. In most cases, the answer is “the clients who come to buy the product or service.” There are not enough clients who buy. We see distribution channels going adrift in step 2, EXPLOIT. Before spending money to attract more clients, do not waste the ones who already * Of course, not all of these manufacturers’ problems were because of poor distribution policies. However, these types of policies interact with and exacerbate other problems.

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come to buy from us. It is a complete waste when clients do not buy because they cannot find a product in a given location, but the same product is on the shelf in another location. In order to avoid wasting a customer, we must dramatically increase the chance of matching the right inventory in the right place at the right time to the end consumer demand. To achieve this, we must answer the questions: ◆ ◆

Where is the ideal place to have most of the inventory? What are the correct logistics to replenish the inventory between manufacturers and distributors, and between distributors and retailers?

We will begin with the first question. Consumer demand varies widely from one geographic location to another. In any one retail location, it can also shift dramatically from day to day. There are time lags between changes in end consumer desires and the reactions of the supply chain. All of these factors make predicting demand for any product at the retail level a phenomenal challenge. Manufacturers often try to react to the challenge by pouring millions of dollars into more sophisticated forecasting systems, only to find little, if anything, improved. After all, a forecasting system does not make the end consumer react more rationally or predictably. To exploit the constraint, the customer who wants to buy, we must move away from sophistication into a much simpler solution. There are two steps necessary to solve service level, inventory, and obsolescence nightmares permanently in a distribution environment: 1. Pool the inventory where there is the greatest predictability 2. Implement a pull system to replenish individual items frequently based on what was sold during a short interval If you were the logistics manager of a large, shoe manufacturer, what is the ideal way to distribute the inventory of size 8 brown shoes across the supply chain? In one week, you could not say that anyone will buy even one pair of those specific shoes in any given store. But you would have much more confidence about the national numbers. The more macro the level you are forecasting, the greater the predictability. Predictability decreases as you move from national to regional and from regional to city and city to individual location. Based on the above characteristic of predictability, the logical thing to do would be to have most of the inventory at the manufacturing plant, less at the distributors, and even less at the retail level (see Figure 7.1). Logically, you would also replenish with much shorter lead time. In this way, there will

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Distributor

Retailer

Inventory Inventory Inventory

Retailer Inventory

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FG Inventory

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Before Five Focusing Steps

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Distributor

Retailer

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After Five Focusing Steps: • Total inventory down (by 50 percent or more) • Service level up to high ’90s • Transportation logistics changed

Figure 7.1. Exploiting and Subordinating in Distribution.

be less chance of stock-outs at any given location and trends will show up much more quickly, with less waste. For example, assume that a retail shoe store today is currently holding three months of inventory of each SKU. This inventory requirement is calculated based on the total replenishment lead time. The replenishment lead time is made up of: ◆ ◆ ◆

Transportation lead time Production lead time, the time it takes the manufacturer to produce the product Order lead time, the time between when the retailer sold the first item and the time they reorder

While the supplier controls transportation and production lead time, the retailer controls order lead time. As it turns out, order lead time usually

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provides the biggest opportunity for improvement. In the old approach, retailers reorder when they hit a minimum quantity in stock (commonly called the min/max system, since they will order sufficient quantity to bring their stock back to a maximum level). Under the EXPLOIT step, we will implement a pull system that has the retailer order, every period (e.g., one week), exactly what they sold the previous period. In our new system, transportation lead time stays the same. With finished goods inventory now being held by the manufacturer at the plant warehouse, production lead time is zero; the product should be in stock in the plant warehouse. The biggest difference is usually in the order lead time. Instead of waiting two to two and a half months for the stock level of each item to hit a minimum and ordering a two- to three-month supply of that item, the new pull system has the retailer order only the SKUs that moved the previous week, in the exact quantities sold the previous week. The order lead time has now been reduced from months to a matter of days. This means that the amount of inventory that the retailer needs to carry of each item to cover its replenishment lead time is much less. It also means that the chance of running out of an unexpectedly popular item for weeks at a time is almost nil. Service levels, under this new system, move much higher, while total inventory in the supply chain typically drops by twothirds! The system reacts much more quickly to the variability and uncertainty of consumer demand. It also greatly simplifies both the distributor’s and the retailer’s lives. Instead of worrying about ordering a three-month supply and debating how much and which products the consumers might demand over that long a time period, the order items and quantities are automatic based on sales. Wearing our marketing hat, with the additional space freed up in the store by reducing the overstocks, we would have the retailer carry a greater variety of our goods! More variety means more sales. As for transportation costs, in the real-life cases where this was implemented, the configuration of each of the shipments was different, but the frequency and cost of shipping remained about the same. Instead of shipping fifty units (a three-month supply) of ten items, we are shipping ten units (a three-week supply) of fifty items. For distribution chains that have changed logistics according to these principles, the statistics are astounding. Overall operating expenses (considering the combination of transportation costs, interwarehouse transfers, inventory carrying costs, returns, and obsolescence costs) decrease dramatically. Successful companies do not stop at the EXPLOIT step. By focusing attention on step 3, SUBORDINATE, you substantially reduce any risk of failure.


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Even with a single company that owns its own distribution and retail outlets, the SUBORDINATE step requires buy-in across the functional team. In cases where you have different companies in the supply chain, you must methodically overcome the resistance to change or the solution will be stopped dead in its tracks. SUBORDINATE means that everyone in every part of the distribution supply chain, including the manufacturers, adopts the attitude that “as long as the end consumer has not bought, we have not sold!” Existing measurements must change to encourage pull rather than push. This is especially important for the manufacturer, who will now be carrying a significant portion of the total finished goods for the entire supply chain in the plant warehouse.* In the SUBORDINATE step, the company puts the pull system software and procedures in place. The minimum inventory necessary to cover fluctuations in consumer demand and transportation time during a short time period are stocked at the retail level (or level closest to the end consumer). The distributor carries the minimum inventory necessary to cover fluctuations in demand from its customers plus the transportation time from the manufacturer to replenish the inventory. The manufacturer carries a larger inventory to cover fluctuations in distributor demand plus the cycle time for it to manufacture sufficient quantity to replenish its plant finished goods inventory. Of course, you must factor these numbers based on reliability of transportation and manufacturer into these calculations. Under the pull system, if the manufacturer wants to introduce a new or replacement product into the market, or even if it is replacing a defect in an existing product, it needs to cover only one-third of the inventory that it was covering before. The lead time to replace products is much shorter and the cost is much less. Some of the most successful companies in the world are using such systems today, from computer manufacturing to super retail stores to luggage companies. Just look at the inventory turns of highly profitable manufacturers and distributors; the numbers speak for themselves. They have implemented a true pull system. What about step 4, ELEVATE? Distributors might need to elevate, for example, if they want to open up new geographic areas. But with the cash freed up from the first three focusing steps, it is much easier to add new distribution locations. Plus, the cost of setting up each new distribution location is much smaller due to the decreased inventory.

* For a more detailed discussion of the distribution solution and measurements, see TOC Insights into Distribution in the bibliography.

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Six Ways that the Holistic Distribution System Increases Throughput 1. Having sufficient stock of each product at the right location in time to match demand increases the service level (the percentage of time the buyer finds the item in stock and therefore is able to complete a purchase). 2. With less inventory and therefore less shelf space required per item, the distributor and retailer are able to stock a greater variety of items, thus increasing throughput from the same physical space. 3. With less inventory per item, sales to get rid of excess inventory are required much less frequently. This means that both the margins and the sales revenue are increased. It also implies that sales of older products do not spoil the market for new products. 4. With less inventory per item, there is less obsolescence, leading to greater satisfaction among consumers and therefore increased sales. The products on the shelf are newer and therefore more appealing. This can have a huge impact on throughput with items that have expiration dates. 5. Faster replenishment during stock-out situations means that there will be much less opportunity for a buyer to have to resort to a competitor’s product. 6. The faster reaction to changes in consumer demand leads to fewer stock-outs.

Summary and Next Steps Many distributors fight hard with their manufacturers to carry smaller quantities of inventory on better terms. At the same time, the manufacturers are often trying to do the opposite — push larger amounts of inventory to distributors and retailers with more aggressive terms. Each link tries to push their inventory as quickly as possible to the next link in the supply chain. This creates huge gluts of inventory at the retail level. As retailers try to predict what their consumers will demand months in advance, and order accordingly, it is 100 percent certain that retailers will have too much of some products and not enough of others during this long time period. The new frame of reference (T, I, OE and the Five Focusing Steps) changes this nonsense from a push system to a pull system. Inventory is kept where it makes sense (less at the retail level, more at the manufacturer’s and regional warehouses). This is entirely feasible when the time to replenish goods at the retail level is significantly decreased. With these changes, total


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inventory in the supply chain decreases by two-thirds, while customer service increases. All of the pieces that we have discussed so far to implement a Viable Vision require project management. Speeding up these projects dramatically is now vital to your improvement strategy. The next chapter on project management highlights one of the most exciting developments of the past fifty years. If you think that measuring people to finish their tasks on time is good, you may be very surprised by what Goldratt discovered about human behavior and managing complexity on projects.

8 Project Management “Projects follow the two-cubed (23) rule. They take two times as long as planned, cost two times as much, and promise two times what they actually deliver!”

A recent Standish Group International study of over 13,000 projects shows 82 percent of all projects surveyed finished late,* up about 30 percent in the past three years. No wonder executives have a huge problem today in accomplishing improvements quickly and predictably enough to meet their goals. Statements such as, “We lost nine months of product sales because the project was late” or “Our stock price slid by 20 percent because we failed to meet our promise for launching the new plant” are very common. Shareholders and boards of directors are not very forgiving of ugly surprises from projects. CEO credibility is damaged badly not just by project overruns, but also by poor project analysis. For example, many of us have heard the story of a two-year project that was 95 percent complete and took another year to finish! Executive survival, more and more, depends on improving project management. Executives must choose the right projects, ensure that the chosen projects have the right scope, and complete them faster than ever before, in order to meet shareholder and customer expectations. This pressure is well supported by the statistic that 57 percent of the 367 largest corporations surveyed have replaced their CEOs in the past three years.** * March 2003 Chaos Report, www.standishgroup.com. ** USA Today (April 8, 2002) study by outplacement firm Drake, Beam, Morin. 71

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Executives are not alone in project management problems. It is intriguing that the words that project managers use to describe their problems, in all countries and in all industries, are almost identical. You hear statements like, “We don’t have enough resources” and “The executive pushed us to start the project before the requirements were properly defined. Now we have a lot of rework.” Another frequent complaint is “priorities are constantly changing.” These complaints suggest that many project managers believe that the problem is out of their hands. As long as this belief continues to exist, executives are not likely to see a huge improvement. The very fact that the identical project manager complaints existed twenty years ago and are still not resolved suggests that we need a new approach. This chapter explains why it takes so painfully long to get the chosen projects completed and what to do about it.

The #1 Root Problem in Project Management: Identifying the Constraint The same frame of reference that led to devastating consequences in operations, marketing, and distribution surfaces again in project management. It is the practice of seeking to manage complexity by insisting on local accountability everywhere. In project management, this is reflected in the focus on finishing each project task according to its estimate. Today’s common belief is that the best way to ensure that a project will finish on time is to try to make every task finish on time. The problem begins with the way people develop a task estimate. Most people today are involved in more than one project. Many people also have some operational responsibilities. And there are emergencies: an e-mail that must be responded to immediately, rework from a previous project, a special assignment from the boss’s boss, an unplanned meeting. So it is not unusual that a task involving three days of dedicated work effort is given an estimate of two weeks to complete. Even then, the person giving the estimate will hedge with comments such as, “But it depends on what happens with such and such” (other work they already are in the process of doing). People react this way because they know, from experience, that as soon as you give a manager an estimate, it becomes a commitment. No one wants to be seen as unreliable, so they give a promise date well beyond the level of effort, to account for the combination of uncertainty and their multiple responsibilities. To illustrate the extent of the protection that each task is given when your reputation is on the line, consider this example. Tomorrow morning, your company’s most important client wants to meet with you at your office about a huge new order. This customer is a nut about punctuality. Usually, it takes you about half an hour to get to work, but you

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can remember several times when it took more than an hour. How much time will you allow to get to the office? Will you answer “thirty minutes” or are you likely to double the time and say “one hour”? Anyone who is not kamikaze will answer “one hour.” There is a big difference between average time versus the worst case. When our reputation is on the line, it is natural for us as human beings to remember the worstcase scenario and cushion ourselves with a large amount of safety. However, if most project task estimates have such significant extra time imbedded, how can we possibly explain why so many projects finish later than planned? An examination of human behavior on projects shows that this safety imbedded in task estimates is often misused. In juggling work on different projects and operational responsibilities, the project team member must decide what to work on right now. Knowing that they have safety in their estimate, people often delay starting work on a given project task until much later than they had originally planned. Instead, they choose more urgent tasks. Goldratt terms this behavior “Student Syndrome.” This refers to the behavior of students who have three-weeks notice of an exam, but wait until the night before the exam to start studying. When a team member starts a task much later than originally planned, and “Murphy” does occur, the task finishes later than its estimate. The effect of Student Syndrome is made worse by the dependencies between tasks on a project. While the team member delays the completion of his or her task, all following tasks, dependent on this task, are waiting. If some of the following tasks are also subject to Student Syndrome, the delay in getting a project completed will be substantial. Another common behavior further delays vital project work. Project managers are under tremendous pressure from executives to show progress now, so they push very hard on team members to cut task time estimates. As a result, when a team member puts up a tough fight and wins a concession on a task estimate, the team member and project manager both consider that estimate a due date. Team members know that if, by some miracle, they finish a task in less time and turn their task in earlier than the due date, then the next time they will be expected to finish tasks in record time. Therefore, in cases where the team member does finish the specified work early, they prefer to work up to the due date, adding unneeded bells and whistles and doing extra checking. This behavior is called Parkinson’s Law, where work expands to fill the time available. The devastating waste to the company occurs with the combination of Student Syndrome and Parkinson’s Law. These behaviors drive up individual task time durations, resulting in longer projects. But while these negative effects are serious, there is another sinister factor in the multiproject environment driving project durations through the roof.

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The Multiproject Environment Most organizations today operate in a multiproject environment, an environment where different projects share one or more common resources. In fact, in real life, managers are not so polite in their description. They usually call it “fighting” over resources rather than “sharing.” Once again, local optima reign supreme. Functional heads initiate projects, irrespective of the capacity of the organization to do the work. They are doing this for an excellent reason. If they do not meet their goals by the next review period, they may no longer be employed or they may miss a significant measurement. Executives assume that the sooner the project is initiated, the sooner it will be completed. Each senior executive who is accountable for results sees project initiation as his/her right. By comparison, this is like giving each functional executive unlimited numbers of blank checks and telling them to make whatever capital investments he/she feels are necessary. The only difference with projects is that we are dealing with limited human capital in addition to dollars. Every organization has many more opportunities to improve, using projects, than it has the resources with which to execute those projects. When too many projects are activated simultaneously, the result is bad multitasking — a huge waste of resource time. Bad multitasking occurs when team members split their time between multiple tasks such that the combined duration of all projects is dramatically increased. Figure 8.1 illustrates an example of the time required for a resource to complete multiple tasks. If the resource dedicates its time to process only one task at a time (labeled “Dedicated”), each task requires three elapsed weeks. However, there are two negative effects when the resource takes on all three tasks at once and juggles, doing parts of each task every few days. Look at the line labeled “Bad Multitasking.” One negative effect of bad multitasking is that the level of effort for each task increases. Due to effort to regain concentration each time the same task is restarted, the three weeks of effort can easily turn into four weeks. The other negative effect is the extended duration of each task. When the effect of multitasking is combined with additional start-up time, you can see that the first task is not finished until week eleven instead of week three. In new product development, this means that the company lost or deferred eight weeks of sales and may have missed a competitive window. For projects bringing internal benefits, it means those benefits were delayed or missed for eight weeks. Before describing the solution, it is important to understand the leverage point in projects. The Five Focusing Steps show how to identify the constraint of every project, an important prerequisite to exploiting it.

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Figure 8.1. Elapsed Time, in Weeks, to Complete a Task.

The Five Focusing Steps in the Single Project Environment Projects are initiated to bring some benefit to an organization. The longer the project takes to complete, the longer the organization waits for the benefit. So the constraint of any individual project must be whatever most determines project duration. Many years ago, some brilliant engineers came up with the concept of “critical path.” In every project, there are some tasks that cannot be started until previous tasks are completed. There also are often many different paths of dependent tasks within a project. The longest path of dependent tasks (determined by the days of estimated effort) is called the critical path. When critical path concepts were first applied, it was common practice to have dedicated resources on projects. Therefore, it was valid to consider only logical task dependencies and to ignore resource dependencies when calculating estimated project duration. Resource dependencies occur when the same resource is working on a task in one part of the project and is needed simultaneously in another part of the project. Goldratt took this into account and extended the concept of critical path and called it “critical chain.” The critical chain of a project is the longest chain of dependent events, considering both task and resource dependencies. It is this chain of events that is most likely to determine how long a project will take to complete.

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We have IDENTIFIED the system’s constraint. It is the critical chain. Next we must EXPLOIT it, but the current measurement system blocks us. When people performing critical chain tasks are measured to finish their tasks according to an estimate, they use task estimates with huge safety embedded. Then, in project execution, we encounter Student Syndrome and Parkinson’s Law behaviors, delaying task completion. Further, with the executive practice of initiating projects without consideration of the organization’s project capacity, these same resources are also badly multitasked. In order to EXPLOIT the constraint, we must change the local optima rules that strive to have each task finish on time. The new rules are as follows: ◆

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Do not turn estimates into commitments. Estimates are not deterministic numbers, they are just estimates. Instead, use estimates that discourage Student Syndrome and Parkinson’s Law behaviors. To do this, take current estimates and cut them in half. However, do not hold team members accountable to completing tasks according to their estimate. Every team member’s focus is on the project deadline, not a task deadline (see Figure 8.2). Critical chain tasks are performed with a relay runner work ethic. Team members start and complete these tasks as quickly as they can (no more Student Syndrome) and pass the work (baton) on to the next resource as early as they can (no more Parkinson’s Law). The team member performs the task in as dedicated a manner as possible.

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C 25 Critical Chain, 25% Improvement

Figure 8.2. Scheduling of Four Resources (A, B, C, and D).

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Half of the safety that we remove from individual task time estimates is returned to the project and used strategically to protect the project as a whole. This protective buffer, called a project completion buffer (see Figure 8.2), acts as a shock absorber to insulate the critical chain holistically from any variation of task time durations on the critical chain tasks. Some critical chain tasks will surely finish later than expected. Some will finish earlier. These statistical fluctuations across many tasks average out. Therefore, it is possible to predict, with high certainty, the duration of a chain of tasks protected by one buffer. In execution, project and resource managers use the buffer and a tool called Buffer Management to determine when to take action.

Details of this approach are explained in other materials.* The new, much simpler principle is: Focus on much less work, using the critical chain and the strategic resource as the focal points, and complete the work much more quickly. To SUBORDINATE to the above decisions on a single project, we will schedule any work that feeds critical chain tasks to be completed a little earlier, so as to not delay the critical chain work progress. We accomplish this using a tool called a feeding buffer (FB on Figure 8.2). The feeding buffer insulates the critical chain from delays caused by any variation among tasks on noncritical paths.

Subordinating in the Multiproject Environment A permanent solution to overcome bad multitasking requires a new process. For one thing, we must carefully activate projects only when the organization has enough resource capital in the bank. However, trying to balance the workload of all project resources is far too complex. In the multiproject environment, critical chain determines the organization’s capacity according to the capacity of one resource — the “strategic resource.” This is the one resource where projects get stuck the most or the resource most heavily loaded across the collection of the organization’s projects. Critical chain requires the following SUBORDINATE step: ◆

No new project begins any sooner than the capacity of the strategic resource permits.

Such a process implies that the senior manager’s power to initiate projects unilaterally must be subordinated to the organization’s capacity to do the work. This conclusion often makes senior management very uncomfortable. * See Insights into Project Management in the bibliography.

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Most forms of curtailment of power are seen by executives as unnecessary meddling. This spells out an urgent requirement. To implement high-value project management within an organization, each senior manager must believe that the new process will not damage the due date for his/her project. When this subordinate step is implemented, the executives can have their cake and eat it too. All projects will now complete much earlier than before. In addition to reduced project durations, the new approach provides much better project execution management, with less time spent in review meetings. In critical chain, two parameters are used to determine when intervention is required (see Figure 8.3). We expect to see work completed on the critical chain on a regular, progressive basis. We also expect that we will use up the project completion buffer (the safety net protecting the entire project) on a fairly regular basis as the project progresses. If, on review, we have only completed a small amount of the critical chain work, but we have eaten up a lot of the project completion buffer, we know we have a serious problem. Similarly, if we have completed a large part of the critical chain, and still have a lot of our project protection in tact, the project is in great shape. Therefore, the likelihood of finishing any project according to the promise date is easier to predict. You simply compare the critical chain percentage complete to the percentage of the project protection (completion buffer) used. As Figure 8.3 shows, the trend over time gives a clear picture to senior management and project managers of whether a project is in schedule trouble and when a project is likely to complete. In deciding which projects to authorize and prioritize, the critical chain paradigm offers a significant new factor: throughput per strategic resource unit. In the multiproject environment, the organization’s strategic resource, more than any other resource, determines how many projects can be completed each year. Therefore, we can compare projects according to their value and their utilization of the strategic resource. For example, suppose we have one proposed project that will yield a net value of $25 million to the company, but will tie up the entire strategic resource all year long. We have another project that will also yield a net value of $25 million, but this project will only use the strategic resource for four months. We could do three of those types of projects per year, generating $75 million in net value to the company, compared to a third of that amount for the first project. The decision becomes much easier.

Some Cases There are many documented success stories with critical chain. These few cases just scratch the surface of what is possible:

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Weekly Progress Trend Figure 8.3. Project Execution.

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Israeli Aircraft Maintenance Division cut the average aircraft widebody conversion time from three months to two weeks. This gave them a huge competitive advantage, with their customers clamoring to book them a year ahead of time. Seagate Technologies cut new product development times in half. ElBit Systems is able to complete their senior management review of all forty projects in less than two hours. Lord Corporation’s IT group went from completing 100 percent of their projects late to completing 85 percent early or on time. U.S. Marine Corps Naval Depot more than tripled workload completed using the same resources. A division of BAE Systems shaved two to four months off project durations (20 to 40 percent saving) and, as a result, added $37 million in profitable programs.

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Summary and Next Steps Today, project durations are much too long because of a common management practice — holding people accountable to their task estimates. This local optima measurement distorts human behavior on projects to such an extent that project durations are often more than doubled. When projects are late, executives do not meet their goals. So executives try to push more projects into the system, irrespective of the capacity of the resources to do the work. This exacerbates the already difficult situation, introducing bad multitasking and making the project durations even longer. The new frame of reference (T, I, OE and the Five Focusing Steps) puts team members, project managers, and resource managers in the same relay race, focused on critical chain tasks and fewer active projects. The results show reductions of 25 percent or more on project durations. Critical chain ensures that each project finishes on time. Further, we can complete more projects without adding resources. To reach the next level of improvement, every company eventually must deal with something that it does not, in most cases, directly control — the external supply chain. Many companies no longer compete just with other companies. They are part of a supply chain that is competing with other supply chains. In the next chapter, you will see how two measurements, derived from our frame of reference, help different organizations within a supply chain become more responsive to each other, making the entire supply chain a big winner in turn!

9 The Supply Chain “The purpose of measurements is to motivate the parts to do what is good for the supply chain as a whole.”

Introduction The success of any product is determined in part by the manufacturer and in part by the rest of the supply chain. All it takes is one small part of the supply chain not doing its job properly to kill everyone else’s effort and profits. If an end customer is not happy with the availability, service, or quality of a product, the entire supply chain is hurt. Unfortunately, today’s frame of reference (local optima) often blinds the responsible party from seeing the problem and from taking quick, effective action to overcome it. Even when end customers are happy, supply chains may carry far too much inventory. These systems are plagued with problems such as high costs of obsolescence and transportation and much too lengthy reaction time to changes in market demand. This chapter describes how to use the new frame of reference to align all the parts to do what is good for the supply chain as a whole — a necessary condition for achieving a Viable Vision.

Aligning the Parts of a Supply Chain There are three global indicators of how aligned the supply chain is and how much it has improved or deteriorated over time: throughput, investment, and operating expense of the supply chain as a whole. A company must look 81

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beyond its own financial achievement to determine if it is part of a healthy supply chain. Selling goods or services from one part of a supply chain to another, without the end consumer having bought, may appear healthy to some parts of the supply chain at a particular point in time. However, if goods are stuck within a supply chain and the end consumer does not buy those goods at all or quickly enough, the situation is not healthy. Every member of the supply chain has an important stake in the performance of the supply chain as a whole.

Goals and Measurements of Supporting Departments Within a Supply Chain In Chapter 7, we described how to EXPLOIT the constraint, by changing from a push system to a pull system. This system brings the right inventory to the right location in time to meet end consumer demand. Two key measurements are needed to cause each member of the supply chain to SUBORDINATE in perfect alignment with each other. 1. Throughput $ Days (Late): A supply chain must recognize that shortages increase the risk of losing both the current sale and future business. For some products, the end consumer will tolerate some shortages, but not for too long. To take this into account, this measurement multiplies the late throughput, valued at the point of end consumer sale, by the number of days that the throughput is late. If one line item on an order is missed, Throughput $ Days is calculated based on the value of the total order, recognizing the client’s irritation that one item was missed. The objective is zero. 2. Inventory $ Days: People usually describe inventory either in terms of its dollar value or in terms of how many days of consumption it represents. This measurement considers both attributes by multiplying the value of the inventory within the supply chain (at raw material cost) by the number of days that the material is held within the supply chain at any level. The objective is to reduce, without negatively impacting Throughput $ Days (late).

Throughput $ Days (Late) In many supply chains, the end product has a high price tag (hundreds or thousands of dollars), while many components of that product have minimal

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cost (dollars or even pennies). The entire supply chain benefits if the supplier of a $1 component reacts urgently when it is blocking a $25,000 sale. To help each organization within a supply chain determine what is urgent to downstream links, it needs a daily or weekly report showing Throughput $ Days (late) from its customers — the next link down in the supply chain. The Throughput $ Days are expressed using the pricing of the end consumer. Such a report tells each organization the magnitude of a problem order to the entire supply chain and how to prioritize its actions. For example, assume that Company A manufactures a $1 shear pin that is used in building a transmission by Company B. Company B ships the transmission to Company C, a major automotive manufacturer. If Company A is one day late with an order of 100 shear pins, it might ordinarily look at this order as unimportant, since it only represents $100 to them. However, each shear pin is holding up a $25,000 sale at the end consumer level, representing $20,000 throughput to the entire supply chain. Company A receives a report showing $2 million Throughput $ Days for the shear pins (100 * $20,000). Now, Company A understands the importance of this order and how to prioritize its efforts. If the same order is late for a second day, the report would show $4 million Throughput $ Days (100 * $20,000 * 2). The amount will continue to increase until this order is satisfied. Another example deals with quality problems. If Company A ships the shear pins on time, but a quality problem shows up in the automotive manufacturer on the day the shipment is due, the transmissions are returned to Company B. Company B now has $2 million Throughput $ Days assigned to it; the order is now late. It is a hot potato. The company examines the transmissions and determines the problem is with the shear pins. The Throughput $ Days are now assigned to Company A and will stay with that company until the problem is resolved. If the problem requires another two days to resolve and Company A ships the corrected shear pins to Company B, the order, which is now three days late, has an assigned Throughput $ Days of $6 million (3 * $2 million). It is an even hotter potato for Company B. Similarly, if the problem resides with a materials or packaging supplier to Company A, the procurement department in Company A has the hot potato until the problem is resolved. By combining both dollars and days in this measurement, the supply chain is more likely to retain customers by avoiding long stock-outs and long repair periods for quality problems. In order for Throughput $ Days to be effective, the members of the supply chain must agree to use this measurement to drive priorities throughout the supply chain.

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Inventory $ Days The Inventory $ Days measurement is secondary to Throughput $ Days. Therefore, it is very important that reductions in supply chain inventory do not cause problems in missing orders. Some inventory is necessary in the supply chain as protective capacity against “Murphy” — fluctuations and problems in transportation, manufacturing, and end customer demand. By making this a supply chain measurement, rather than an individual entity measurement, the behavior within the supply chain drives a holistic result. For example, the correct distribution of inventory within most supply chains is to hold the most inventory where the forecast is most accurate and the fluctuations are smallest. This implies that more inventory should be held at or close to the manufacturer, with smaller inventories at the distributor and the smallest inventory at the source closest to the end customer. Today, many organizations within a supply chain try to reduce their inventory investment by pushing the inventory on to the next link in the supply chain. They can then claim this as a “sale” on their books. However, this behavior hurts the performance of the supply chain in terms of both total inventory carried within the supply chain and stock-outs. Therefore, as with the Throughput $ Days measurement, agreement is needed across all supply chain organizations to look at the overall inventory rather than an individual organization’s inventory.

A New Way of Doing Business in a Supply Chain Even when the supply chain is doing a good job with the inventory and stockouts, there is another sinister Cost World measurement that can kill throughput. Each supplier within the supply chain wants to get a “reasonable” profit from the sale of its product or service to the next link. To most suppliers, “reasonable” means covering the supplier’s cost plus some profit margin. The problematic behavior begins when a supplier tries to assess “cost.” In attempting to calculate product cost, the supplier typically allocates corporate overhead costs and other indirect costs and uses an estimate of the sales volume. The supplier assumes that any sale at a price below its calculated cost means that it is losing money. The supplier also assumes that if the customer pays its calculated cost plus a “reasonable margin,” then it is good for the supplier. Neither assumption is valid. At the end consumer level, the buyer may be willing to pay much more than simply “cost plus a reasonable margin” because the value of that product to them is much greater than the supplier perception of value. In this case,

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all of the companies in the chain have given up a lot of profit. Other customers may think that the end consumer price is ridiculously high, because the product simply does not have the perceived value to them. In this case, the suppliers lost a sale that could have been profitable for everyone in the supply chain. Consider this example. A U.S.-based computer software vendor has built a software package that it sells to medium and large companies. It is priced at $1 million, which the company feels is fair considering the dozens of manyears invested in building the product. This scheme was working well in the countries in which it had its own direct sales force. The company arranged, however, to sell through a distributor in Mexico. The U.S. company demanded a wholesale price of $500,000 per unit. Over a two-year period, the distributor talked with many good prospects, but was unable to make a single sale. Many of the companies in Mexico needed the software, but the value in terms of quantifiable benefit to them was much less than $500,000 due to their size, the economics of Mexico, and the currency exchange. The distributor tried to convey this message to the software manufacturer on several occasions, but it fell on deaf ears. The actual cost for the U.S. manufacturer to reproduce the software, including all technical manuals, was a few hundred dollars. The cost to support an implementation in the first year was about $10,000. Any sales above $11,000 would have yielded more profit to the U.S. company’s bottom line. Furthermore, assuming the Mexican market was truly segmented from the U.S. market, the pricing of the product in Mexico would have had no impact on the U.S. product pricing. Given this example, and the goals of T, I, and OE across the supply chain, there is a different approach to selling within a supply chain that makes sense. Give the last link in the supply chain, the one with the closest contact with the end consumer, the flexibility to get as much as they can for a product above some minimum price that is based on the raw materials cost of a product rather than allocated costs. Then have an agreement in place to share the profit, over these minimum costs, between the various links in the supply chain on a percent basis. By doing this, all the links will be aligned to help each other maximize the throughput of the supply chain, rather than just their own throughput. They will also align to minimize operating expenses and inventory across the supply chain, since this will contribute even more to overall profits. Of course, such an approach requires a high level of trust and confidence between all of the supply chain partners. Start with the holistic measurements — Throughput $ Days and Inventory $ Days — to begin building that trust. This new method of pricing products can follow after those measurements are working.

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Summary and Next Steps Any supply chain can easily suffer from the silo mentality, where each organization tries to optimize its own results at the expense of other partners in the supply chain. By gaining the agreement of all member organizations to abide by two measurements, the supply chain will win against competing supply chains. The two key measurements in any supply chain are Throughput $ Days and Inventory $ Days. When applied with correct and timely reporting, the two measurements will cause appropriate behavior to deal with late orders, quality issues, rework, obsolescence, introduction of new products, and many other supply chain challenges. Often, in order to implement the new logistics across the supply chain, a company must overcome some technology limitations. This requires the IT function to become a partner in achieving the Viable Vision. In the next chapter, we describe how to change the IT paradigm to make IT a major contributor to your organization’s goals.

10 Information Technology: Necessary But Not Sufficient

“Implementing new computer systems changes nothing, unless you diminish a limitation that is blocking the goal of your organization.”

Introduction The Y2K “crisis” generated many software purchases for the major computer vendors. Struggling to replace old legacy computer systems that were predicted to fail in the year 2000, organizations bought new ERP (enterprise resource planning) systems in record numbers. Large companies spent hundreds of millions of dollars. For every dollar spent on purchasing the software, many times that amount was often spent on consultants to implement the software. Yet with so many companies making this enormous investment in technology, how many CEOs have you heard bragging about their fantastic ERP implementations and the incredible return on investment they provided? Annoyed CEOs are looking for the “sweet spot” of technology and so are IT executives. But IT and functional executives are often in conflict as they struggle to find the common ground. Technology vendors are part of this battleground. What is the problem? 87

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The Organization’s Constraint and the Role of IT IT tries to satisfy its customers (the functional departments) with what it knows best (technology). IT departments study user requirements, document them, get sign-offs from functional managers, build or buy systems to fit those requirements, and then all hell breaks loose. Let the finger pointing begin. The users claim that IT did not understand or interpret their needs correctly. Therefore, the system that was implemented is not doing the job for them. IT puts more money into the system, building additional features and taking much longer than planned to implement the system. In the meantime, IT defends its position. The IT people worked extra hard to define the user requirements carefully. They may have even used a sophisticated project management stage gating system. They got the user sign-offs. They implemented the technology that the users said they wanted. Many IT people ask, “What on earth else are we expected to do?” Simply changing a computer system or implementing a new one does nothing by itself to make more money for the company. The correct focus for both IT and every functional executive must be derived from the global measurements of T, I, and OE and the Five Focusing Steps. Otherwise, how can anyone say that new technology has value to the organization? Meeting user requirements is just a means to an end. Often, user requirements are based on local optima that do not result in global, bottom-line improvement. To move closer to the company goal, the computer technology must remove or diminish some limitation within the organization or its supply chain. Over the past several decades, the very nature of the organization’s limitation has changed. The implications of this change for IT and for technology vendors are extremely important. In the decades between 1960 and 1990, the limitation of many companies was either the speed with which they could perform a process or the transaction volume that they could handle with given resources. Therefore, the power of the computer hardware and software easily diminished this limitation by processing many more transactions at lightning speed. For example, in the early 1970s, even a medium-sized manufacturing plant would only recalculate material requirements to produce all products once per month. Because it took the computer so many hours to do this work, most companies did not have the physical capacity to run more than once per month. This physical limitation blocked many companies from improving plant scheduling and inventory reductions. Yet even when some companies installed the powerful new computers, they received no benefits. Many companies continued to recalculate material requirements once per month! These old practices, developed specifically to

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cope with the limitation of the technology, continued to haunt them. Therefore, to make sure that a technology change will bring benefits to the bottom line, there are six questions that must be asked.

Six Powerful Questions to Ask Before Changing Technology* 1. What is the company’s constraint? 2. What technological limitation(s) does the business have, relative to the constraint? 3. What rules or practices did the business put in place to deal with the limitation? 4. How will the technology remove the limitation? 5. What new rules should the company have once the new technology is implemented? 6. How will you implement the change? Before committing to further major investments in IT, every company will benefit by applying step 1 of the Five Focusing Steps (IDENTIFY the system’s constraint). Ideally, the company should apply this step to the overall supply chain and the market. Only after we have identified this constraint is it reasonable to ask what limitation IT must diminish in order to improve the company as a whole. In many supply chains today, the ERP reports and data provide focus on local conditions: inventory in your warehouse, efficiencies of various processes, people and machines within one organization, etc. The connections between the entities in the supply chain are either nonexistent or not directed towards bringing bottom-line benefits. The Throughput $ Days and Inventory $ Days reports (see Chapter 9), which must be generated between entities in the supply chain, are nonexistent. In project management, the old rules are still embedded within the software and management practices. In most enterprise project management systems today, there is no portfolio management function that focuses on the organization’s project capacity according to a strategic resource. And on individual projects, managers still hold their resources accountable to their task time estimates. No wonder new software is implemented, but the return on investment is impossible to find! * See Directions, The Ashridge Journal, Summer 2001, www.ashridge.com, In Search of True Change interview with Dr. Eli Goldratt.

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As we have pointed out in earlier chapters, to overcome a limitation, we must change the rules by which the company operates. The new rules in software and automated procedures are summarized below. 1. In finance and measurements, the new rules are: ◆ Decisions are made in accordance with their impact on T, I, and OE. ◆ Cost allocations are abolished in all internal reporting and measurement systems. Reports such as Product P&L or Profit Center reports for internal departments are abolished. ◆ Throughput accounting is implemented. 2. In operations, the new rules are: ◆ Local efficiencies (and reports to that effect) are discouraged, except at the constraint — the drum. ◆ Reports and processes are built to determine when material should be released at each gating operation, priorities according to predicted arrival at the drum, detailed drum schedule, buffer management. ◆ Pareto analysis is developed to document buffer penetration at the drum and aid the ongoing improvement process. ◆ Lead time and work in process are monitored, with the data and reports to support decisions to reduce both. 3. In distribution, the new rules are: ◆ Inventory is located where it makes the most sense, including a substantial inventory at the plant warehouse. ◆ Inventory is replenished through a pull system, based on what was sold. ◆ Order lead time is cut dramatically by having software to generate and transmit orders automatically to suppliers. Orders are based on previous period consumption, with seasonal and other special condition adjustments. 4. In project management, the new rules are: ◆ Projects are staggered according to the capacity of the strategic resource, with software capable of what-if analysis and restaggering according to a change in priorities. ◆ Pareto data are captured and reports are developed to document project completion buffer penetration and aid the ongoing improvement process. ◆ Project input data focus on how much time is left to complete work, rather than due dates for individual tasks. ◆ Project reports show critical chain complete information and project and feeding buffer consumption.


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5. In the supply chain, the new rules are: ◆ Every link acts in accordance with Throughput $ Days reports, striving to drive Throughput $ Days to zero. ◆ Collectively, the links look at Inventory $ Days reports, striving to reduce total inventory in the supply chain without impacting customer service. For the most part, the raw data to implement the rules already exist in most ERP systems today. What is missing is the linking of the various systems across the supply chain, with the implementation of the new rules for decision making.

IT: Applying the Five Focusing Steps If, and only if, the IT effort is positively impacting the T, I, and/or OE of the company will it bring benefits. Given this overall management philosophy, it becomes much easier to decide how to use IT to EXPLOIT and SUBORDINATE to the company’s constraint: ◆

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If the constraint is in the market and the company reaches the ELEVATE step, the “Mafia Offer” usually requires some changes that involve IT. For several examples, see Chapter 5 on Marketing. IT can subordinate to the market constraint by making the required marketing projects their highest priority and by eliminating all vestiges of cost allocations from product reports. If the constraint is in the market and new product development is needed, IT can subordinate by making critical chain software and reports available in real time to all managers. If the constraint is in operations, the first priority of IT should be to provide the logistics support to improve operations flow. If the constraint is in distribution, the first priority of IT is clearly in supporting the new logistics to bring better reporting and decision making across the entire distribution channel. If the constraint is within the supply chain, but external to your organization, IT must provide the links to generate Throughput $ Days and Inventory $ Days reports throughout the supply chain. No matter what area IT focuses on, it must still accelerate project deliveries. IT can exploit its own constraint in project duration by adopting the critical chain solution in every IT effort.

From what we have described so far, we see that the conflicts between IT and the functional departments can often be traced to different measure-

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ment systems. IT claims victory when it reaches a technical goal, the implementation of new hardware or software, or the completion of a project. Functional departments claim victory when they meet their own local goals. The organization as a whole benefits only when the new technology results in a measurable, positive impact on T, I, and OE; that is, when it diminishes a limitation blocking the company. To accomplish this, several other obstacles must be overcome: ◆

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◆ ◆

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IT software providers must be willing to imbed the new rules of operations, distribution logistics, project management, and throughput accounting into their systems, data, and reports. IT integrators and internal IT departments must agree to be measured according to the impact of their services on the company’s goals (T, I, and OE). IT must agree that the implementation of a new technology, by itself, is not a goal and therefore should not be measured as such. To ensure that IT is successful in this new way of measuring, the organization must have expertise in identifying its constraint and deciding how IT can help exploit and subordinate to the constraint. IT requires new knowledge of the holistic approach to the organization and how systems must be designed to support the holistic approach.

A new breed of technology experts with deeper business knowledge is evolving. Some of these software vendors have already built the new rules into their products and have implemented the solutions worldwide.* When such software implementations are completed, these efforts, in combination with policy and measurement changes, put millions of dollars on the bottom line within a year. The most challenging obstacle, typically, is getting the collective collaboration of the organization to identify and focus on its key constraint and then gaining the level of business understanding and collaboration from IT integrators and internal departments to address the constraint. When this is so obviously a win/win for all sides involved in this effort, how come it is so difficult to get the parties to cooperate with each other? Fifty percent of the challenge of any problem is analyzing it to its root and finding the correct solution. The other 50 percent is selling the solution in such a way that you have the buy-in and full commitment of all involved. Overcoming this obstacle requires honing one of the most important skills: sales. It is such an important part of this effort to IMPROVE, that we have dedicated the entire next chapter to it. * See Appendix D or e-mail [email protected].


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Summary and Next Steps A technology is successful if, and only if, it diminishes some limitation that is blocking the organization’s goals. Therefore, to measure the success of any IT effort correctly, we must first answer the question, “What is the limitation that is blocking the organization from achieving its goals?” To begin, IDENTIFY the system’s constraint. To overcome this identified limitation, the company must change the rules by which it operates and IT must imbed these new rules within its database, reporting, and software infrastructure. The correct answers to the limitations in operations, distribution, project management, marketing, and finance and measurements were already provided in earlier chapters. Today, software solutions with the new rules already exist. What remains to be done is to gain the buy-in to this approach from the management team and from IT integrators, service providers, and the internal IT department. Since we often find that this step has its own unique challenges and since so many people make a fatal mistake in underestimating this step, we have devoted the entire next chapter to sales — how to overcome the layers of resistance to change. From our experience, the more powerful the solution and the more obvious the benefits are to you, the more difficult it will be for you to sell it to someone else. The reasons are not at all obvious. The powerful approach to selling described in the next chapter was derived from the Five Focusing Steps.

Part IV Making It Happen, Now and in the Future

11 Buy-In: Overcoming the Layers of Resistance

“The more powerful a solution, the more difficult it is to sell. Win/win solutions do not sell themselves!”

Introduction The more convinced you are of the power and benefits of your Viable Vision, the more resistance to change you will likely create. It is quite common for a CEO to struggle when trying to get the senior management team to act effectively to implement a paradigm shift. Their opposition is often well founded. Often, the words “change” and “improvement” are used interchangeably. However, while improvement demands change, change does not always bring improvement. Many studies document a high failure rate (greater than 50 percent) in achieving tangible improvement from change efforts within organizations. This chapter addresses one of the major causes of these failures, the failure to get the needed buy-in from all parties. For years, many people viewed “sales” and “buy-in” as an art. When you consider all of the different areas where buy-in is required to implement a major solution successfully, such as a Viable Vision, do you want to trust your success to an art? Goldratt offers a process for buy-in and sales that is 97

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designed to overcome the layers of resistance to change and increase the probability of success. Remember the many areas where this success is needed. Salespeople must learn how to sell the value of a compelling marketing offer. Operations management must get buy-in from its people to simplify the scheduling and execution effort dramatically. To be successful, project managers must achieve a major buy-in to the new way of scheduling projects, to the relay runner work ethic, and to stop measuring individuals to finish their tasks on time. In distribution and within the supply chain, all participants must be sold on moving to a pull system and on using the Throughput $ Days and Inventory $ Days (see Chapter 9) measurements to drive them. People who sponsor the ideas behind any major change see all of the good aspects of the idea to such an extent that they become blinded to any problems that the solution may create. Often, the people who are proposing a major change are labeled as “fanatics.” Goldratt jokingly says that if it is the CEO who is proposing a huge paradigm shift, the label is “dangerous fanatic.”* When a person begins a presentation to management by describing his/ her brilliant new ideas for improving things, typically you do not witness a warm reception. People react negatively, with resistance to change, for different reasons. In any management team, most members have already thought about the subject being discussed and have their own ideas about it. Some people do not see their problems being addressed by the solution or their needs being met. Others see the solution as too complicated or impractical. Still others see the solution in conflict with their own ideas for improvement. Therefore, starting a presentation by putting forward a solution is a major block to achieving buy-in. This is common to both internal and external sales. This syndrome was formally recognized by a brilliant statistician, Neil Rackham,** who performed a study of 35,000 sales calls, documenting behaviors that worked in favor of and against closing a deal. The core problem is a skills issue. There are several layers of resistance to change. To increase your chance of success in any sales effort, internal or external, you must overcome these layers in sequence.

The Layers of Resistance to Change Often, by the time a solution is identified, the sponsor feels driven to start implementing it as quickly as possible, before full buy-in is achieved. It is * TOC Self Learning Program, Module 6, Sales (see the bibliograhy). ** Neil Rackham, SPIN Selling, McGraw-Hill, New York, 1988.

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tempting to “go for a close” in one meeting by talking about how wonderful life will be after the solution is implemented. But to succeed, salespeople and managers must do something counterintuitive — they must not present the solution too soon. This holds true, even if you are the CEO. Going for the close too early is predictably deadly, according to Rackham’s research. Rackham points out that objections are often voiced when the presenter talks about the features or benefits of a solution before establishing the need. The more objections voiced in a buy-in situation, the less likely they are to close the deal. The name of the game is objection prevention. Overcoming the layers of resistance to change in the correct sequence prevents objections.

Layer 1: People Do Not Agree on the Problem Many people do preparation work to gain buy-in, but leave out one essential detail: what the problem is in the eyes of their specific audience members. The difficulty is that in any topic, there is more than one problem. For example, for a company selling to projects, the VP Marketing might describe the problem as, “There is huge excess capacity throughout our industry.” Salespeople might say, “Competition is fierce.” The VP Operations might comment, “Customers are expecting miracles on lead time,” while the CFO might comment, “Overheads are too high.” If your buy-in presentation focuses on one of these problems and excludes the others, it will be impossible for you to get a consensus from the entire management team. Furthermore, these problems are just symptoms. Addressing a symptom without addressing the root problem accomplishes nothing lasting. Trying to solve each problem in isolation is horribly complex and ineffective. This is the time that inherent simplicity really pays off, by connecting many problems to a common root cause. To transform an audience to feel like part of a holistic effort, describe their problems in a way that helps everyone see that they are in the same boat and their symptoms are connected. This means that the presenter must show connections between problems across different functional areas. The way to touch several different symptoms in such a meaningful way is by correctly identifying a major conflict, something that is at the very heart of all of the problems you described. In our example, the presenter will capture everyone’s interest by accurately describing the conflicts that lead to many of the symptoms (see Figure 11.1). “With huge excess capacity in our industry, we are in a constant conflict over inventory. Sales wants us to carry more inventories, so that we don’t miss sales. But no one can accurately predict what customers will want in the short term. So when we carry more inventory, we end up with costly surpluses. If we don’t add more inventory, we lose some sales or we have

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Profitability decreases

Cost increases

Income decreases

Plant must reschedule, work overtime

Income decreases

Lost sales

Urgent orders

Shortages

Inventory reduction sales

Excess inventory We cannot accurately predict customer demand

Do not add more inventory Add more inventory

Figure 11.1. Problems.

Overcoming Layer 1 Resistance: Showing Connections Between

urgent situations. Now we all understand why operations management gets upset when they have to turn the plant upside down to meet an urgent order. If we don’t change our fundamental practices in operations, sales, and marketing, these problems will persist.” The presenter could go on to describe conflicts between production and engineering, quality and production, etc. Connections are established between functional areas. Then, the presenter could summarize how each area, driven by its local measurements, is naturally working against the other areas in a nonholistic way. It is now obvious that the core problem lies deeper than each of the individual symptoms, but is connected to every single person’s individual problems.


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Layer 2: People Do Not Agree on the Direction for a Solution Even when your audience agrees with you about the core problems, do not think that they are ready to hear your solution. The real danger at this stage of buy-in is that people will look for partial, nonholistic solutions that may address only part of the core problem — the part that most directly affects them. Therefore, you must work to gain agreement on the correct direction for a solution. To prevent a lot of unnecessary dialog and poor suggestions, describe the characteristics that such a solution must have before describing the solution itself. Describe the needs that the solution must address. For example, in a Viable Vision, the following needs must be addressed and the stated characteristics included: ◆

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Include a holistic frame of reference that aligns and focuses the entire company on its constraint and the related drivers for exponential growth. Recognize the organization’s limited resources. Have a clear, easy to understand holistic measurement system. Contain offers to the market that will be difficult for the competition to copy. Include fast implementation methodology. Make operations and distribution perform much more predictably, with the ability to handle huge increases in sales with shorter lead times and fewer shortages. Provide supply chain measurements to drive all parts to do what is good for the supply chain as a whole. Teach salespeople how to sell major value to clients.

If someone suggests a valid alternative solution to one that you are proposing and you ignore it, you could lose their energy to help implement the solution and you might also overlook a better solution. The logical thing to do is to consider it fairly. This is an excellent position to be in, to have two or more good alternatives. The first question to ask is if the alternative solution has all of the characteristics that you identified and presented. If it does, then the use of the T, I, and OE measurements along with both sponsor’s underlying assumptions about their proposed solutions, provides an excellent evaluation tool. No matter which idea gets implemented, the holistic needs are understood by everyone in every functional area. Meeting these needs by overcoming longstanding conflicts, such as the one illustrated in Figure 11.1, is the direction for a solution.

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Layer 3: People Do Not Agree That the Proposed Solution Will Overcome the Problem The person proposing the solution must use compelling logic to show how each part of his or her solution will overcome the problems captured in layer 1: the symptoms and the root cause. This means that the solution must be spelled out in enough detail so that each functional area can see both its promise for the company as a whole and how it will overcome the major problems in its area that are blocking company goals. A solution that is not well thought out will be shot full of holes by the management team, and rightly so. The kind of logic we are describing is cause-effect, a structure built with cement, not spit, and held together by time-tested rules of logic. For detailed examples, see Insights into Operations, Distribution, Finance and Measurements and Project Management.* As one example, see Figure 11.2. In presenting the Viable Vision for a company selling through distributors, we must show how the new plant logistics allows us to offer a guarantee of short lead time. We must show why our offer will be taken seriously by the prospect, by the penalties we are willing to pay. We must be able to explain why the pull system in distribution will reduce shortages, increase sales, and reduce obsolescence and carrying costs. We must show the logic that explains why the company will rarely have to pay any penalties. We must also show how the operations group can cope with volumes that are five times the current level. As the presenter explains these detailed elements of a solution and their effects, the audience must see how the major pieces fit together. Once people are convinced that the solution will address the problem, they have two types of negative concerns. Those are covered in the last two layers of resistance to change.

Layers 4 and 5: Yes, But … The person who is proposing a solution must begin a presentation with a mindset of expecting criticism, not praise. It is perfectly normal for people to be very skeptical about proposed solutions to major problems. Often, this is the point in time at which a presenter could easily kill the buy-in by reacting in the wrong way to criticism of their solution. Anyone who wants real commitment and buy-in must steel themselves to expect such criticism and deal with it positively. The “Yes, but” criticism comes in two forms. Layer 4 resistance indicates that the implementation of the proposed solution could lead to negative * TOC Insights series described in the bibliography.


Increase in sales

Better ability to deal with peak demand

Quality improvement Better decisions

Five Focusing Steps plus T, I, OE

Business Strategy

Fewer urgent orders

Better due date performance

Shorter lead times Fast project implementation

Production Logistics

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Critical Chain

Significant reduction in shortages

Distribution Pull System

Figure 11.2. Overcoming Layer 3: Showing How the Solution Overcomes the Negative Effects.

consequences. For example, the VP Operations of a manufacturer might say, “If the marketing offer is successful, we will run out of manufacturing capacity before we have time to expand our facility.” Another type of “Yes, but,” which is called Layer 5 resistance, occurs when a person sees obstacles to implementing the solution. For example, “Yes, but the new logistics for managing operations requires technical skills and software that we do not have.” In other words, they are not complaining about negative effects that occur after the implementation of the idea. They are worried about obstacles that might block them from implementing the idea. Both of these types of concerns must be taken very seriously, rigorously documented, and overcome. The best person from whom to solicit ideas for overcoming these concerns is the person that raised them in the first place.

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We therefore claim that a very positive reaction to any such concern is to capture the concern in written form, formally acknowledging the concern. The next step is to find out if the concern is valid. If the person’s concern has a reasonable chance of being correct, your response should be “You are right. That could be a problem. Do you have any idea of how to solve it?” When a person who has such concerns is invited to offer a suggestion, it is surprising how often that same person has a great idea to overcome them. And if their idea is included as part of the solution, their buy-in has just increased significantly.

The Layers of Resistance: Investing a Little More Time Now, A Lot Less Time Later This approach to buy-in, overcoming the layers of resistance to change, works beautifully when followed in sequence. If you skip a step, you will find yourself pushing hard on your solution with increasing likelihood of failure. The buy-in that every presenter requires is beyond simple understanding of the solution. The audience, be it internal management team or customer, must work urgently and in perfect alignment from day one to implement the solution. There is a very positive psychology that occurs when this process is followed. At layer 1, the audience says, “This person understands my pain.” They see the system as a whole and the underlying root problem. If you have accomplished your goal at this layer, the audience says, “I see the futility of addressing symptoms in isolation. Of course we must deal with the root problem.” At layer 2, the audience concludes, “Our direction for a solution must meet some vital system needs.” At layer 3, they are convinced that “This solution will overcome every one of our major problems, if only we could implement it.” Finally, at layers 4 and 5, the audience should say, “All my major concerns are addressed. How can I help implement this idea?”

Summary and Next Steps The biggest failure in most efforts to sell and gain buy-in is the practice of pushing a solution much too hard before you have agreement from your audience on what the problem is. The layers of resistance to change are a very powerful, positive force in any paradigm shift if you make use of them. If they are addressed correctly and in sequence, it is much easier to convince people to really support and help implement the solution.


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If you address your constraint, as described so far in this book, you will have come a long way towards making your organization very healthy, with happy customers and good supplier relationships. However, all of this may not be enough to achieve a Viable Vision. Most of the building blocks are already there. But to grow exponentially, you must have a clear roadmap. All of this comes together in the next chapter on Strategy.

12 Strategy “Most long-term strategies are as useful as a five-year weather forecast.”

Introduction Investors want to see sustainable, significant, improvement in measurable terms. To achieve such improvement, the organization must have a strategy that insulates it from huge swings when there are economic downturns or major new competitors. To accomplish such a strategy, an organization must do more than meet its goals in a given time period. All of the ideas and the new frame of reference that we have described in previous chapters are prerequisites to a good, long-term strategy. But they may not be enough to sustain your organization for the next fifteen years. The problem is that a good strategy implies not just one thing, it implies three different things that are often in conflict with each other. ◆ ◆

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Make money now and in the future. Provide satisfaction to the market, now and in the future. (By the market, Goldratt means more than just customers and prospects. He also includes suppliers, the communities you operate in, the environment, etc.) Provide a secure and satisfying environment for employees, now and in the future.

It makes no difference which of the three conditions you call your goal and which you call necessary conditions, the strategy will be identical. Com107

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panies may claim that their goal is to satisfy their customers, now and in the future. That is OK, as long as they recognize that making money and satisfying employees are necessary conditions to sustain customer satisfaction. Or, a labor union could say that the goal is employee security and satisfaction. That is also OK, as long as they realize that making money and satisfying customers are both necessary to keep employees secure for the long term. Making money, providing employee security, and satisfying the market come into conflict when either cash flow is threatened or when a company is in a downward spiral and does not see a way out in the short term. When a company finds itself in the uncomfortable position of having to violate one of these three necessary conditions of existence, the results are often disastrous. Fortune Magazine noted a study some years ago that showed that companies that do layoffs and massive cost cutting tend to go through the same exercise repetitively. In the long run, the study showed that they fare worse than companies that use growth strategies for improvement. A layoff that is justified due to a cash flow crisis can be tolerated by employees, if it happens once. Multiple layoffs, or a layoff when the company’s shortterm and long-term cash situation is OK, sends a message to all employees. “Don’t bother to try to improve anything here, because any improvement will just be translated into more layoffs.”

Removing the Conflicts Permanently These conflicts will not be removed by optimistic forecasting, by a sophisticated computer system, or some other “unique” technology. Any strategy based solely on any of these features is risky at best. So permanent resolution to these conflicts can only come when you answer the question “How do we create a lasting competitive edge?” — one that will sustain the organization for the next ten to fifteen years. The key to removing the conflicts between the three necessary conditions permanently goes beyond good marketing and good operations. In today’s global market, it is astonishing how quickly things can change. There is a lot of “insulation” required around an organization to meet all three conditions. That insulation is not developed overnight. Ask yourself what unanticipated events could bring down your organization. To meet all three conditions, an organization must be able to create a dominant competitive edge. Further, even if the organization is devastated in one or two areas of operations, either by competition or government decisions or some other serious events, its strategy must allow it to continue improving without impacting either customers or employees.

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Creating a Lasting Competitive Edge There are five necessary prerequisite conditions to any good strategy: 1. A common, correct frame of reference for all management, including a global measurement system that induces and encourages holistic behavior across the supply chain. This framework is T, I, and OE combined with the Five Focusing Steps. 2. Stable and predictable operations logistics that allow the organization to “turn on a dime.” An organization must be able to meet its customer due date and lead time expectations, at least as well as the competition. Further, as demand increases by large amounts, the organization must be able to respond quickly. This requires a focus on one or two variables, the pressure points in the operation that must be adjusted quickly. The Drum, Buffer, Rope solution, as described in Chapter 6, must be in place before you open the valve to the market. 3. Stable and predictable distribution within a supply chain that is superior to competitor supply chains. The TOC distribution logistics provides the pull system and rules to sustain such an environment. 4. The ability to implement change quickly and predictably. This means superior project management execution. Critical chain methodology provides the means to cut project durations drastically and increase predictability of successful completion. Critical chain is not optional, it is a prerequisite to achieve a Viable Vision. 5. Software that imbeds the TOC rules. Once an organization has implemented these five conditions, it is stable and can adapt to market changes very quickly. The organization is now ready to open up the market. Here are six ideas that, in combination, will lead to market domination for ten to fifteen years: 1. Implement modifications to current product/service offerings that substantially increase the customer perception of value for a sizeable market. This idea uses the concepts of the “Mafia Offer” described in the Marketing and Viable Vision chapters. To create such an offer, you must really understand your customer and how they will benefit significantly from changes in: ◆ Options ◆ Packaging ◆ Service level ◆ Guarantees

110


◆ Response or lead times ◆ Removal of industry standard annoyances, such as freight charges,

minimum order quantities, etc. Do not make such an offer based on lower price. Price is the easiest attribute for any competitor to copy quickly. You should look at rooted industry policies first, before changing the physical product itself. The result of implementing this idea is a significant advantage in a sizeable market. In addition, the marketing department has learned how to reposition their products with higher value to a market successfully. The people in sales have learned how to sell value effectively and those in operations have learned how to manage significant increases in demand. These successes help to build the confidence of all of these functional areas in the strategy, a desirable condition before implementing idea #2. 2. Offerings are introduced in a way that guarantees practical segmentation. A market is considered to be segmented correctly when the prices and quantities sold in that market segment have no impact on the prices and quantities sold in any other segment. Such segmentation gives you the opportunity to address the needs of different groups of customers in a unique way, with the same base product or service. For example, a manufacturer of expensive shoes enters the mass-market segment for less expensive shoes. A maker of original truck parts segments by entering the aftermarket for replacement parts. A distributor of advanced products in the wireless communications industry uses its know-how to distribute basic consumer goods. The result of the implementation of this idea is that the company is operating in many market segments in which it has a competitive edge. 3. The company elects not to take 100 percent of any market segment, which is not very lucrative. A company that owns 100 percent of a market segment has much less flexibility to improve. Being in a monopoly situation implies certain responsibilities. If you decide to get out of that segment and you do not leave your customers with an alternative, those customers will hate your organization for a long time. Do not put a lot of energy into taking 100 percent of a market unless it is hugely beneficial. Conserve your resources for where they will do the most good. 4. The company is careful to enter only into new products that require almost the same resources (people) as it already has. A company that can shift its resources at will, easily, between different markets and opportunities, is a company that has excellent flexibility. Such flexibility gives the company the ability to meet the necessary condition of employment security and satisfaction in a way that makes more

Strategy

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money for the company. The key point to remember when implementing this strategic idea is that it is people, not machines, that we are talking about. A person who is a great manager of engineering airplane components, for example, also can manage many other engineering environments. As a result of implementing this idea, the company succeeds in segmenting its markets, not its resources, with flexibility to shift resources at will. 5. In choosing its overall collection of market segments, the company looks for segments where the probability is very small that many segments will experience economic downturns simultaneously. When combined with ideas #2, #3, and #4, this one provides the company with the insulation it needs for long-term stability. When a lucrative segment is up, by deliberately not taking 100 percent of any other market segment, the company has the flexibility to shift resources to it. When a segment is down, the company can shift resources to other segments. Given this situation, the company rarely will find itself in a situation where it is forced to lay off people. 6. The company uses the window of opportunity created by implementing the above ideas to identify a factor in which an order of magnitude improvement will bring a significant competitive edge and uses its improvement efforts to achieve it. With ideas #1 and #2 above implemented successfully, it is possible that competitors will catch up within two to three years. This idea calls for the company to use this window to build a decisive competitive edge. The company now must identify one factor and develop it to be several times better than current performance. For example, in computers, this would be a machine that operates at five times the current performance or five times the simplicity. In air travel, imagine an airline that could get you to your destination in a quarter of the time it now takes. It does not necessarily mean that the airplane is four times faster. In building a car to order, instead of twelve to fifteen weeks lead time, picture such a custombuilt car delivered to your door within two weeks. Such factors exist in every industry, but require turning a company on its head to make it a reality. It is not only a technological challenge, it usually means aligning efforts in engineering, production, distribution, and marketing. More details on this step, with some further examples, can be found in the bibliography.* As a result of this step, the company now has potential to increase revenue well beyond its current capacity. * See, for example, TOC SLP Module 8 on Strategy in the bibliography and Gerald I. Kendall, Advanced Project Portfolio Management and the PMO, J. Ross Publishing, Boca Raton, FL, 2003, Part II on Strategy.

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This is what is meant by a strategy that is not based on a forecast. This collection of ideas is designed to work together, in concert and in sequence, to build your organization to be a 500 kilogram gorilla, one that dominates the industry. Where does a 500 kilogram gorilla sleep? Wherever it wants! The main thing now blocking your organization from implementing this strategy is having a good assessment of your current state and gaining the executive and management buy-in to implement it. That is the subject of our final chapter.

Summary and Next Steps By following the new frame of reference and implementing the five prerequisites outlined at the beginning of this chapter, your organization will already be well ahead of many competitors. You will be addressing your organization’s current constraint. Your supply chain will be aligned, from raw material suppliers through distribution to the end consumer. Your operations will be under control. Furthermore, almost all of your projects will be completing faster than ever before. From here, a good strategy will secure the future for the next ten to fifteen years. Such a strategy requires a lasting competitive edge. Six major ideas will get you there; the ideas described in this chapter. Now what remains is to ensure that you have complete buy-in and implement a detailed strategy. Building the detailed roadmap requires an assessment of your organization. An assessment is necessary to give you the proper starting point, the current constraint. The CEO needs an honest appraisal of where the organization stands. If the CEO agrees with the assessment and with the components that comprise a Viable Vision, then the buy-in process can begin with the rest of the management team. The entire management team must not only be 100 percent committed, they must also have the full, crossfunctional understanding to support what must be done. These issues are so important that I have devoted an entire chapter to them. The next chapter concludes what you must do to implement and apply the new frame of reference in your company, one that will build an organization of continuous improvement, ever-increasing stakeholder value, customer and market delight, and security and satisfaction for employees.

13 Executing the Paradigm Shift “Let’s not fool ourselves that it is possible to change a company’s culture through a computer.”

Introduction After more than twenty-five years of experience, and after smacking my head hard into all kinds of brick walls, I have learned how to bring a top management team to consensus on a meaningful strategic plan without using a big stick. In fact, thanks in large part to the research and investment by Dr. Goldratt and his team, these ideas have been proven. Starting this process off the right way ensures that it accelerates rapidly and sustains its momentum.

Phase I: The Assessment and Identification of the Viable Vision The first and most significant layer of resistance to change lies with the senior management team. You must obtain very strong consensus at this level as a prerequisite to execution. To gain this consensus, you must have a Viable Vision that is rock solid. Therefore, the first step is to assess the underlying constraint and root problem(s) of the company. Preferably begin with the CEO to ensure an understanding of the goals of the organization and his/her perception of the 113

114


major problems blocking achievement of those goals. During the meetings with all other members of the executive team, it is also important to document their perceptions of the problems/conflicts blocking them from achieving the goals of the organization. In each functional area, explore the existence of the generic supply chain problems and their impact on the organization’s performance. For example, here are some issues that need to be explored in marketing, operations, and distribution: 1. Marketing ◆ The complaints that groups of clients have, not just with your company, but with all companies in your industry ◆ Ways that the use of your products/services block value and add value for the major markets (Note: the emphasis here is not on your brand, but on the generic product or service.) ◆ Market share and market pressure to reduce price ◆ The impact of product shortages on the bottom line of both the customer and your company ◆ The competition between new product introductions and existing products ◆ Quantity and value of returned products ◆ The importance of inventory turns and cash flow to clients ◆ The unique selling proposition of each major product line 2. Operations ◆ Due date performance and current expediting activity level ◆ The difficulty to handle peak demand situations ◆ The level of work in process and finished goods ◆ The existence of urgent orders and their implications ◆ Quantifying quality problems 3. Distribution ◆ The level of finished good inventories and their locations ◆ Quantifying overages and shortages ◆ The existence of “urgent” deliveries, finished goods transfer from one warehouse to another, and quantification ◆ The dependency on the accuracy of the forecast ◆ The existence of a single replenishment policy across the supply chain ◆ Logistics of the current system (min/max or other) If necessary, you can derive these questions by viewing more detailed materials.* The analysis of this information must confirm, without question, * See TOC SLP series and TOC Insights series in the bibliography.

Executing the Paradigm Shift

115

where the organization’s constraint is and the impact that constraint is having on the company’s performance. From this information, there are four key elements that you must develop to build a Viable Vision. One essential component is the marketing strategy, including the offer to the market, which will drive exponential sales growth. If the company has less than 50 percent market share, there is a good chance that such an offer can be made to existing markets. Remember that every offer has a component that makes it “too good to refuse,” but this component is never based on price. If the company has greater than 50 percent market share, then the marketing strategy will need to consider other markets and other products. The second essential component of a Viable Vision is the logistics application(s) that will allow dramatic, ongoing improvement in lead time, due date performance, throughput generation, shortages, and reductions of inventories throughout the supply chain. If you require a more in-depth understanding of the logistics, these are readily available.* The third essential element is the correct frame of reference (the Five Focusing Steps; the global parameters of T, I, and OE; and the supply chain measurements of Throughput $ Days and Inventory $ Days) and the fourth element is rapid project management, with correct logistics for managing the multiproject environment — the critical chain approach described in this book.

Phase II: Buy-In Before approaching an entire senior management team, make sure that the CEO and one or two top members of his/her team are bought in to the Viable Vision. At an individual level, each executive wants to know if the Viable Vision and its logistical changes are practical and whether this will make his or her life any easier. While the executives care very much about the performance of the overall organization, it is their painful problems that they have to live with every day. Therefore, once you have completed an assessment and have identified the Viable Vision, you must ensure that the entire management team agrees to the conclusions. One excellent way to do this is by using questions to probe current practices and conflicts. In presenting this analysis, you must show the interactions between the constraint and the pain it is causing across the functional areas. It also must show where the huge potential is to move towards a Viable Vision, based on new offers to the market. Chapter 11 provides some examples of this approach. * See TOC Insights into Operations and Distribution in the bibliography.

116


Profitability decreases

Cost increases

Income decreases

Plant must reschedule, work overtime

Income decreases

Lost sales

Urgent orders

Shortages

Inventory reduction sales

Excess inventory We cannot accurately predict customer demand

Do not add more inventory Add more inventory

Figure 13.1. Example of a Systems Conflict.

In gaining buy-in to the issues, it is important to watch for defensive reactions. When presenting an analysis, be very careful to point the finger at the system, not at individuals, by showing how it is a system’s conflict that causes the problems. (“Systems conflict” means that two needs, both of which are essential to meet system goals, drive conflicts and negative outcomes, as illustrated in the example in Figure 13.1.) You need the consensus of the majority of the senior management team before moving on to Phase III. If some members of the team have legitimate reservations about the analysis that can be cleared up quickly with some additional investigation, agree to do it and set a date for the next meeting. At this point, a successful process means that the team agrees that the identified vision is viable and they agree on the root problem/conflict(s) blocking it. Before implementing the Viable Vision, several obstacles must be overcome. If the team does not have a deep and common understanding


117

of the cause-effect relationships across the internal and external supply chain, the chances of implementing a complete solution are nonexistent. These executives will not fully appreciate the need for certain ideas to be implemented or for certain measurements to change.

Phase III: The 4 × 4 Process* Each team member must understand and agree on what they must do to help exploit and subordinate to the constraint. The process described below has generic attributes that any company can use to build senior management consensus. The term “4 × 4” does not mean that we pick up a big block of wood and hit people over the head. It denotes an eight-day process, split into two logical parts. The first four days are used to build a deep and common understanding of the cause-effect relationships across the supply chain and a common language. It reinforces the new frame of reference discussed in this book. The second four days build the detailed strategy, with a focus on the constraint and the ideas to overcome it, logically connected and sequenced. The understanding of the major conflicts that have blocked the company in the past and what it will take to overcome them is a key element to build consensus in the senior management team. For example, consider this case of a major international distributor: In a distribution company, there was a long-standing conflict within the senior management team that polarized two different viewpoints. This distributor’s marketing approach was to be a single-source supplier of wireless communications products. It was already stocking over 16,000 SKUs and offering to supply another 10,000 by ordering them when needed. In this environment, you have customers constantly asking for items that are not stocked. If you are missing just one out of 100 items in a single customer order, you have an excellent chance of losing the entire sale and losing that customer’s future business as well. Under these circumstances, it is no wonder that the VP Sales was continuously driving for diversity, stocking more products, and meeting every customer’s demand. At the same time that there are huge benefits to diversity, it also drives many undesirable effects. It creates a marketing bottle* You can find more details about this process in the book by Gerald I. Kendall, Advanced Project Portfolio Management and the PMO, J. Ross Publishing, Boca Raton, FL, 2003, Section II on Strategy.

118


neck in terms of the constant demand for new marketing programs. It creates a huge transaction volume for the procurement department that is under constant pressure to set up new vendor relationships and order different items. It is also no small challenge for the logistics people who must figure out where to store the items, how much to stock, and when to reorder. If either part of the management team attempts to push their side of this conflict on the rest of the management team, kiss the consensus and implementation of a lasting strategy good-bye. To overcome these obstacles, during the first four days, the team needs to learn the cause-effect relationships across the supply chain. Tools that you can use to conduct this process are the TOC Self-Learning program (a series of eight presentations of two and a half hours each, covering the generic problems across a supply chain) and the TOC Insights (four in-depth, selflearning products on operations, finance and measurements, engineering/ project management, and distribution), described in the bibliography. By using good supporting materials and translating any generic materials to your environment, this process drives executives to think differently about what is necessary to improve their organization. Each executive begins to evaluate the implications of their ideas beyond his or her silo.

The 4 × 4 Process: The Second Four Days — Developing the Detailed Strategy A good strategy must: ◆ ◆ ◆

◆

Have a Viable Vision. Identify and address the organization’s constraint. Lay the correct foundation for long-term growth. This includes stabilizing logistics for operations, distribution, and project management, while imbedding the new frame of reference. Have the senior management team see the implementation of the strategy as their baby and their top priority.

To meet these needs, the second part of the 4 × 4 has the senior management team detail the way that they will implement the Viable Vision. The details must include the ideas necessary to overcome the multitude of conflicts that have blocked the Viable Vision for so long, conflicts such as those described in the distribution example above. First, each member of the executive team documents what is blocking him/her from implementing his/her part of the Viable Vision. Then, the


119

individual works with the rest of the team to find the way to overcome these blockages, many of which are driven by conflicts with other functional areas. This is already one fundamental reason for a very strong commitment to the strategy. If they also see a way to build rapid growth and stability for the entire organization, they have another good reason to carry through on their commitment. The team collects all of the ideas necessary to successfully implement a Viable Vision. All of the ideas are then translated into a high-level project plan. The team must then designate a project manager to drive this entire initiative through to completion.

Your Next Steps For some of you, your journey on the road to building a process of continuous improvement may just be beginning. You may be wondering where to start in your organization or how to develop more of your knowledge in these processes to facilitate or help implement this new frame of reference. Over the past twenty years, more than thirty books have been published on the Theory of Constraints. These are supplemented by self-learning programs, articles, videos, simulators, and many other tools to help you develop more and more expertise in this subject. We invite you to visit the bibliography to explore these possibilities. I hope that this book has helped you become wise, by experiencing a paradigm shift inside your head and your heart. That is the first important step towards a better quality of life for you and those around you.

Summary Companies always have solutions, but often do not recognize their constraint. Therefore, many companies are spinning their wheels, solving the wrong problems, without leverage on their scarce resources. To overcome this deepseated practice, begin by building a deeper understanding of the cause-effect relationships across the supply chain among the entire executive team. Invest the time to identify a Viable Vision, which leverages your organization’s precious resources. Then, get the top management team to buy in to the organization’s constraint and come to consensus on the ideas to overcome it. It is much more fun and exciting for a management team to build exponential growth through a Viable Vision than what many companies are currently doing, working with an impossible vision or no vision at all. Capturing, enhancing, and unleashing the energy associated with a Viable Vision transforms a team. Attitudes change from, “There is no way to do this” to

120


“Nothing can stop us from doing this.” This transformation of your team, with the better quality of life, is the success I wish for you and your organization. I also invite you to share your experiences, questions, and feedback. What else has helped you deliver successful strategies? What other help do you need? What other topics would you like to see addressed? E-mail your comments to [email protected].

Bibliography Larry Bossidy and Ram Charan, Execution: The Discipline of Getting Things Done, Random House, New York, 2002. Oded Cohen and Domenico Lepore, Deming and Goldratt, North River Press, Great Barrington, MA, 1999. Jim Collins, Good to Great, HarperCollins, New York, 2001. Robert G. Cooper, Scott J. Edgett, and Elko J. Kleinschmidt, Portfolio Management for New Products, 2nd ed., Perseus Publishing, Cambridge, MA, 2001. Thomas Corbett, Throughput Accounting, North River Press, Great Barrington, MA, 1998. Stephen R. Covey, The 7 Habits of Highly Effective People, Simon & Schuster, New York, 1990. Stephen R. Covey, Principle-Centered Leadership, Simon & Schuster, New York, 1992. Roger Fisher and William Ury, Getting to Yes, 2nd ed., Penguin, New York, 1991. Eliyahu M. Goldratt, The Goal, North River Press, Great Barrington, MA, 1984. Eliyahu M. Goldratt, The Haystack Syndrome, North River Press, Great Barrington, MA, 1984. Eliyahu M. Goldratt, It’s Not Luck, North River Press, Great Barrington, MA, 1994. Eliyahu M. Goldratt, Critical Chain, North River Press, Great Barrington, MA, 1996. Eliyahu M. Goldratt, Necessary But Not Sufficient, North River Press, Great Barrington, MA, 2000. Eliyahu M. Goldratt, Necessary and Sufficient Self-Paced Learning in CD format. For further information, see www.tocinternational.com. 121

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Eliyahu M. Goldratt, Theory of Constraints Self-Paced Learning Program in CD format. For further information, see www.tocinternational.com: ◆ Operations ◆ Finance and Measurements ◆ Project Management ◆ Distribution ◆ Marketing ◆ Sales and Buy-in ◆ Managing People ◆ Strategy Eliyahu M. Goldratt and Rami Goldratt, Theory of Constraints Insights into Project Management, Operations, Finance and Measurements and Distribution, available as a download. For further information, see www.tocinternational.com. Mikel Harry and Richard Schroeder, Six Sigma, Doubleday, New York, 2000. Institute of Management Accountants and Arthur Andersen, Theory of Constraints (TOC) Management System Fundamentals Statement Number 4HH, IMA, 1999. Thomas H. Johnson and Robert S. Kaplan, Relevance Lost, The Rise and Fall of Management Accounting, Harvard Business School Press, Boston, 1991. Gerald I. Kendall, Securing the Future: Strategies for Exponential Growth Using the Theory of Constraints, St. Lucie Press, Boca Raton, FL, 1997. Gerald I. Kendall and Steven C. Rollins, Advanced Project Portfolio Management and the PMO, J. Ross Publishing, Boca Raton, FL, 2003. Harold Kerzner, Project Management — A System’s Approach to Planning, Scheduling and Managing, 8th ed., John Wiley & Sons, New York, 2003. Victoria Mabin and Steven Balderstone, The World of the Theory of Constraints, St. Lucie Press, Boca Raton, FL, 2000. Eric Noreen, Debra Smith, and James T. Mackey, The Theory of Constraints and Its Implications for Management Accounting, North River Press, Great Barrington, MA, 1995. Neil Rackham, Spin Selling, McGraw-Hill, New York, 1988. Peter M. Senge, The Fifth Discipline, Doubleday, New York, 1994. Donald J. Wheeler, Understanding Variation, The Key to Managing Chaos, 2nd ed., SPC Press, Knoxville, TN, 2000. Mark J. Woeppel, Manufacturer’s Guide to Implementing the Theory of Constraints, St. Lucie Press, Boca Raton, FL, 2001.

Appendix A: Viable Vision Financial Examples

The following three financial examples are drawn from real cases. They indicate where the leverage points are for increasing profit. Most companies that are operating below capacity have a huge leverage on profit. For example, a manufacturing company with excess capacity can often add profit directly to their bottom line for little more than the cost of the raw materials contained in the product. Other overhead costs do not increase. The assumptions contained within the following spreadsheets are conservative, relative to average improvements obtained in Theory of Constraints documented cases. These spreadsheets were provided by Alan Barnard of Goldratt’s Consulting Group. I am indebted to Alan for sharing this information. The three examples provided are: 1. A generic example for any company in any industry 2. The cable company discussed in Chapter 1 3. The drip irrigation company discussed in Appendix B

123

In Ia I

ROI

Inventory Assets Total Investment

Return on Investment

20%

25%

25%

50%

$250

10%

$100

$250

50%

$500

$500

40%

60%

100%

$400

$600

$1,000

% of Sales

Year 0

Value [$m]

20%

20%

-10%

0%

-20%

155%

30% 5%

0%

5%

Price

+ Change =

Qty

57%

$450

$250

$200

$255

$525

$780

$480

$1,260

36%

20%

16%

20%

42%

62%

38%

100%

% of Sales

Year 1 Value [$m]

20%

20%

Qty

3%

5%

0%

70%

30% 10%

0%

5%

Price

+ Change =

$576

$1,588

$463

$263

$200

$434

$578

94%

$1,012

29%

17%

13%

27%

36%

64%

36%

100%

% of Sales

Year 2 Value [$m]

20%

20%

Qty

4%

0%

10%

70%

33% 5%

-5%

5%

Price

+ Change =

24%

13%

11%

37%

30%

67%

33%

100%

153%

$483

$263

$220

$737

$606

$1,344

$657

$2,000

% of Sales

Year 3 Value [$m]

15%

15%

Qty

7%

5%

10%

35%

24% 10%

0%

5%

Price

+ Change =

$276

192%

$518

21%

11%

10%

41%

$993 $242

28%

69%

31%

100%

$667

$1,660

$755

$2,415

% of Sales

Year 4 Value [$m]

859%

4%

10%

-3%

893%

33%

177%

89%

142%

Total % Growth in 4 Years

Note The increase in Sales can come from either increase in Volume AND OR increase in PRICE. Remember that when Selling Prices go up, Variable Cost don't necessarily go up…This really provides a leverage point to increase NP and ROI… Play with the numbers to prove it to yourselves...!

SR VC T OE NP

Sales Revenue Variable Cost Throughput Operating Expenses Net Profit

Description

ViableVision Challenge — Generic Company XYZ

What % annual improvements in Sales, Costs and Investment is needed to achieve Profits equal to current Revenue in four years?

124 Viable Vision: Transforming Total Sales into Net Profits

In Ia I

ROI



50%

$45

11%

25%

$23

20%

-10%

-20% 0%

328%

6%

25%

$5

61% 56%

$55 $50

$23

30% 0%

39%

$35

20%

100%

$90 0%

5%

Price

+ Change =

Qty

% of Sales

Year 0

Value [$m]

53%

$41

$23

$18

$21

$71 $50

$42

$113

36%

20%

16%

19%

63% 44%

37%

100%

% of Sales

Year 1 Value [$m] 20% 20%

3%

0% 5%

75%

30% 10%

0%

5%

Price

+ Change = Qty

$42

$24

$18

$37

$92 $55

$50

90%

$143

29%

17%

13%

26%

65% 38%

35%

100%

% of Sales

Year 2 Value [$m]

20%

20%

Qty

4%

10% 0%

80%

33% 0%

-5%

5%

Price

+ Change =

24%

13%

11%

38%

68% 31%

32%

100%

156%

$43

$24

$20

$68

$123 $55

$57

$180

% of Sales

Year 3 Value [$m]

15%

15%

Qty

7%

10% 5%

34%

23% 10%

0%

5%

Price

+ Change =

21%

11%

10%

70% 28% 42%

30%

100%

195%

$47

$25

$22

$91

$151 $61

$66

$217

% of Sales

Year 4 Value [$m]

1654%

4%

10%

-3%

175% 21% 1716%

89%

142%



SR VC T OE NP


Description


Described in Chapter 1

Viable Vision Challenge — POWER CABLE CO.

Appendix A: Viable Vision Financial Examples

125

In Ia I

ROI



50%

$125

16%

25%

25%

$63

8%

$20

$63

60%

52%

40%

$100

$150

100%

$250

$130

% of Sales

Year 0

Value [$m]

30%

30%

-10%

87%

$113

$50 $63

0%

$98

$130

$228

$130

$358

31%

17%

14%

27%

36%

64%

36%

100%

% of Sales

Year 1 Value [$m]

-20%

388%

52% 0%

0%

10%

Price

+ Change =

Qty

30%

30%

3%

0% 5%

111%

50% 5%

0%

10%

Price

+ Change = Qty

23%

13%

10%

40%

27%

67%

33%

100%

178%

$116

$66

$50

$206

$137

$342

$169

$511

% of Sales

Year 2 Value [$m]

30%

30%

4%

0%

10%

81%

53% 10%

-5%

10%

Price

+ Change = Qty $731

17%

9%

8%

51%

21%

71%

29%

100%

309%

$121

$66

$55

$372

$150

$522

$209

% of Sales

Year 3 Value [$m] 30% 30%

7%

5%

10%

64%

48% 10%

0%

10%

Price

+ Change = Qty

471%

$129

$69

12%

7%

6%

58%

$609 $61

16%

74%

26%

100%

$165

$774

$271

$1,045

% of Sales

Year 4 Value [$m]

2841%

4%

10%

-3%

2945%

27%

416%

171%

318%



SR VC T OE NP


Description


Described in Appendix B

Viable Vision Challenge — Drip Irrigation Co.


Appendix B: More Viable Vision Examples

A Distribution Company A $300 million distribution company in the U.S. had an enviable following, which it had built up over its twenty-year history. Its customer list of thousands of companies and government sector buyers reads like a Who’s Who. The manufacturers that the company represents are the cream of the crop in the communications industry. Yet the company was stagnating, even though their market share was below 20 percent. This distribution company, with many thousands of products in its warehouses, chose to grow its business by trying to become the single-source supplier for all of its customer’s needs. In its industry, the products change very quickly. Many products have a life of nine months or less. It is not practical for the distributor to inventory every manufacturer’s item for the same type of product. To put it into perspective, there are so many overlapping products, that the distributor would have required ten times its warehouse space, without the inventory turns to justify it. Many products are one-time buys for customers. In this environment, you have customers constantly calling and asking for items that are not stocked. Even though the distributor may have a reasonable substitute, there are also many reasons why customers cannot or will not accept the substitute. From the perspective of the VP Sales, if you do not have the right product in stock today, you have an excellent chance of losing the entire sale and also that customer’s future business. Also, given 127

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a life cycle of six to twelve months for many of these products, a huge opportunity can be missed easily by failing to add some of these new products quickly. In fact, over 20 percent of all orders were leaving the warehouse with at least one line item missing. In the CEO’s mind, this implied a lot of unhappy customers. At the same time that this drive towards product diversity has benefits to the customer, it also drives many undesirable effects. While the sales organization and the senior executive push diversity, it creates a marketing bottleneck in terms of the constant demand for new programs. It creates a huge transaction volume for the purchasing department, both in setting up new vendor relationships and contracts, and handling the additional purchasing paperwork. The technicians and support people, who help clients integrate these products, experience a constant nightmare of trying to keep up. And the distribution center’s job becomes more challenging as it tries to find space for all these new products. Also, let us not forget the finance people who must constantly come up with more money for inventory of vendors and products that do not have a successful track record. You could witness this company suffering from its core conflict on a daily basis: the fight between being selective versus being diverse in products carried. The managers in the company oscillated back and forth on this conflict. Sometimes, sales would “win.” Sometimes, warehouse management backed by procurement and finance would “win.” However, the company’s top and bottom line told the true story. Everyone was losing. Since this company has excess capacity — many, many products in their warehouses that are not moving nearly enough — and very low market share, the Viable Vision begins in two areas: 1. Distribution logistics software: With a pull system, to ensure fast reaction to changes in market demand and to help stock the right inventories with less Inventory $ Days. By simultaneously reducing inventories while increasing throughput, this system builds the foundation to support the offers to the market. Note that as a distributor, this company can use the software to connect with its wholesalers and retailers, as well as to connect with some of its big manufacturers. Automatic purchase orders can be placed at the right time to the distributor and from the distributor to the manufacturer, dramatically reducing the total lead time for replenishment of product, as described in Chapter 7. 2. Offers to the markets: Note that in the case of this distributor, the Viable Vision recognizes that there is not one uniform market. Rather, there are three distinct markets where specific offers hold huge importance to the prospects:


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◆ Fortune 1000 repeat customers: For the products carried by this

distributor, the buyers were often the IT support organization. The products were needed to build new networks, replace broken components, provide wireless services (modems, cell phones, etc.) to users, etc. These buyers were always complaining about lead time, even when it took only one to two days to get product delivered. The offer for these customers is to have a stock of product on the client site. The stock ownership remains with the distributor, until an item is removed, and then it is instantly sold to the customer. This turns the IT department personnel into heroes, with the ability to deliver instantly to their customers. It saves enormously on shipping charges, regardless of who is paying for the shipping. It also reduces workload for the distributor, with fewer shipments required to replenish stock. ◆ Project customers: Many customers use this distributor’s products in a project environment. For example, there are customers who build large communications towers and this distributor supplies all the parts to build the towers. There are other customers who are building large networks. The offer to these customers is the same as what is described in Chapter 1. These customers are given the right to change their minds up until almost the last minute, with very short lead times and guarantees to pay penalties based on the damage to the project. ◆ Resellers: Using the new distribution logistics, the resellers are offered the opportunity to reduce inventory significantly while increasing turns. With less per-item inventory, retailers can carry a greater variety of items, thus increasing their sales even further. This distributor already has an excellent sales force. The problem in the past was that the sales force was spending most of its time pushing products at trade shows and in meetings, without having a meaningful enough value proposition for the clients. With the Viable Vision offers, the sales effort is leveraged towards those clients where the value is most meaningful. By implementing these offers with the new logistics, the distributor simultaneously creates an incredible offer for the manufacturers whom it represents. The manufacturers can increase their sales with less inventory, less risk of obsolescence, and much faster reaction to changes in market demand. Finally, a word about the employees of this distributor is important. This is a very challenging business. There is the combination of huge transaction volumes, product complexity, and rapid change. The distributor has an outstanding staff of technicians, software and hardware experts, warehouse labor, and back office support. It is very frustrating to work hard and fast

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every day, only to see the company stagnate. With a Viable Vision, the employees can once again look forward to the excitement of rapid growth, company success, and all of the employee benefits and opportunities that come with it.

A Drip Irrigation Company Drip irrigation, for many farmers, is like a dream come true. Crop yields increase from 50 percent to several hundred percent. At the same time, the amount of water needed drops by a large percentage. This irrigation system was brought into use in 1965 and refined into a commercial product by the Israelis, who needed an economic and practical way to make crops grow in the desert and in areas where minimal water was available. You would think that a company having such a product would not need a Viable Vision, that they could take the world by storm. Yet this industry has turned into one of fierce competition, with at least one of the original manufacturers nearly going bankrupt. The dilemma is that this system requires a very large capital investment. Even though the return on investment is often less than three years, and sometimes within a year, there is a huge risk. Farmers can never predict when the next disaster will hit them. It could come from insects or weather or, in some countries, war or even worse, changes in government policies. You can imagine the reaction of a banker, when approached by a farmer for a loan to install a drip irrigation system. “Yes sir, we know that you could potentially increase your profit with a higher yield. But what if the system doesn’t work that well? What if your crop is destroyed by a plague next year? What if? What if? What if?” It is no wonder that this outstanding invention, drip irrigation, has a very poor market penetration. In this situation, having low-risk financing available to the farmer is key to implementing a Viable Vision. The question that needed to be answered was, “What type of company deals effectively with risk, not on individual cases but collectively?” The obvious answer is an insurance company. The Viable Vision in this case revolves around having an insurance company underwrite the risk for the financial institution. The drip irrigation company, the insurance company, and the financial institution take their payments from the farmer based on the increase in crop yield. For the farmer, there is no risk and no large capital outlay up front. For each of these partners, the payment is much higher than each company would have received without such an offer to the market. The increase in crop yield, on average, provides the manufacturer with much higher margins than it would have received


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from an outright sale. The insurance company’s premium return is much higher. The bank is extremely well rewarded. With this offer, the drip irrigation company has the realistic potential to far exceed the original Viable Vision premise. Its net profits could easily exceed current sales within less than four years by a factor of several times, making it a multibillion-dollar company.

A Hospital While all of the discussion about Viable Vision has focused on business, the same concept is easily applied to a not-for-profit organization. In this reallife example, the U.K. healthcare system is the target for improvement.* In a not-for-profit environment, the Viable Vision can be expressed in terms of goal units, rather than dollars. In the case of a hospital, the number of patients successfully treated (in the emergency room, operating room, or through stays in hospital) is one important measure. The companion measure is the cycle time (how many hours or days) it takes to complete the treatment. A sign of an organization in trouble was the 30 percent increase in the British healthcare budget over three years, while the number of patients treated had increased by less than 4 percent. The constraint was inside the system, with pressure on capacity in evidence throughout the system. For example, emergency room patients were often experiencing twelve-hour waits in ambulances or on trolleys to be examined. Backlogs for elective surgery stretched between nine and eighteen months. In this case, the Viable Vision was achieved using a portion of the operations logistics solution described in Chapter 6. The idea behind buffer management, as applied to the hospitals, was to take the target and monitor it, logging causes of buffer penetration. For example, the national target for treatment in the emergency room is four hours, from the time of arrival until discharge or admission. When the buffer management process began, only 70 percent of the 1,200 patients attending weekly were treated within the target four hours at the Radcliff Hospital. Within three months, over 90 percent of a much larger patient volume, 1,400 patients, were treated within the four-hour interval. Shortly after, the hospital reached and has maintained the required four-hour

* See www.toc-goldratt.com, reference bank on Radcliff Infirmary. This information was supplemented by a presentation by the Oxford Radcliffe Group of hospitals at the TOC Upgrade Conference in Cambridge, U.K., 2003.

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service level for over 95 percent of all attendances. A second hospital that implemented the same solution did so well, they were able to reduce their target time to three hours and have been meeting it at 100 percent over several months. When the same approach was applied to hospital stays in acute care facilities, the average patient stay dropped from over forty days to around twelve days. Given a real cost of several hundred dollars per bed per day, this improvement had a dramatic effect on the hospital’s budget and simultaneously on the backlog of surgeries. The principle of buffer management in a hospital is to monitor the reasons why services are not completed within target intervals. These reasons are examined weekly by a multidisciplinary team, in a maximum one-hour meeting. Each week, using the Pareto Principle, the team picks the most common reason for delays, analyzes its root causes, finds a solution, and implements the solution. Without adding staff, equipment, or capital investment, the hospital staff turned a deteriorating situation into a highly visible success. The hospital transitioned from being one of the five worst hospitals in the U.K. in performance to target to being among the top two in the country.

Appendix C: Other Mini Examples These are just a few of the many stories, exemplary of those that you will find in the references provided in Appendix D. These are not Viable Vision stories. These stories are about companies that took one application of the Viable Vision in one area of their company, applied it, and achieved outstanding results. Imagine what these companies would have achieved if they had applied the entire Viable Vision.

Marketing Furniture Manufacturer* As discussed in Chapter 5, the question that offers a way to distinguish your company from the competition, for both customers and prospects is, “What problems do you have that no one in our industry is addressing?” In other words, marketing must discover what problems you can solve in your industry that no competitors have yet solved. This requires a marketing person to access senior customer management and find out about their business. For example, the President of a furniture manufacturing company called on prospects and asked them what made it so hard to run a furniture retail store. He heard comments such as, “You see this huge inventory in the store. Most of it has been sitting here for six months or more, and I’m paying the bank huge interest charges to finance this inventory. At the same time, I have * The full case study is presented in Securing the Future, referenced in the bibliography. 133

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customers that walk into the store and can only find a partial living room or bedroom set, or the color that they want is not in stock.” The President of the manufacturing company asked the owner of the retail store why he had so much inventory. The owner, looking at the President as if he were nuts, said, “Are you kidding? It’s you guys that force furniture dealers to take so much inventory!” “How so?” asked the President. “First, it takes you eight to twelve weeks to fill an order. Since we have no accurate way to predict exactly what customers will want, we have to hold large quantities of inventory to last for at least several months to account for changes in consumer demand. Second, if we don’t buy large quantities, we don’t get a decent discount and then we can’t compete with other furniture dealers down the street. And finally, if we don’t buy at least half a truckload of furniture, we get killed on freight charges.” With this information, it became clear how the furniture manufacturer could create a compelling marketing offer and beat the competition. He launched a marketing program with transportation logistics that offered new dealers four major advantages: 1. 2. 3. 4.

No minimum order quantities No penalties for freight Volume discounts based over time, not on a per-order basis Guaranteed replenishment every two weeks, achieved by having the manufacturer organize the freight forwarding, rather than the freight forwarder

With these promises, the dealers could satisfy more customers with a smaller quantity of inventory and reduce their carrying costs substantially. With fewer stock-outs, their sales would increase. Also, they could respond more quickly to changes in consumer taste, by carrying a smaller inventory and turning it more often. They could also carry a greater variety of product. A by-product for the dealers was that their administrative time to configure an order was drastically reduced. For the most part, they were on a replenishment system, just replacing what they sold in the previous two weeks. The results have ranged from 20 to 100 percent increases in per-retailer sales. In the first few weeks of making the offer, the company had over thirty dealers clamoring to sign up. Supply chain inventories are down by over 30 percent, with higher service levels to end consumers. Note that the implications for project management are significant. The furniture manufacturer did not need huge pots of data and custom, complex analysis and reporting. He did not need to implement complex co-op advertising programs to attract new dealers. He did not require complex sales analysis to track different discount structures for different dealers.

Appendix C: Other Mini Examples

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Glass Manufacturer The President of a glass manufacturing company, who supplied custom cut glass to furniture manufacturers, called on customers and asked them what made it so hard to run their factory. He heard comments such as, “You see all of this broken glass all over the floor? Most of it is because of all of the handling we have to do with every shipment from every manufacturer. The manufacturers package all of the glass en masse, usually by size. We have to unwrap it all and sort it by the sequence needed for our weekly manufacturing plan.” He further explained that this took many man-hours every day and sometimes delayed their manufacturing schedule. The President of the glass company asked one of the VPs at the furniture manufacturing company why the breakage was such a problem. After all, he knew that his company replaced the broken glass at cost and the cost was very small. The owner explained, “Your standard lead time is four to six weeks to fill an order. So we have to plan what furniture to produce eight to ten weeks ahead of time. Second, when there is a breakage, you guys take another six to eight weeks to ship the replacement glass. So every piece of broken $5 glass is holding up a $600 to $1,000 bedroom or living room set for eight weeks!” With this information, the glass manufacturer created a compelling marketing offer and beat the competition. He had a computer program developed very quickly to get the furniture manufacturer’s production schedule the day before shipping the glass. Then he launched a marketing program with transportation logistics and computer transmitted orders that offered furniture manufacturers three major advantages: ◆ ◆ ◆

Shipment of all glass orders, sequenced according to the furniture manufacturer’s production plan, within three weeks of order date Uniquely designed packaging of all glass to reduce breakage Guaranteed replacement of broken glass within one working day with no disproportionate shipping charges

Finally, the furniture manufacturer could complete its weekly production plan and save hours of time that it used to spend in sorting the glass into production sequence. With shorter lead times and not having to wait weeks to replace broken glass, the furniture manufacturer’s sales would increase. Also, it could respond more quickly to changes in consumer taste, by making its manufacturing plan with less lead time. This offer, in combination with improved production logistics, resulted in the company quickly transitioning from a loss situation to making an excellent profit. The value of the company, when being acquired by a competitor, doubled over an eighteen-month period. One side benefit is that employee turnover was cut in half, according to the owner, as a direct result of these new processes.

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Such an offer, when thought through to the extent exemplified above, is too good for a prospect to refuse. Remember, no one else in the industry is solving such problems. In most cases that we have seen, the companies that implement such an offer are not changing their products. They are definitely not changing their prices. Rather, they are changing their policies, policies that have become imbedded in their industry by all suppliers. These are policies that drive customers crazy.

Operations A T-Shirt Manufacturing Company* This southern Florida company imports plain quality T-shirts from Asia and imprints or embroiders them with sports team pictures, authorized by the various sports franchises. The customers are companies like Wal-Mart, who demand weekly shipments unique to each store, based on what was sold the previous week. The company had huge work-in-process inventories all over its huge manufacturing floor. Orders were released to the floor without regard to the capacity on the floor and without recognizing where the bottlenecks were located. This company also stored millions of shirts in warehouses around the plant. The product moved in large batches throughout the plant, from the preparation stage, through imprinting, to retail tag ticketing, to packing, and finally to shipping. Average lead time for an order was close to two weeks, with several emergency shipments taking precedence several times each week. The company was also turning down orders due to capacity problems. When the company implemented the Drum, Buffer, Rope production logistics approach, they chose their graphics department as the drum. This seemed to be where orders were bottlenecked most of the time, as each week, new sports figures were featured based on who won last week’s football, soccer, baseball, or basketball game. With the new paradigm, orders were released to the capacity of this department. Another part of the solution involved cutting batch sizes in half. Immediately, the lead time through the plant was cut in half. Work in process started to clear up. Schedules became much more predictable. Emergencies * This case is almost identical to one presented by William Law, a TOC consultant in Hong Kong, about Global One Headwear Manufactory. Law has a very impressive one-hour video, with many interviews at the customer location describing their implementation of both operations logistics and critical chain project management. See Appendix D for further information.


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became much easier to handle. For this $20 million business, the new process put $1 million in cash back in the owner’s hands just through freed up inventory.

An Assembly Line Most people think of an assembly line as the ultimate balanced production line. When it works, everything flows at the same rate, smoothly. However, if any one part of the assembly line breaks down, all parts of the assembly line are now idle. In the automotive industry, the operations logistics solution was used to improve assembly line flow dramatically. On the assembly line, the constraint operation was identified — the operation that influences flow more than any other part of the assembly line. This concept is counterintuitive, since most people view all parts of an assembly line as working at the same speed. This is true. However, the speed is determined by the weakest link, which is not necessarily the slowest machine on the line. It might be the machine that breaks down most frequently, or, when broken, stays down for the longest time periods. The concept of a buffer was implemented, but in this case, a physical space buffer was constructed before and after the constraint operation. In this way, the constraint could keep working if there were any problems upstream or downstream. In addition, the assembly line could keep working when the constraint was down. The cost of several hundred thousand dollars to construct the “space buffer” was recovered within a few weeks.

Distribution Perishable Consumer Products in Asia Depending on the time of year and how its product is stored, this consumer products company expects its products to stay fresh and acceptable to consumers for four to six weeks. Retailers are able to return “stale” product without penalty. The company loses around 15 percent of its product each month to waste due to the returns. Further, the company suspects that it is also losing customers due to some retailers selling stale product. This company has several different brands of products. The current paradigm is to ship large quantities of each product to its distributors and retailers, with more than five weeks of inventory in the system. Using the distribution logistics solution, it was proven that the company could cut inventories by a minimum of 25 percent and cut waste in half, which means a saving of

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millions of dollars per year. The impact on the market, in terms of increased sales due to fresh product, has not been determined, but it is suspected that this upside potential may exceed the benefit from the 50 percent waste reduction.

Supermarket in a Large U.S. City Consumers in one of the largest cities in the U.S. are always in a hurry. When they stop to shop at the small, local grocery stores, they hope to find everything they need in stock, with a good variety of choices to satisfy their tastes. Since space is at a premium in this city, supermarkets are small and tend to have limited choice. Over the past several years, consumers in this city have acquired a taste for specialty products. When these products are not stocked at this company’s supermarket, the consumer is forced to make more than one stop to shop. Based on consumer surveys, this inconvenience was beginning to cost the company in terms of both lost sales and lost customers. To implement the distribution solution with a huge impact on the customer, the company concentrated on implementing the replenishment logistics, in combination with stocking a greater variety of goods on the shelves. Although this company did not report results, the expectation was for 30 percent reduction in inventory, 25 percent increase in the number of SKUs carried, and a 40 percent increase in sales.

Project Management There are so many excellent stories in project management, documented and in the public domain,* that it is hard to pick just two as examples. These two stories stand out in my mind, simply because they illustrate the extreme damage that comes from the silo approach.

Consumer Hardware and Plumbing Products: Engineering Design This Canadian company was struggling to get new products out the door. In spite of a highly qualified engineering staff of approximately fifteen people, the company was only releasing a handful of new products each year. For most products, it was taking longer than a year to move the product from initial design through a ready-to-market stage. At the time of my visit, its * See Appendix D for many examples.


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trends were showing that this time to market was deteriorating rapidly and would soon approach two years. This company had sent one of the product managers to a critical chain project management workshop. He was convinced that this approach would have a dramatic impact on his company, but could not convince his senior management. He spent a year trying. Since I was going to be in the area, I offered to visit his company and spend two hours with the senior executive team to help him move the buy-in process forward. I remember running a simulation with this team, illustrating the effects of having too many active projects. The VP Marketing then said that he thought the company was killing itself for exactly the reasons illustrated. I asked the team how many active projects they had on the go currently. The VP Engineering said, “about seventy.” The VP Marketing immediately countered with, “But that’s only development projects. You have another thirty maintenance projects also active today.” The team agreed, 100 percent, that the company’s multiproject constraint resource was the engineering group. So I asked the team, “How many projects can this group realistically handle, without bad multitasking?” The answer from the VP Engineering was, “About fifteen.” They had 100 active projects, more than six times what they should have had active! To test this further, I asked, “With the bad multitasking resulting from too many active projects, you are now approaching two years to get a product out the door. Without the bad multitasking, how long should it take?” The answer came back as “two months.” For every new product that this company produced, they were losing almost two years of revenue, plus two years of competitive advantage. Unbelievable! The best part of this two-hour visit was that I did not have to point any of this out to them. They drew their own conclusions and implemented the solution soon afterwards.

An Engineering Project in Asia Many of the underdeveloped countries of Asia suffer from frequent power stoppages. One of the largest employers in a country in which I consulted has an impressive factory that produces millions of consumer products each day. During the year of my work with this company, it encountered one period of time where its internal capacity became its constraint. When there is a power stoppage, even for as short as a minute, it can take an hour to get a machine producing again to full capacity. There are glue and paper and other material flowing through machines and power stoppages do ugly things to the insides of the machines. Resetting can involve a lot of agonizing waste and rework.

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The company identified that through the use of a power switch, it could dedicate some generators that it already owned to the shop floor during prime production hours, thus reducing the effect of power outages by 100 percent during those times. If the office went without power for a few minutes or even an hour, it did not impact the company’s revenues or profits significantly since the office was not the constraint of the company, the plant was. The value to the company of addressing the constraint was almost $100,000 per day. The cost of the switch was less than $50,000. When the critical chain approach was explained to the people responsible for this project, with the impact on throughput and net profit, it became very clear that everything this company’s operation’s director could do to expedite the delivery of the switch was worthwhile. The company took steps to accelerate the critical chain by expediting the shipping and by contacting the switch manufacturer’s head office to find out how to speed up the project. My wife, Jackie, suggested that the company offer a bonus to the switch manufacturer — a bonus that exceeded the cost of the switch. Since it was worth close to $100,000 per day for every day the switch could be delivered early, why not offer a $5,000 to $10,000 per day bonus to the manufacturer? This is the kind of thinking that requires the new frame of reference that we describe in the book, not just at the CEO level, but by everyone in the company.

Appendix D: Companies Using Goldratt’s Theory of Constraints Introduction Over forty hours of research was invested to produce a list of over 200 references. Out of the many tens of thousands of web pages referencing Dr. Eli Goldratt or Theory of Constraints applications, you will find thousands of client names. My criteria for picking these were: ◆ ◆ ◆

I preferred a story to identify the client name. I looked for stories that talked about results. Wherever possible, I looked for stories either told by the end users themselves or with direct quotations from the end users.

There are many sites that are not in English that have other stories. This list is confined to those stories available in English. While I did not attempt to accumulate new statistics on Theory of Constraints average improvement results, my subjective conclusion is that these results are comparable to those documented by the extensive research of Mabin and Balderstone.* Those results of applying the Theory of Constraints were: * Victoria J. Mabin and Steven J. Balderstone, The World of the Theory of Constraints, CRC Press, Boca Raton, FL, 2000. 141

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◆ ◆ ◆ ◆ ◆


Mean Mean Mean Mean Mean

lead time reduction: 70 percent cycle time reduction: 65 percent improvement in due date performance: 44 percent reduction in inventory: 49 percent increase in revenue throughput: 63 percent

Since the list of companies using Theory of Constraints is constantly changing, I have included a small sample of companies in this Appendix. However, you can download the complete current list, which is in an Excel spreadsheet format from www.tocinternational.com. The download is available at no cost.

Belgium Brazil

Canada

Canada

Canada Canada Canada Canada Canada China

Verhaert Dana Albarus DSC

Alcan Aluminum

Babcock & Wilcox

Butler Metal Group Imperial Oil Novopharm Pratt & Whitney Scarborough Public Utilities Global One Headwear Manufactory Scholly Fiberoptic GmbH Elecon Engineering Indo Asian Fuesgar Limited

Germany India India

Australia Australia Australia Australia Australia, Malaysia Belgium

HWI Electrical Skye Telwater TRS BHP Coated Products Division

Baxter Corporation

Australia

Expozay International

Country Industrial Mgmt Magazine, May 1994 www.tocca.com www.tocca.com www.tocca.com www.tocca.com APICS Australia conference, 1991 Theory of Constraints and Its Implications for Management Accounting www.goldratt.com APICS Constraint Mgmt Proceedings 2000 APICS Constraint Management Conference, Securing the Future Advanced Project Portfolio Management & PMO Dissertation—Rik Berry www.goldratt.com www.chesapeak.com World of TOC book Securing the Future Video available from [email protected] www.toc-goldratt.com www.toc-goldratt.com www.goldratt.com

Source of Reference

Sample of Companies Using Theory of Constraints

Company Name

Table D-1.

Distribution Operations Logistics Operations Logistics

Thinking Process Thinking Process Distribution Operations Logistics Thinking Process Operations Logistics

Strategic Planning

Strategic Planning

Thinking Process Operations Logistics

Operations Logistics

Operations Management Thinking Process Operations Logistics Operations Logistics Project Management Operations Logistics

Application

Manufacturing—Wireless Manufacturing—Industrial Manufacturing—Electronics

Manufacturing—Automotive Oil Pharmaceutical Manufacturing—Aircraft Electric & Water Utility Textile

Nuclear Mfg.

Primary Metals

Engineering—Product Dev. Manufacturing—Automotive

Health Care

Distribution—Small Appliances Textile Manufacturing—Boats Refrigeration Contracting Steel

Textile

Industry

Appendix D: Companies Using Goldratt’s Theory of Constraints

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India Ireland Ireland Ireland Ireland Israel Israel Israel Israel Israel Israel Israel Israel

Israel Israel Israel Japan Japan Japan Malaysia Mexico

Mexico Mexico Netherlands

Netherlands

Larsen and Toubro Copeland Glenaden Shirts Hampton Conservatories Ltd. McDonagh Furniture Ltd. Better Online Solutions Dolav Emblase Semiconductor Ltd. Intel Israeli Air Force Israeli Aircraft Mtce. Division METEC Netafim Irrigation Products

Rafael Seabridge Zoran Corporation Gunze Japan Research Institute Suntory Group Curriculum Development Center Dirona, S.A.

Grupo Rio Varanni de Mexico S.A. de C.V. Samsonite Europe

Tim Voor Kantoor

Country www.realization.com www.goldatt.co.uk www.goldratt.co.uk www.toc-goldratt.com www.toc-goldratt.com www.goldratt.com www.goldratt.com www.toc-goldratt.com www.goldratt.com www.goldratt.com TOC Upgrade Conference www.goldratt.com TOC Upgrade ConferenceCambridge 2003 www.goldratt.com www.goldratt.com www.toc-goldratt.com www.goldratt.com www.goldratt.com www.goldratt.com www.tocforeducation.com APICS Constraint Mgmt 2001 Proceedings www.toc-goldratt.com www.toc-goldratt.com Theory of Constraints and Its Implications for Management Accounting www.goldratt.com

Source of Reference Application

Marketing

Thinking Process Strategic Planning Distribution

Project Management Project Management Project Management Supply Chain Thinking Process Operations Logistics Strategic Planning Supply Chain

Project Management Operations Logistics Operations Logistics Project Management Operations Logistics Project Management Thinking Process Project Management Project Management Thinking Process Project Management Operations Logistics Viable Vision

Sample of Companies Using Theory of Constraints (continued)

Company Name

Table D-1.

Retail—Office Supplies

Health Care Retail—Shoes Manufacturing—Luggage

Manufacturing—Defense General Manufacturing Semiconductor Manufacturing—Textile Consulting Manufacturing—Beverages Education Manufacturing—Automotive

Heavy Engineering Manufacturing—Refrigeration Textile Construction Manufacturing—Furniture High Technology—Software General Manufacturing Semiconductor Semiconductor Government—Defense Aircraft Maintenance General Manufacturing Manufacturing—Agriculture

Industry


www.goldratt.com www.toc-goldratt.com www.criticalchain.co.uk www.goldratt.com www.toc-goldratt.com 2003 Cambridge TOC Conference www.toc-goldratt.com www.toc-goldratt.com

South South South South

South Africa South Africa Spain Spain Spain Spain Sweden Sweden UK

UK UK UK UK UK UK

Iscor Media Automotive Pretoria Academic Hospital Robor Stewarts & Lloyd

SilvaCel Unilever, Lever Ponds Caser Fuchosa JAE Vizuete SL ABB Acreo Alderman Pounder Nursery School Alphamet (UK) Limited Audus Noble Ltd. Balfour Beatty Clowes Group Garrett Corporation Oxford Health & Social Care System Servomex Group Ltd. Sadesa

UK Uruguay

Africa Africa Africa Africa

www.goldratt.com www.tocforeducation.com www.tocforeducation.com www.chesapeak.com www.toc-goldratt.com www.toc-goldratt.com www.mpsys.co.za/Downloads/ Critical_Chain_Article_ Radar_development.pdf www.toc-goldratt.com Midrange ERP Magazine www.toc-goldratt.com www.itweb.co.za/office/cs/ 0002140907.htm www.goldratt.com www.toc-goldratt.com www.realization.com www.realization.com www.realization.com www.goldratt.com www.vm-g.com www.vm-g.com www.goldratt.com

New Zealand Philippines Russia Scotland South Africa South Africa South Africa

Habitat for Humanity Department of Education Ministry of Education Rohm and Haas African Explosives Limited Afrox Ltd. Council for Scientific and Industrial Research

Thinking Process Operations Logistics Project Management Marketing Operations Logistics Buffer Management, Thinking Process Operations Logistics Operations Logistics

Thinking Process Strategic Planning Project Management Project Management Project Management Operations Logistics Operations Logistics Project Management Thinking Process

Project Management Thinking Process Thinking Process Distribution

Project Management Thinking Process Thinking Process Operations Logistics Supply Chain Distribution Project Management

Manufacturing—Electronics Manufacturing—Tanner

Metal Broker Plastics Engineering—Civil Printing Manufacturing—Automotive Health Care

Pulp & Paper Consumer Products Insurance Manufacturing—Automotive Automotive General Manufacturing Energy—Technology Manufacturing—Microelectronics Education

Primary Metals Distribution Health Care Steel

Construction Education Education Manufacturing—Packaging Manufacturing—Construction Industrial Products Defense

Appendix D: Companies Using Goldratt’s Theory of Constraints

145

USA USA

USA USA USA USA

Abbott Laboratories Alko Lighting

Amazon.com Antartic Support Associates APN Inc. AT&T

Country www.prochain.com Total Quality Mgmt. Magazine, Vol. 3 1992 NY Times, January 21, 2002 www.goldratt.co.uk www.toc-goldratt.com www.mcts.com/Theory-ofConstraints.html

Source of Reference Application

Operations Logistics Project Management Thinking Process Operations Logistics

Project Management Operations Logistics

Sample of Companies Using Theory of Constraints (continued)

Company Name

Table D-1.

e-tail Retail commerce online Research Manufacturing—Food Manufacturing—Communications

Pharmaceutical Manufacturing—Lighting

Industry


Index 4×4, 117, 118 activity-based costing, 26 additive rule, 24, 25, 28, 55 aircraft maintenance, 45 airline, 48, 111 allocated costs. See cost allocations apparel, 33 Asia, 10, 136, 137, 139 automotive, 25, 26, 36, 37, 38, 39, 83, 137 BAE Systems, 79 batching, 13 bowling, 61 buffer, 57, 58, 59, 77, 78, 90, 109, 131, 132, 136, 145 buy-in, 67, 92, 93, 97, 98, 99, 101, 102, 104, 112, 116, 139 capacity, 4, 5, 10, 11, 12, 13, 37, 38, 43, 49, 50, 51, 52, 56, 57, 58, 59, 74, 76, 77, 80, 84, 88, 89, 90, 99, 103, 111, 123, 128, 131, 136, 139 car rental, 48 competition, 4, 5, 6, 9, 10, 11, 12, 15, 24, 43, 45, 49, 51, 68, 101, 107, 108, 109, 110, 111, 112, 114, 130, 133, 134, 135

completion buffer, 77 consignment, 14, 15 cost accounting, 25, 26, 27, 39 cost allocations, 26, 27, 33, 44, 85, 91 critical chain, 50, 59, 75, 76, 77, 78, 80, 90, 91, 109, 115, 121, 136, 139, 140 critical path, 40, 75 distribution. See distributor distributor, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 31, 40, 46, 48, 59, 61, 62, 63, 64, 66, 67, 68, 72, 84, 85, 90, 91, 92, 93, 101, 109, 110, 111, 112, 114, 117, 118, 127, 128, 129, 138 drum, 57, 58, 59, 90, 109, 136 ElBit Systems, 79 elevate, 37, 38, 44, 47, 58, 59, 67, 91 Eli Goldratt. See Goldratt, Eli engineering, 31, 44, 46, 59, 100, 111, 138, 139 ERP, 4, 12, 18, 87, 89, 91, 145 Europe, 10, 144 exploit, 37, 38, 44, 45, 46, 47, 57, 59, 63, 66, 76, 91 feeding buffer, 77 financial institution, 28, 130

147

148


Five Focusing Steps, 36, 37, 39, 44, 46, 50, 56, 57, 59, 63, 68, 74, 75, 80, 88, 89, 91, 93, 109, 115 forecasting, 13, 14, 33, 64, 84, 107, 108, 112, 114 furniture, 133, 134, 135 glass manufacturing, 135 Goldratt, Eli, xiii, 3, 4, 5, 18, 19, 27, 37, 38, 48, 49, 53, 54, 57, 69, 73, 75, 89, 97, 98, 107, 113, 121, 122, 123, 141 golf club, 61 health care, 43, 131 home construction, 54 hospital, 48, 131, 145 IT. See information technology identify, 37, 44, 46, 57, 59, 63, 89, 93 information technology, 11, 18, 26, 32, 33, 37, 40, 59, 86, 87, 88, 89, 91, 92, 93, 129 inventory, 11, 14, 15, 16, 17, 19, 26, 32, 34, 35, 36, 45, 46, 48, 51, 52, 55, 56, 59, 61, 62, 63, 64, 65, 66, 67, 68, 69, 81, 82, 84, 85, 86, 88, 89, 90, 91, 98, 99, 114, 115, 127, 128, 129, 133, 134, 137, 138, 142 inventory $ days, 82 investment, 32, 34, 35, 39, 81 irrigation, 130 Israeli Aircraft Maintenance Division, 79

replenishment, 65 transportation, 65 leverage, 11, 19, 25, 27, 28, 29, 31, 36, 37, 40, 59, 74, 119, 123 logistics, vi, 10, 15, 17, 28, 46, 48, 50, 57, 64, 66, 86, 91, 92, 102, 103, 109, 115, 118, 129, 134, 135, 136, 137, 138 Lord Corporation, 79 Mabin and Balderstone, 31, 59, 141 mafia offer, 7, 47, 48, 49, 50, 109 make or buy, 33 market constraint. See marketing marketing, 10, 13, 25, 28, 31, 43, 44, 45, 47, 48, 49, 50, 66, 72, 91, 93, 98, 99, 100, 103, 108, 109, 110, 111, 114, 115, 117, 118, 122, 128, 133, 134, 135, 139, 144, 145 market share, 5, 10, 37, 115, 127, 128 McDonald’s, 61 measurement, 18, 25, 29, 33, 51, 53, 54, 55, 67, 74, 76, 80, 81, 82, 83, 84, 85, 86, 88, 90, 91, 92, 93, 98, 100, 101, 109, 115, 117 medical, 61 Mexico, 33, 85, 144 multitasking, 28, 74, 77, 80, 139 operations, 31, 35, 46, 48, 50, 51, 52, 53, 54, 56, 57, 59, 90, 98, 99, 102, 103, 109, 114, 115, 118, 122, 131, 136, 143, 144, 145 order lead time, 65, 90

Johnson and Kaplan, 25 layers of resistance to change. See resistance to change lead time, 6, 7, 12, 14, 17, 27, 32, 33, 36, 38, 45, 47, 48, 50, 52, 57, 58, 59, 64, 65, 66, 67, 90, 99, 102, 109, 111, 115, 128, 129, 135, 136, 142 order, 65 production, 65

Pareto Principle, 45, 58, 132 Parkinson’s Law, 73, 76 power cables, 4, 5, 6 procurement, 11, 12, 13, 24, 35, 36, 58, 83, 118 product cost, 33, 84 production, 24, 31, 33, 35, 36, 50, 51, 52, 53, 54, 55, 58, 65, 66, 100, 111, 135, 136, 137, 140 profit center, 32, 90

Index

project, 4, 6, 7, 8, 11, 17, 18, 19, 23, 24, 31, 37, 38, 40, 45, 47, 50, 59, 69, 71, 72, 73, 74, 75, 76, 77, 78, 79, 80, 88, 89, 90, 91, 92, 93, 98, 99, 102, 109, 112, 115, 118, 119, 122, 129, 134, 138, 139, 140, 143, 144, 145 project management. See project pull system, 16, 17, 48, 64, 66, 67, 68, 90, 98, 102, 109, 128 Rackham, Neil, 98, 122 relay runner, 58, 98 Relevance Lost. See Johnson and Kaplan resistance to change, 67, 93, 97, 98, 99, 102, 104, 113 retail, 9, 11, 15, 16, 17, 24, 48, 59, 61, 62, 63, 64, 65, 66, 67, 68, 128, 129, 133, 134, 136, 137 rooted industry policies, 49, 110 Seagate Technologies, 79 segmentation, 49 silo, 23, 24, 25, 29, 44, 86, 118, 138 Six Sigma, 18, 45, 122 Standish Group, 71 steel, 43, 48, 51, 54, 55, 62, 102 student syndrome, 73, 76 subordinate, 37, 38, 46, 47, 58, 66, 67, 77, 91

149

supermarket, 138 supply chain, 9, 11, 14, 16, 18, 25, 26, 27, 29, 31, 32, 43, 46, 61, 62, 63, 64, 66, 67, 68, 69, 80, 81, 82, 83, 84, 85, 86, 88, 89, 91, 98, 101, 109, 112, 114, 115, 117, 118, 119 throughput, 9, 13, 15, 16, 17, 19, 24, 27, 28, 33, 34, 35, 38, 39, 57, 59, 61, 63, 68, 78, 81, 82, 83, 84, 85, 86, 89, 90, 91, 98, 115, 121, 128, 140, 142 throughput $ days, 82, 83 tobacco, 54 U.S. Marine Corps Naval Depot, 79 value proposition, 10, 12, 129 Viable Vision, vi, ix, 3, 9, 12, 17, 19, 25, 27, 29, 31, 36, 40, 47, 50, 59, 69, 81, 86, 97, 101, 102, 105, 109, 112, 113, 115, 116, 118, 119, 127, 128, 129, 130, 131, 133, 144 Wal-Mart, 136 weakest link, 28, 37, 137 wireless, 10, 15, 47, 48, 49, 110, 117, 129

152


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