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APPLYING THEORY OF CONSTRAINTS PRINCIPLES AND

GOLDRATT’S THINKING PROCESS TO THE PROBLEMS ASSOCIATED
WITH INVENTORY CONTROL Lloyd J. Taylor, III, P.E., Ph.D.,, Associate
Professor of Management, School of Business, University of Texas of the Permian
Basin, Odessa, TX, And Rekha Asthana,, School of Business, University of Texas
of the Permian Basin, Odessa, TX
Applying Theory of Constraints Principles and Goldratt’s Thinking Process to the Problems Associated

with Inventory Control

Abstract:

Operating in a challenging environment, inventory control problems pervade practically all

manufacturing facilities. The nucleus of the research is a study of a segment of a manufacturing
company facing inventory control problems. Preliminary foundation is based on Literature
Review. Further research is pursued, using Goldratt’s Thinking Process, with the intent of
investigating solutions to the problem faced by the company. Findings and conclusion derived
by using the Thinking Process are used to derive implementable solutions, which can offer
substantial gains to the problem at hand, as well as diverse industry applications.

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Purpose: The central focus of the research study aims to investigate inventory control problems

faced by a manufacturing facility in New Mexico.

Nature of Problem: The problems facing the facility are the constraint to produce electrical

products for utility and industrial markets, to meet rigid delivery schedule and specifications,

within the capacity limitations, and minimize costs and the use of premium overtime due to

rejects.

Need for a Solution: To explore prospective solutions to reduce costs, improve quality and

profitability facing the manufacturing facility, an imperative need was ascertained.

Design/Methodological Approach: The article explores how the facility referenced above can

deal with inventory control issues, using Goldratt’s Thinking Process.

Findings: To effectively utilize the Thinking Process, an organization begins by identifying the

underlying causes of the problem i.e. undesirable effects (UDEs), subsequently developing a

Current Reality Tree (CRT) , evaporative cloud and an evaporative cloud with injection(s),

which is the action that will be taken to bring about a positive result . The organization then

develops a Future Reality Tree (FRT), using the injection, which produces the desired results and

eliminates the core problem.

Research limitations/ Implications: The referenced list was not exhaustive of all publications

relating to the investigation, imposing some limitations.

Practical Implications: Research study, such as the focus of this paper that crosses disciplinary

boundaries and utilizing the Thinking Process, can contribute to ideas and implementable

solutions to problems in diverse industries and scenarios.

Keywords: Thinking process, Decision Trees, Inventory control, Inventory management

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Paper Type: Literature Review

Applying Theory of Constraints Principles and Goldratt’s Thinking Process to the Problems Associated

with Inventory Control

Introduction to the Problem

The pervasive problem of inventory management and inventory control facing any manufacturing company,

poses challenges of untold magnitude. Schonberger and Schniederjans (1984) contend that ‘early western

notions of inventory management were unsound. Classic Inventory Control problems deal with economic

quantities and buffer stocks aimed at avoiding running out of stock, resulting in high inventories and long lead

times. To sustain productivity and quality improvement with greater flexibility and delivery responsiveness

new inventory models need to be recast’. Similar inventory control problems and inventory management

issues, persisting in a manufacturing facility are explored forming the crux of this research.

The problems facing the facility being explored are the constraint to produce electrical products for utility

and industrial markets, to meet rigid delivery schedule and specifications, within the capacity limitations, and

minimize costs and the use of premium overtime due to rejects. To investigate the core problem, associated

with the problems facing the manufacturing facility, Goldratt’s Thinking Process was applied. Once the core

problem is identified, solutions and implementations of the solution to the problems were sought.

Background-Setting the Stage

A six sigma leading global manufacturer of electrical connectors and components is explored for this

study. These problems in manufacturing and /production could be practically applicable to any company, as the

problems are pervasive across the globe. The electrical segment product line produces fittings and accessories

for diverse electrical utility applications. Marketing channels consist of direct sale to utilities, original

equipment manufacturers, end-users, as well as distributors, mass merchandisers, catalog merchandisers, and

home improvement centers.

Product changes were accompanied by organizational changes, international market entry, mergers and

acquisitions. These triggered a series of strategic moves and organizational changes to consolidate operations

and optimize efficiency. To optimize operations, Total Quality Engineering (TQE), Supplier Quality

Commodity (SQC), and Just in Time (JIT) manufacturing models were implemented over the years. Providing

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“each customer with the right product, on time delivery and zero defects” was the ultimate goal.

Ushering in the era of electronic commerce, the company designed and implanted Easy

Access and Distributor/Manufacturer Integration, an interactive system that optimized

inventory management and electronic customer interaction. These state-of-the-art systems

represented important steps toward reducing costs while increasing direct contact with market

trends via the company's customers.

Literature Review

In 1952, Whitin made this statement: “In recent times, inventory control problems, have

received increasing importance from several different groups. Even businessman and

entrepreneurs realize the importance of inventory problems”. These problems still exist today.

Commonly prevalent in manufacturing and production operations, Inventory Management and

Inventory Control problems are identified as subcomponent of Strategic Planning. ‘Quality

problems are also amongst many of the problems’ (Schonberger and Schniederjans, 1984).

Intense competition and thrust on productivity and quality performance puts incredible pressure

on manufacturing and operation functions in an organization. Inventory is expensive and can

become obsolete as models change. It is vital to strike a reasonable balance by understanding the

inventory versus customer service tradeoff (Hopp, Spearman, Zhang, 1997). Thus bearing

responsibility for output- i.e. provision of goods or services, effective operations form the

backbone of organizations.

Silver (1981) concludes that the objective of Inventory Management includes:

• Profit maximization (with or without discounting)

• Maximization of rate of return on stock investment

• Cost minimization (with or without discounting)

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• Maximization of chance of survival

• Ensuring flexibility of operation

• Determination of a feasible solution.

Vast majority of Operations Research Literature use criterion of minimization of cost. If manufacturing and

production operations are inefficient, domino effect culminates in decline in productivity, increased costs,

decreased delivery and performance, ultimately resulting in slipping market share and revenue loss. Departing

from the conventional norm, Skinner (1992) proposed top down approach starting with the company and its

competitive strategy.

Abundant techniques and methodologies for operations prevail, yet the central problem- provision of goods

and services to the customer is easily overshadowed (Collins, DeVanna, 1990). 5 key interconnected concepts

drive efficient operations function namely:

• Capacity
• Standard
• Scheduling
• Inventory
• Control

Understanding the interrelationships of the key concepts is crucial to management for accomplishing the

strategic mission. JIT, TQM, Kanban are some modern methodologies and models suggested for driving

inventories down and improving inventory control.

To clarify the concept of Inventory Management and Inventory control, some definitions are:

Inventory is an accumulation of the finished products, Work in Process (WIP) and raw materials at all

stages of the production process (ReVelle, 2002).

Inventory control means maintaining your inventory in a way that will maintain consistent quality

production. Poor inventory control results in wasting resources and can cause delivery and customer problems

(Sprague, 1990).

Control is after-the fact evaluation. Devoid of a control mechanism, planning activities make little sense,

even at the strategic level. 3 Steps are critical to control:

1. Observe-see what actually happened

2. Compare-study what did happen with what was supposed to happen

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3. Decide-if the comparison shows that the objectives were not met, determine what needs

changing, and change it to ensure success next time.

Control addresses simple yet powerful questions e.g.:

• Was the capacity there and was it properly utilized?

• Was the objective of avoiding customer waiting for more than 3 minutes achieved?

• Did the shipment go out at 4:00 pm as promised to the customer?

• Was the inventory able to meet the needs of the customers?

Without control if excess inventory exists, it is considered a symptom of many underlying problems.

Common problems relate to defects, production imbalances, long setups, equipment downtime and late or

defective deliveries. Associated costs with excess inventory impact the organization’s business strategy. ‘A

common error made by organizations is to evaluate performance against historic measures or other standard,

which is not necessarily appropriate’ (Hopp, Spearman, Zhang, 1997). What good is 95% delivery reliability

when the competitor offers 100% reliability at competitive prices?

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Inventory is a manufacturing firm’s major asset though a hotly debated issue between

manufacturing and the financial arm. From a financial perspective inventory is considered cash

that is tied up. Money that could be converted to assets, generate revenue and used more

productively. So any amount of inventory is too much in the financial arm of an organization.

Opposing view favor ‘the more inventory, the better-to support the customer base. From

marketing and sales standpoint, existence of inventory permits immediate sale of goods that can

take considerable time to produce. Increased sales and revenue ensue, when customers can order

customized product for delivery in three weeks, vs. waiting 3 months to manufacture a product.

Yet again, the physical care of stocks is a nightmare that feeds into work-in-process. On one

hand, the lesser the physical material, the easier it is to control On the other hand lapse in

inventory more likely results in unmet customer needs and loss of sales and revenue (Sprague,

1990).

Manufacturing/operations Theory and Models

The Classical Inventory Theory dominated the production and inventory control systems for 40 years.

Now considered old, the Classical Inventory Theory formed the basis American Inventory Management

systems. With the push for Orlicky’s Materials Requirements Planning (MRP) crusade, the Classical Inventory

theory was blamed for the magnitude of manufacturing’s work-in-process stock problems in many firms

(Sprague, 1990). The premise of the theory is that an organization’s inventory serves as an appropriate

solution to certain manufacturing and distribution problems, by seeking the lowest combination of costs. Costs

meant those costs captured by the firm’s accounting system, while some costs and benefits of inventory were

not captured in the normal cost accounting system. Silver (1981) identifies 4 categories of costs relevant to

inventory decision making namely:

(1)Replenishment costs,

(2) Carrying costs,

(3) Costs of insufficient supply in the short run

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(4) System control costs.

Thus differing connotations of costs arose, which were addressed by Goldratt (1992).

Recent views regarding inventory methods and cost perspectives push Japanese methods to deal with

the pervasive problem of inventory. Methodologies such as JIT, TQM, and Kanban are touted as solutions.

Notably, the new theories make a fundamental shift considering inventory a cost generator to be avoided.

Whether the new models and methodology positively escalate benefits and reduce problems is beyond the

scope of this research. Basic presumption is that total associated costs of inventory will dominate the benefits.

The intent is to focus on problems that must be attacked directly to prevent the creation of problem inventories.

Thus approaches seen as plausible solutions for solving inventory problems are named as:

• Variability

• Variety

• ELS or EOQ

• Decoupling

• Pipeline

ReVelle (2002) aptly concludes “whether a company’s goal is to improve responsiveness, product quality,

product scheduling, sensitivity to customer expectations, reduce process cycle time, cost of quality, or variation

in products or processes, there is a methodology waiting to be discovered that can enhance a company’s

operations”.

Inventory Control Problems at The Company

In the manufacturing sector emerging models have shifted trends. “In the past it was possible

for some firms to maintain profit margins, with highly inefficient inventory control methods, but

modern large-scale enterprises operate with narrow profit margins. As margins decrease, and

costs increase and buyers demand quality products and low prices, profitability can be eliminated

with poor inventory control methods” (Whitin, 1952). This leaves manufacturers with little room

for error. “In practice, a manager’s goal is to achieve a specified level of service with minimum

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investment in inventory” (Sox, Thomas & McClain, 1997). This was the challenge the company

where quality flaws resulted in the manufacturer having to remanufacture the parts to fulfill

customer order. In fact, none of the defective finished goods could be reengineered or salvaged.

These facts were troubling for manufacturing and operations, where costs were increasing, work-

in process levels increased and magnitude of associated problems spiraled. Contrary to motto

proclaimed, quality was running below expectations.

The Symptoms

The Company initially enjoyed the benefits of long-term employees. Over the years they

were trained and learned how to operate the equipment, monitor production, follow safety

standards, and identify quality shortcomings; but attitudes changed as new policies were

implemented and workers’ attrition rate increased.

There was a noticeable continual increase in the parts reject rate. The production managers’

concern was elevated by an increasing need to run special shifts to overcome the reject rate

which did not pass quality inspection. Moreover constant request prevailed to release more raw

materials to the floor while work-in-process mounted. The pressure from these added expenses

and quality inspections was taking a toll on the Company’s profitability and productivity.

Internal disagreements escalated with departments blaming each other for continual frustrations

and failures. Keeping track of inventory, fulfilling customer order and associated problems was

a nightmare.

The Thinking Process and the Theory of Constraints

During the 1980’s, Goldratt [1992-b] wrote a book entitled The Goal. In this book, he conveys the

story of a plant manager struggling to keep his plant afloat while searching for a way to improve the plant’s

performance. With the help of an old college professor, the manager learns how to improve the performance of

his plant while also learning a method for resolving problems to the point of a win-win situation. Goldratt’s

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Theory of Constraints (TOC) focuses on the efficiency of all the processes as a whole rather than the efficiency

of any one single process. While the TOC was developed for manufacturing through Goldratt’s Thinking

Process, the Thinking Process system can be used to work through many other business processes and

problems.

In Goldratt’s TOC, a given group of processes will have a weakest link and the weakest link controls

the entire systems production rate. In order to maximize the system production, the weakest link must be

improved and all other links in the processes regulated to the speed of the weakest link. The weakest link is

the constraint and all steps must be examined together to determine the constraint; the core problem for

termination.

Since the constraint is not always obvious, Goldratt [1992-b] developed the Thinking Process. This is

a series of steps used to locate the constraint (What to Change?), determine the solution (What to change to?)

and how to implement the solution (How to make the change?). These steps are actually referred to as the

Thinking Process. Goldratt’s next book It’s Not Luck [1994] describes the Thinking Process in much more

detail.

What to Change?

If the symptoms of a core problem are undesirable effects (UDE’s), then the undesirable effects are

merely symptoms brought on by the core problem itself. This core problem needs to be determined and

eliminated. The methodology employed in the search for a core problem is based on a cause and effect

relationships. These cause and effect relationship are used to uncover the core problem associated with the

UDE’s. The core problem is also the weak link in the operation when it concerns obtaining the goal of the

company.

By determining the true core problem in a situation, it is helpful to write the current state in a diagram

format. This diagram shows a logical explanation of the situation. With practice and logical based common

sense, the major UDE’s can be interconnected through cause and effect relationships in a Current Reality Tree

(CRT). Creating this tool leads to the process of determining “What to Change.” Goldratt [1992-a] claims, the

analytical method of a CRT is used in attempting to reveal the Archimedes point – the identification of the root

cause.

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This analysis method also provides a tool to understand the existing nature of the cause. It does this

by discussing and scrutinizing our basic intuitive sense, which exists in our environment. It is somewhat

different from the management approach of correlation and classification. All past unsuccessful efforts to

eliminate the undesirable effects failed to attack and eliminate the core problem. That’s why the symptoms

returned. In general, employees want to do a good job. They want to do what is best for the organization but

don’t always feel current procedures allow for core problem elimination.

Undesirable Effects

According to Goldratt [1994] the first step in the Thinking Process is to develop a list of at least 10 –

12 undesirable effects that currently apply to the problem at hand. The process of building the CRT does not

focus on the severity, ranking or order, but on the effect-cause-effect relationships of the list of undesirable

effects. An analysis of the symptoms surfacing at T&B Corp identified the following undesirable effects:

1. Increased request for additional raw material for production.

2. Increase in Quantity of Reject parts.

3. Work -in-process inventory levels keeps increasing

4. Lag in product delivery to customers.

5. Decline in productivity, customer service and profitability occurs.

6. There is loss of revenue.

7. High workers turnover rate exists.

8. Low worker morale increases. creates threat to form a union

9. Increase in production and manufacturing costs is observed.

10. Production is unable to meet customer demands

11. Internal disagreements and frustrations occur.

12. Lack of communications on the shop floor between engineers, managers and workers.

13. Plant personnel do not understand the strategic aim of being profitable.

14. Production and Manufacturing strategy is not aligned with business strategy.

15. Quality practices suffer

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16. Multiple reports for same problem occur.

Once the list was compiled, undesirable effects that appeared to have a connection were linked

together in a cause-and-effect relationship. Then insufficiencies (bits of relevant information that are coupled

with undesirable effect that assist in the logical flow of effect-cause-effect analysis) and clarities (bits of

information inserted between the two undesirable effects to provide a smoother flow of the effect-cause-effect

analysis) are added to aid in the logical flow of the tree. These cause-and-effect relationships were then utilized

to construct the CRT that defined the core problem.

The Current Reality Tree

After organizing the Undesirable Effects in an effect-cause-effect relationship analysis, a tree took

shape that identified core problem as being “UDE #12: Lack of communications on the shop floor between

engineers, managers and workers”. The core problem as defined by Rack (1992) emphasizes ‘the UDE, that

when solved, most significantly impacts the performance of the entire chain’. The core problem will be

located at the bottom of the tree with all other UDE’s leading from the core problem. The Current Reality Tree

is read from the bottom up starting with the core problem and progressing upward through the tree using if . . .

then statements in a logical format. (See Figure 1):

The tree reads as follows:

• If there is a lack of communication between engineers, managers & workers on the shop floor,
then, Production suffers and company profitability is not maximized.
• If Production suffers and company profitability is not maximized, then Production and
manufacturing strategy is not aligned with business strategy.
• If Production and manufacturing strategy is not aligned with business strategy and Plant
personnel do not understand the strategic aim of being profitable, then, best production
practices are not always adhered to.
• If best production practices are not always adhered to, then, Quality practices suffer.
• If Quality practices suffer, then, Quantity of reject parts keeps increasing
• If Quantity of reject parts keeps increasing, then Increase in Production and Manufacturing costs
is observed.
• If Multiple reports for same problem occur and Quantity of reject parts keeps increasing, then,
Production levels fall behind.
• If Production levels fall behind, then, Production is unable to meet customer demands.
• If Production is unable to meet customer demands, then, there would be increased requests for
additional raw material for production.
• If there are increased requests for additional materials for production and there are several
customers’ orders waiting to be fulfilled then, Work-in-process inventory level would increase.

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• If Work-in-process inventory level keeps increasing, then, lead-time increases.

• If lead-time increases, then, there would be a lag in product delivery to customers.
• If there is a lag in product delivery to customers, then there would be a decline in customer
service, profitability and productivity.
• If there is a decline in customer service, profitability, and productivity, then, there would be a
loss of revenue.
• If the company loses revenue, then, internal disagreements and frustrations occur.
• If internal disagreements and frustrations occur, then low worker morale would occur.
• If there is low worker morale and trained and experienced workers leave the company, then,
there would be an increase in employee turnover rate.

(A loop which feeds back into the tree was present in the CRT and the problems would keep revolving
unless actions are taken to solve the core problem.)

• If there is an increase in employee turnover rate and new workers lack sufficient training, then
quality practices would suffer.
• If quality practices suffer, then, the process is repeated.

What to change to?

Once the Current Reality Tree is formed a conflict emerges and pulls the situation in two directions.

The most common way of managing conflict is to compromise in some way. However, if compromise were a

true solution for the problem, the conflict would have been eliminated a long time ago. Therefore the tendency

to look for a compromise to handle the situation should be overcome and the true core problem should be

eliminated.

Goldratt [1992-a] stated that since a vacuum does not exist, eliminating the core problem

means creating a UDE

new#7.reality, in which the opposite of the core problem exists. To eliminate the
High workers turnover rate exists.

UDE #8. Low worker morale increases

Trained and experienced workers leave the company.

UDE #11. Internal disagreements and frustrations occur.

UDE #6. There is loss of revenue.

UDE #5. There is a decline in customer service, profitability and productivity

UDE #4. Lag in product delivery to customers.

Lead-time increases.

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UDE #3. Work-in-process inventory level keeps increasing.
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Figure 1 – Current Reality Tree

core problem, a tool known as the Evaporating Cloud (EC) should be used. An EC, according to

Goldratt [1993] lets a person precisely present the conflict facilitating the core problem and then

helps find a solution by challenging the assumptions causing the conflict. The EC starts with an

objective that is the opposite of the core problem. From the objective, the requirements

(minimum of two) are listed. Each requirement will have at least one prerequisite. It is the

prerequisite that depicts the conflict. All of the requirements and prerequisites are based on

assumptions that have been ingrained into our minds over time. It is these assumptions that keep

us in the conflicted environment. This is the first step in freeing ourselves from the binding

controversy.

Evaporating Cloud

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Goldratt contends that compromising does not solve the core problem though short-term

success may be realized. He suggests using the Evaporating Cloud to search for real solutions

that will break the conflict that bring about a win-win solution for everyone. The core problem is

UDE #12 : Lack of communications between engineers, managers and workers on the shop floor,

so the objective of the EC will be for “adequate communications to exist amongst engineers,

managers and workers on the shop floor”. Next, we must list a minimum of two requirements.

Each requirement will have at least one prerequisite. It is the prerequisites that depict the

conflict. The zigzag arrow between the two prerequisites represents the conflict.

To read the EC one would use “in order to …we (they) must” syntax.

• In order to have appropriate communications amongst engineers, managers and workers on the shop
floor they must adhere to best production practices and at the same time quality practices must not
suffer.
• In order to adhere to best production practices, request for additional materials must decrease
which would cause WIP inventory to go down.
• In order for quality practices not to suffer, quantity of rejects must decrease which would cause
WIP inventory to go up.

Request for additional materials must

Adhere to best production decrease which would cause WIP
practices. inventory to go down.

Adequate communications to exist

amongst engineers, managers and
workers on the shop floor.

Quality practices must not Quantity of rejects must decrease

suffer. which would cause WIP inventory
to go up.

Figure 2 - Evaporating Cloud

Evaporative cloud with injections

In the case of T&B Corp, the following injections were used in an attempt to evaporate the cloud.

(See Figure 3):

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1. Initiate an education process to inform the employees of the need for efforts to maximize
profits.
2. Implement cross-functional communications committee to enhance collaboration between
engineers, managers, and workers.

This tool will logically show that once the injections are implemented, the desirable effects can be

accomplished. When the EC is broken, the FRT is built using the injections from the EC. The injections are

connected with the Effect-Cause-Effect logic and “clarities” and “insufficiencies” may be used where

additional information is required. This process tests the solution and is enhanced by criticism and negative

comments. If criticisms, negative comments and UDE’s can be overcome by the proposed solution then this

provides proof of the solution and leads to the next step in the process. This process taps into the natural

tendencies of criticism and negativity.

INJ 1: Initiate an education process to inform the employees of the need to maximize
profits.

Adhere to best production Request for additional materials

practices. must decrease which would cause
WIP inventory to go down.
Adequate communications to
exist amongst engineers,
managers and workers on the
shop floor.

Quantity of rejects must decrease

Quality practices must not which would cause WIP inventory
suffer. to go up.

Figure 3 -communications
INJ2:Implement cross-functional Evaporativecommittee
Cloud with Injections
to enhance collaboration between engineers,
managers, and workers.
How to Cause the Change

Next consider whether the injections will lead to direct desirable effects. An injection

allows for an acceptable resolution to one side of the conflict. With the injections and the

logical based common sense cause and effect relationships, the desired effects can be connected

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and the future outcome developed. This technique is called building the Future Reality Tree

(FRT). The FRT according to Goldratt [1993] is the thinking process that enables a person to

construct a solution that, when implemented, replaces the existing undesirable effects by

desirable effects without creating devastating new ones. Goldratt [1992-b] goes on to add, the

analytical method of the FRT is used to construct and scrutinize such a solution.

Future Reality Tree

A FRT was then constructed in an effort to ensure that all of the UDE’s would be eliminated using the

resolution identified in the EC. The FRT is essentially the same as the CRT; however the injection(s)

identified in the EC are placed into the tree to create a vision of the “future reality.” The FRT is read from the

bottom up using if…then statements in a logical format just as the CRT. By using the FRT, it enables us to

look at the ideas generated and ensures that the UDE’s are changed to Desirable elements (DEs).

The future reality tree reads as follows (See Figure 4):

• If cross-functional communications committee is implemented to enhance collaboration

between engineers, managers, and workers, then, communications between engineers,
managers & workers will improve.
• If communications between engineers, managers & workers improves, then, production will not
suffer and company profitability will be maximized
• If Production does not suffer and company profitability is maximized, then, production and
manufacturing strategy is aligned with business strategy
• If cross-functional communications committee is implemented to enhance collaboration
between engineers, managers, and workers, then, Plant personnel understand the strategic aim
of being profitable.
• If production and manufacturing strategy is aligned with business strategy and plant personnel
understand the strategic aim of being profitable, then, best production practices will be adhered
to.
• If best production practices are adhered to, then quality practices do will not suffer
• If quality practices do not suffer, then, Quantity of rejected parts will decrease.
• If quantity of rejected parts decreases, then production and manufacturing costs will decrease.
• If education process is initiated to inform the employees of the need for efforts to maximize
profits, then multiple reports for same problems will not occur.
• If multiple reports for same problems do not occur and quantity of reject parts decrease, then,
production levels will not fall behind.
• If Production levels do not fall behind, then, Production department will be able to meet
customer demands.
• If Production is able to meet customer demands, then, requests for additional raw material for
production will be minimized.

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• If requests for f additional raw material for production is minimized, then, work-in-process level
will decrease.
• If work-in-process level decreases, then, lead-time will decrease. .
• If lead-time decreases, then, Product delivery to customers will improve.
• If Product delivery to customers improves, then customer service, profitability and productivity
will improve.
• If Customer service, profitability, and productivity improve, then, there will be an increase in
company’s revenue.
• If Company’s revenue increases, then, internal disagreements and frustrations will not occur.
• If internal disagreements and frustrations do not occur, then, worker morale is productive.
• If worker morale is productive, and trained and experienced workers remain dedicated to the
company, then employee turnover rate will be very low.
• If employee turnover rate is very low and new workers are not required, then quality practices
will not suffer.

The purpose of the future reality tree is to graphically represent the conflict resolution.

Conclusion

Relating to the subject’s problems and literature review differing views and gaps exist between theory and

practice in inventory management. At the inception, an attempt was made to explore prospective reasons for

the problems with inventory management and control relating to increase in rejects and the resulting loss of

revenue. Working through the current reality tree and the future reality tree helped to uncover that the problem

was not narrowly confined to the raw material as preconceived. In an ongoing effort to reduce costs and

improve quality, recognizing that organizational structures, policies and procedures contributed to the

operations problem, was an important factor for the Company.

Applying the Thinking Process, the solution derived by the analysis was the need for collaboration amongst

engineers, managers and workers. The solution derived from the analysis follows empirical validation of 1995

research findings by Bates, Amudson, Schroder, Morris.

Their analysis indicated that ‘manufacturing strategy and organizational culture are related. A manufacturing

strategy is best implemented when plant personnel understand the strategic aims and direction of the plant.

Higher levels of shop floor contact permit better communication between management, professionals and

workers, allowing communication of the manufacturing strategy. The manufacturing strategy is used to

coordinate manufacturing decision making, production planning, and control systems, work force and quality

practices.

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UDE #7. Employee turnover rate will be very low.

Worker morale is productive.

Trained and experienced
workers remain dedicated
Internal disagreements and frustrations will not occur. to the company.

There will be an increase in Company’s revenue.

Customer service, profitability and productivity will improve.

Product delivery to customers will improves.

Lead-time will decrease.

Work-in-process level will decrease.

Requests for additional raw material for production will be minimized.

Production Department will be able to meet customer demands.

Production levels will not fall behind.

Multiple reports for same problem
will not occur.
Production and manufacturing costs will decrease.
New workers are
not required.
Quantity of rejected parts will decrease.

INJECTION: 1 Initiate an education process to Quality practices will not suffer.

inform the employees of the need for efforts to
maximize profits.
Best production practices are adhered to.

Production and manufacturing strategy is aligned with business strategy. Plant personnel understand the strategic aim of being profitable.

Production does not suffer and company profitability is maximized.

Communications amongst engineers, managers & workers on the shop floor will improve.

Figure 4 – Future Reality Tree

INJECTION2. Implement cross-functional communications committee to enhance collaboration between engineers, managers, and workers.

The result is group oriented organizational culture, with coordinated decision making, decentralized
INJECTION2. Implement cross-functional communications committee to
authority and a loyalenhance
workforce’ (Bates,
collaboration Amudson,
between Schroder
engineers, managers, & Morris, 1995).
and workers. The subject company

researched shares similar commonality, consistent with the validated findings of the 1995 study by Bates et al.

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Well-developed manufacturing and operations procedures could be aligned with business strategy resulting in

system wide organizational efficacy for the subject company. Current problems indicated lack of

communication and poorly implemented policies. Improved communications between plant personnel was

essential to establish linkage between best production practices and quality for inventory management. With

optimized inventory management and control, a host of problems faced earlier will be eliminated.

With improved collaboration, tighter controls could exist on raw material supplies order and release and the

resultant increase in costs and WIP would become non-existent. With adherence to best production practices,

the company can maintain a smaller inventory, reduce costs, and regulate production directly proportional to

meeting customer needs. The end result would culminate in a firmer control on production, inventory, and,

most importantly, the bottom line!

Summary

This procedure, although somewhat different from the normal methods of analysis, is so practical, that

it can be applied to any problem anywhere at any time. According to Goldratt [1992-b], you start with an

effect in reality, and then hypothesize a plausible cause for the existence of that effect. Since the aim is to

reveal the underlying causes that govern the entire subject, try to validate the hypothesis by predicting what

else this hypothesis must cause. Once such predictions are found, concentrate efforts to verify whether or not

each prediction holds water by asking questions. If it turns out that one of the predictions doesn't hold up, find

another hypothesis. If all of them hold up, continue until the entire subject is understood through the bonds of

cause and effect.

Bob Fox [1989], President of the Goldratt Institute, states: I do not believe any longer that the

challenge is the technology of what to do. That has been well developed - maybe not disseminated very well

yet, but developed. The issue is the resistance to change once we know what to do, and I believe there is a

solution to that. This method of problem solving requires ability that everyone has and stems from the

systematic methods and thinking processes. It provides you with the framework necessary to direct these

efforts and to verbalize your intuition to gain a better understanding of managements "intestinal sensations."

Everyone has self-doubt. This self-doubt makes it very difficult to use the scientific method of

analysis. Goldratt [1992-b] reveals, the scientific method involves reaching into the unknown; speculating a

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cause and determining predicted effects probably requires an awkward personality that thrives on the

unknown. But we are dealing with the known, with current reality. There must be an equivalent method, a

thinking process that facilitates building a current reality tree within the known, and we can effectively use it

on any subject that we have intuition for and care about.

This cause and effect approach is used in many areas of Science and Mathematics. The demonstrated

thinking process is what managers need the most. To carry out a successful process of ongoing improvement

there is nothing more important than the ability to answer: “What to change?”, “What to change to?”, and

“How to cause the change?” The results are well worth the required investments.

References

Bates, K.A., Amudson, S.D., Schroeder, R.G., & Morris, W.T. (1995). “The crucial Interrelationship between
Manufacturing Strategy and Organizational Culture,” Management Science, Vol. 41, No. 10, (Oct), pp.1565-
1580.

Collins, G.C., DeVanna, M.A., & Sprague, L. “Operations Management, Productivity and Quality
Performance,” The Portable MBA (New York, NY. John Wiley & Sons, 1990).

Fox, Robert E., (1989), "The Constraint Theory," Internal working paper, Avraham Y. Goldratt Institute, New
Haven Connecticut.

Goldratt, E. M., (1992-a), "An Introduction to Theory Of Constraints: The Production

Approach," Avraham Y. Goldratt Institute.

Goldratt, E. M., (1992-b), "An Introduction to Theory of Constraints: THE GOAL APPROACH," Avraham Y.
Goldratt Institute.

Goldratt, E. M., (1993) "What Is The Theory Of Constraints?" APICS The Performance Advantage, June 1993.

Goldratt, E. M., (1994), It’s Not Luck. Massachusetts: North River Press.

Hopp, W.J., Spearman, M.L, & Zhang, R.Q. (1997). “Easily Implementable Inventory Control Problems,”
Operations Research, Vol. 45, No. 3, (May-June), pp.327-340.

Rack, K. (1992), Using the Theory of Constraints. (TOC) – The Systems Thinking Approach, Managing
Change, North River Press, Great Barrington, M.A.

ReVelle, J.B. (2002). Manufacturing Handbook of Best Practices, CRC Press.

Schonberger, R.J., & Schniederjans, M.J. (1984). “Reinventing Inventory Control,” Interfaces, Vol. 14, No. 3,
(May-June), pp.76-83.

Silver, E.A. (1981). “Operations Research in Inventory management: A Review and Critique,” Operations
Research, Vol. 29, No. 4, Operations Management (Jul-Aug., 1981), pp.628-645.

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Sox, C.R., Thomas, J.T., & McClain, J.O. (1997). “Coordinating Production and Inventory to Improve
Service,” Management Science, Vol. 43, No. 9, (Sep 1997), pp. 1189-1197.

Whitin, T.M. (1952). “Inventory Control in Theory and Practice,” The Quarterly Journal of Economics, Vol.
66, No. 4, (Nov 1952), pp.502-521.

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