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Radical Business Performance Improvement 13
Radical Business Performance Improvement 13
Radical Business Performance Improvement 13
Improvement
Sub Code 332
Developed by
Prof. Rajeev Athavale
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe 2. Dr. B.P. Sabale 3. Prof. Dr. Vijay Khole 4. Prof. Anuradha Deshmukh
Group Director Chancellor, D.Y. Patil University, Former Vice-Chancellor Former Director
Welingkar Institute of Navi Mumbai (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
ALL RIGHTS RESERVED. No part of this work covered by the copyright here on may be reproduced or used in any form or by any means – graphic,
electronic or mechanical, including photocopying, recording, taping, web distribution or information storage and retrieval systems – without the written
permission of the publisher.
IMPROVEMENT
IMPROVEMENT
Today, almost every company has embarked on some sort of improvement
program – often emphasizing the adoption of world-class methods. But
after achieving early success, many such programs run into a brick wall of
stagnation.
There are endless places that can be improved. Many local improvements
do not always improve the performance of the system as a whole.
Therefore, one must identify the elements in the system on which
improvement efforts should be focused. Such identification requires holistic
understanding.
IMPROVEMENT
Look at the organization that you are working for and write here the
Undesirable effects.
Aspect Undesirable Effect
In our example of Steel industry above, the UDEs are generally dealt with
the following initiatives:
Common Improvement
Aspect Undesirable Effect
Initiative
These improvement initiatives have very little to do with each other – they
are local and not holistic.
Is it effective to deal with each problem in isolation? Let us see what Steel
industry achieved by doing it this way.
IMPROVEMENT
Finished Goods
~ 250 thousand tons ~ 250 thousand tons
Inventory
Improvement programs based on the problems is one side of the coin. The
other side points us to the fact that a company must have a strategy in
place and it should strive to follow it.
IMPROVEMENT
Every company was built for a purpose; it was built to achieve something.
There is a goal. The strategy must show us how to reach the goal of the
company. If it does not show us how to achieve more of goal units, we can
safely conclude that it is a bad strategy; it could, at best, can be called
day-dreaming. The strategy must guarantee that there is no external limit
to Throughput so that the company can grow almost infinitely. It means
that the strategy should consider the changes that may happen in the
external world that may influence the success of the company and it should
show the way to rise above that.
Showing the direction to achieve more and more of its goal is the
necessary condition of a good strategy.
The competition is increasing year by year. You cannot survive unless you
improve continuously. This must be at the base of a strategy.
If your rate of improvement is slower than the competition, soon you will
find yourself out of business. The things that you do to improve the
business performance must create a decisive competitive edge which no
other competitor can copy in the short run and you keep getting benefit
out of it for a long time. In order to survive in business, you must improve
at much faster rate. This is represented by the green curve in the figure
below:
6
IMPROVEMENT
It is just not enough to have fast growth. If we talk only about growth, we
are missing something important. There is another version of the above
figure. In the diagram shown below, you will observe that the red curve
represents growth and the green curve represents stability. Business needs
both – high growth rate in their profits and at the same time stability in
their processes. This is important.
IMPROVEMENT
People need stability. If we are making changes in our policies every now
and then, there will be a huge amount of confusion amongst people. In
order to make it sure that people understand the business well and they
are clear about the expectations from them and they know how the top
management works – i.e., what type of management philosophy they
follow — it is essential that there is absolute clarity about how the
company intends to grow. If people are aware of the strategy of the
company and they see the logic and continuity of the policies, they will
have stability.
The need is for a reliable and robust process, that organizations could
count on, to bring them to be “ever flourishing.”
The red curve represents the profitable growth that nearly all top
managers and owners desire. The green curve represents the stability –
the strength of a company that is secure and sustainable. An “ever
flourishing” company is a company that achieves both the ongoing growth
in profits indicated by the red curve, while at the same time strengthening
its stability, as represented by the green curve.
IMPROVEMENT
There is yet another version of the Green and Red Curve as depicted in the
figure below:
You need a bigger and stronger base for a higher jump in performance.
Stability, as represented by the green curve, provides provide it. However,
you also need harmony along with stability. So, the stability of processes
along with harmony with people provides much bigger and stronger base
for the business. The bigger and stronger base enables higher and higher
jumps in their performance, i.e., Radical Business Performance
Improvement.
The level of improvement we need is not 10% or 20%. Not even 100%. We
need an order of magnitude; say 10 times. Is it easy? Of course, not. Can
it be done? The typical answer is “Impossible”!
Japan has showed us this in the area of quality. Earlier, the quality
improvement was measured in terms of percentage, i.e., how many parts
are scrapped per hundred parts. Japan brought about so much
improvement in quality that now the measurement has changed. It is no
more “parts per hundred”. It has changed to “parts per million”. Such an
order of magnitude!
IMPROVEMENT
and then sustained? Can we really have waves after waves of Radical
Business Performance Improvement?
If any solution, that does not meet these criteria, is not a good solution.
10
IMPROVEMENT
TOC considers that in order to succeed in business, one must ensure that
not only there is a win for the company; but there is a win for its
employees and its customers/suppliers also.
There are several risks in a business. Any new initiative has some risks and
one needs to consider the impact of such risks before embarking on it.
TOC solutions are based on “Cause and Effect”. They make it sure
beforehand that the desired effect is achieved by analyzing the current
situation in a systematic way and then finding and applying the solution.
It is said that our today’s problems arise from our yesterday’s solutions.
TOC takes cognizance of that and provides ways to identify the possible
negative effects of the new solution and paves the way to take suitable
actions in order to prevent them.
This way, TOC minimizes the risks while maximizing the gains.
Dr. Goldratt believed, the more complex the business is, the simpler must
be the solution.
Human mind tends to make things complex. TOC believes that every
system has an inherent simplicity and TOC strives to identify it and then
apply its solutions.
So, the solutions suggested by TOC are far simpler than the ones we
typically do today.
11
IMPROVEMENT
When implementing TOC, it is important for the business and for the
people to see some significant improvements quickly. Typically, improved
results are seen in a few months, if not in a few weeks.
This helps the management and the people to come on board and start
following TOC more rigorously and in order to gain better and better
results.
It would be difficult to sustain any initiative that takes years to show some
benefits. By nature, TOC is able to show significant improvement in profits
in the short run as well as in the long run.
It does happen that by applying TOC your business starts growing rapidly.
You reduce your inventory and lead time and start to win more customer
orders. This may cause a chaos on the shop floor because you may
suddenly find lots of work. This could start deteriorating customer service,
quality and degrade due date performance. Eventually, you may lose your
customers and your business may ruin.
It has certain steps, that when followed give tremendous results. They give
a major leap in the performance by removing the obstacles.
12
IMPROVEMENT
TOC, when followed correctly, meets all the above-mentioned criteria and
is a great tool to bring about radical improvement in business performance.
TOC paves the way for an excellent business strategy and focused
improvements that lead to radical business process improvement.
In this book, let us unleash the basic concepts of this theory and judge it
for ourselves.
13
PREFACE
PREFACE
I am very happy to present this book to the students of Welingkar Institute
of Management Development and Research. I am hopeful that this book
will open up a new way of running organizations for you. I do not know
whether any of you is a CEO; but I assume that I am sharing this
knowledge with a fairly young and bright people who have the potential of
being CEOs. While wishing you good luck in your career, I would like to
contribute it in a small way by presenting this book.
Let me be honest. I did not write this book during last few months. I have
been writing this book over a decade! No, I did not thought of it then. I
have been studying TOC for so many years. During this period, I read
several books, articles, papers etc. I visited several websites and gained
knowledge about TOC. There are some discussion groups on LinkedIn and
Yahoo TOC group that helped me to understand it better.
During this period, I had developed a habit of taking notes and since I had
a computer, I wrote the notes on computer and saved them in various files.
These notes were not summaries, but were something that I wanted to
revisit, remember and imbibe on my mind. I felt that it may not be feasible
to read these books again and again (though I did read many of these
books several times later), so I thought it prudent to save my take-away
from these books. TOC was something new to me and the thoughts
presented were counter-intuitive though very logical. It was possible that
due to my day-to-day chores, I could forget the principles. So, these
thoughts prompted me to write notes. Unfortunately, there was no
discipline that I followed in writing those notes. I created several folders
and several files and noted what I liked from time to time. I also created
some training material and conducted training programs. I collocated and
organized these notes for this as well as for the books that I have already
published. I am thankful to Welingkar Institute of Management
Development and Research for causing me to look through my notes and
various resources I had and produce this book.
14
PREFACE
By sheer accident, I came across the famous book “The Goal” written by
Dr. Goldratt and that changed my life. I went on reading Dr. Goldratt’s next
book “It’s Not Luck” and thereafter I read all his books. I also read the TOC
related books written by authors like Eli Schragenheim, William Dettmer,
Oded Cohen, Thomas Corbett, Eric Noreen, Debra Smith, James T. Mackey,
Gerald Kendall, John Ricketts… These books have influenced my thinking. I
am thankful to these authors.
I am also thankful to Andrew Kay, Bob Sproull, Chad Smith, Clarke Ching,
Danilo Serias, Dr. Alan Barnard, Dr. James Holt, Dr. Kelvyn Youngman, Dr.
Lisa Lang, Etienne Du Plooy, Henry Camp, Jack Vinson, Jim Bowles, John
Loucks, John Sambrook, Justin Roff-Marsh, Larry Leach, Manoj Agarwal,
Mark Woeppel, Philip Marris, Ravi Gilani, Rob Newbold, Rudy Burkhard,
Sanjay Ghoshal, Steven Balderstone, Ted Hutchin, Tim Sullivan, Tony
Rizzo, Todd Williams, Vicky Mabin and several others (pardon me, if I have
missed some names). Most of them are my contacts on LinkedIn or
members of TOC Yahoo groups. Various posts by these people, the
documents shared by them and their websites have inspired and enabled
me to learn more.
Apart from his books, I must mention that, Dr. Goldratt’s creations “TOC
15
PREFACE
Self Learning Program (SLP)” and “TOC Insights” have taught me the most
and have greatest influence on me and I referred to these resources
several times and almost every time I learned something.
So, coming back to the writing of this book too, these resources were very
useful. I had created several notes while studying TOC using all these
resources. That helped me to write the book.
If you get passionate about TOC, all credit should go to Dr. Goldratt. If,
however, you do not understand it well by reading this book, please don’t
blame the theory, assume that it’s my failure.
Last but not the least, I am thankful to Luís Cristóvão from Portugal who
helped me by reviewing this book. Luís meticulously went through the
whole book, read everything line by line very patiently and proposed very
useful corrections. And he did this within the time I needed. I have no
words to express my sense of gratitude. Thank you Luís.
Rajeev Athavale
16
He is the author of some underground best seller books that utilize a non-
traditional approach to convey important business information.
17
He obtained his Bachelor of Science degree from Tel Aviv University and his
Masters of Science, and Doctorate of Philosophy from Bar-Ilan University.
In addition to his pioneering work in Business Management and Education,
he holds patents in a number of areas ranging from medical devices to drip
irrigation to temperature sensors.
18
CONTENTS
Contents
Chapter No. Chapter Name Page No.
19
Chapter 1
WHAT IS THEORY OF CONSTRAINTS (TOC)?
Objectives
Structure
1.1 Introduction
1.12 Summary
20
1.1 INTRODUCTION
TOC gets its name from the fact that all organizations are constrained by
something. If they weren’t, they would grow infinitely. But that’s not the
reality and thus gets its name from the central role that constraints play in
determining the achievement of what the organizations desire.
TOC provides a set of holistic processes and rules, all based on systems
approach that exploits the inherent simplicity within complex systems,
through focusing on the Leverage Points, as a way to synchronize the parts
to achieve ongoing improvement in the performance of the system as a
whole.
With the aid of TOC, management is able to identify the few significant
factors that limit the performance of their organization. Addressing these
limiting factors in a systematic manner will yield significant improvements
in profitability.
21
In simple language, TOC is about putting more money in your pocket now
and even more money in your pockets in the future (we assume, of course,
an ethical behaviour).
• By exploring the idea that every business system has a weakest link.
• By turning the weakest link into a leverage point for increased
throughput by applying a rigorous "cause and effect" approach.
There is and always will be limiting factors that work to prevent the
achievement of success. If you don’t manage these limiting factors, they
will most definitely manage you.
If you don’t learn to manage them, some limiting factors also have the
ability to bring you to your knees.
After more than 30 years of development and evolution, TOC has grown
into the following areas:
22
TOC knowledge has been developed for the following business areas:
• Operation
• Project management
• Distribution and Supply Chain
• Finance and Measurements
• Sales
• Marketing
• Managing People
23
Thinking Processes
Assumption #1
Everything within a system is connected by cause and effect relationships.
Identification of the causes leads us to converge onto an apparent core
problem/contradiction/conflict/ dilemma.
Assumption #2
All contradictions can be resolved without compromise – our level of
understanding and our assumptions hold the contradiction in place. A
compromise is not usually a win-win solution.
Assumption #3
There is no resistance to improvement – people do not embrace change
because we have not brought them to see how they can win.
What is Paradigm?
“We don’t believe what we see, we see what we believe” – that’s what the
paradigms are about. Paradigms are sets of concepts, beliefs, patterns or
assumptions which form the basis of all the decisions. It is the way we look
at the things.
Paradigms are frame of references we use to “see” the world and make
decisions. Paradigms let through data that match our “expectations” and
block data that don’t. What may be impossible to do with one paradigm
may be easy to do with another.
24
Paradigms are necessary for helping us to achieve both survival and growth
but they have the potential of limiting our performance and creating
conflicts too. Let’s have look at them:
• Constraints
25
• Complexity
• Conflicts
• Uncertainty
• Bad Behavior
❖ Limiting Paradigm – This paradigm tells us that some people are just bad
by nature and we must get rid of them.
26
The essence of what TOC provides is the same essence as the scientific
method provides. It enables the identification of the failure and the
establishment of a new paradigm. Unfortunately, this could be a slow and
painful process for those who are entrenched in the abilities of the old
paradigm and have too much to lose to give it up.
TOC guides to identify the area where one needs to focus. There are
several challenges that businesses face every day. Trying to deal with all of
them is an exhausting, time- consuming and futile exercise. TOC helps to
identify and prioritize the actions that are needed so as to get maximum
benefit to the business quickly.
There are many interruptions in operations that cause delays and other
problems. Generally, there are long queues and work-in-progress
accumulates at various points and waits for the machine or material or
some processed material to be available etc. This interrupts the flow. It is
observed that the touch time in manufacturing environment is about 10%.
It means about 90% time is spent on wait and queue.
TOC provides a systematic way to identify and prioritize the causes of such
delays and helps in streamlining and improving the flow substantially.
27
system. Consequently, the system’s output must be optimal and not that of
individual processes.
But this is not true. Any one part of the system depends on the
performance of one or more parts of the rest of the system. Also, there is a
statistical variation that affects each part of the system independently.
These variations get compounded at organization level.
28
Chain Analogy
This means that strengthening any link in the chain except the weakest link
does nothing to improve the strength of the whole chain. Strengthening
the weakest link causes an immediate increase in the strength of the whole
chain.
This idea has very deep implications for managers. If only a very few
variables determine system performance, the complexity of managers’ jobs
is reduced substantially. Pareto rule suggests that only 20 per cent of a
system accounts for 80 per cent of the problems within it. If this is a valid
conclusion, managers should be able to concentrate most of their attention
on that critical 20 per cent. But even this could be too large!
29
Dr. Goldratt’s concept of chains and “weakest links” takes the Pareto
concept a step further, rather much further: the weakest link accounts for
99 per cent of the success or failure of a system to progress toward its
goal.
Any organization has a set of departments that need to work for the overall
objective of the organization as a whole. However, at any given point of
time, only a very few variables truly determine the performance of the
organization as a whole.
Conventional Wisdom
30
TOC Wisdom
“Cent, plus a cent, plus…” Dr. Goldratt once said, “You can accumulate
huge wealth. But there is another way. Archimedes was the first to
articulate it”.
Dr. Goldratt continued, “He said, give me a leverage point and I will move
the earth!”
Similarly, rather than reducing cost everywhere, the wise thing would be to
find a leverage point in an organization that will take it to much higher
level of performance.
Most improvements to most links do NOT improve the chain. System wide,
or "global" improvement, then is NOT the sum of the local improvements.
The way to improve the organization is definitely not through inducing
many local improvements. Thus, a company should focus on "chain
strength" (not link weight) by working to strengthen the weakest link – the
constraint!
When the whole system is dependent upon the cooperation of all elements,
the weakest link determines the strength of the chain.
The excess capacity at some links is of little value since there is usually
some other factor that prevents links from functioning at maximum
capacity.
31
Look at the figure 1.2 below. The size of the links shows the relative
strength. The smallest one in the diagram is the one that can be identified
as the weakest link and hence as the constraint.
“It is not enough to do your best; you must know what to do, and THEN do
your best.”
— Deming.
TOC shows us the way to identify the weakest link so that we can focus on
improving it to get the maximum benefit out of the system – the place
where to do our best.
Conclusion
32
A goal implies referencing the current state against a desired future state,
and taking deliberate action to move in the direction of the goal.
Organizations are not built for the sake of it; they are built for a purpose.
Thus, whenever we debate any action in any section of any organization,
the only way to hold a logical discussion is by judging the impact of the
action on the overall purpose.
33
In light of this, think of the statement: “Our goal is to provide the best
quality products coupled with the best customer service”. Such a company
probably has very unique shareholders. The shareholders have apparently
invested their money in the company so that they can brag at a cocktail
party that their company provides the best customer service. Actually, you
need to ask the next question: “What is the purpose that you will achieve
by giving the best customer service?” then probably you will get the
correct answer.
The shareholders would appear to be power maniacs if they say that their
goal is to become number one; they are going to capture the largest
market share.
If a company has even one share traded in stock market, the goal is loud
and clear. We invest our money in order to make more money now as well
as in the future. Then what is the goal?
It is just not enough to define the goal. The goal needs to be achieved
under certain well accepted necessary conditions.
There are certain entities around that have the power to ruin or severely
damage the organization. They can do that if they dislike some aspects of
the organization’s behavior.
The way out of this situation is to distinguish clearly between the goal and
the necessary conditions. The organization should strive to meet its goal
34
within the boundaries imposed by the power groups, striving to fulfill its
purpose without violating any of the externally imposed necessary
conditions.
But certainly, customers do not have the right to dictate or even interfere
in what should be our organization’s goal.
Necessary conditions differ from the goal. Generally, the goal is worded as
something infinite. It usually has no limit; it’s normally worded in such a
way that it’s not likely ever to be fully realized.
However, the necessary conditions are more finite. For example, a for-
profit organization might want to make as much money as it can without
setting any limit. But employee security and satisfaction, as necessary
conditions, should be established at a well-defined minimum level. A for-
profit company’s goal can’t expect to satisfy its employees without limit,
but the organization needs to recognize the necessity of achieving a certain
level of employee security and satisfaction as one minimum requirement
for achieving the goal.
35
People often confuse among necessary conditions, the means and the goal.
Such confusion often leads to misdirection and long-term destruction of the
company. Customer service, product quality, good human relationships etc.
are definitely necessary conditions, sometimes even means. But they are
not the goal. The employees of the company should serve the shareholders
– that’s what they are getting paid for. Serving clients is just a means to
the real task, serving company’s shareholders.
TOC recognizes that only the “owners” of a company can choose the goal.
However, once chosen, the other two become necessary conditions to
achieving the goal.
That is…
• Likewise, if your goal is to provide secure and satisfying jobs, you also
have to make money and satisfy your customers... or you won’t be in
business in the future!
The owners have the choice to choose any of the three as the goal of their
organization.
So, the goal of a typical for-profit organization is “to make more money
now as well as in the future” and the necessary conditions are:
36
Once the goal is identified, the next crucial need for success in achieving
the goal is to identify which measurements will be used to judge success.
“Tell me how you measure me and I’ll tell you how I’ll behave!”
“Tell me how you'll measure me, and I'll tell you what damned stupid
things I'll do to make the measurement look good”
“If my Performance Measurements are not clear, even I will not know how I
will behave!”
Measurements are a direct result of the chosen goal. There is no way that
we can define measurements before the goal is defined. For commercial
organizations, we judge the performance by the financial statement. Net
profit is an absolute measurement. But is this measurement by itself
sufficient? If a company made $10 million net profit, is that good or bad? If
they had invested $20 million, it’s quite good. But if the investment were
$200 million, it’s lousy.
37
However, we need the measurements that will tell us the impact of the
local decisions on the goal. We need measurements which express the goal
of making money perfectly well, but which also permit us to develop
operational rules to carry out our day-to-day work.
38
The cost concepts and cost procedures are the current bridge between our
actions and the bottom-line measurements, but is this bridge taking us in
the right direction?
39
5% 2% $30,000 $20,000 Do
2% 1% $10,000 $20,000 Indifferent
1% 0.5% $5,000 $20,000 Do Not Do
How can we hope to reach a quality level of parts per million scrap when
the cost bridge already blocks us around 1% level? We know that when we
produce defective parts we don’t just scrap material and labor, we are also
scrapping our market.
It is obvious that we must look for a better bridge rather than “cost
savings” to guide us in our efforts to catch up.
“Enterprises are paid to create wealth, not control costs. But that obvious
fact is not reflected in traditional measurement.”
– Peter Drucker.
Fortunately, there is a widely used set of three measurements that are not
bottom-line measurements and not cost measurements but do help in
answering those questions.
40
For example, if a company sells a product for $100. Can we say that the
company generated $100? No. It might be that in the product sold there
are materials that were purchased from vendors for $30. This $30 was not
the money generated by our company but by vendors; this money just flew
through our system.
Throughput (T) = Sales Price – TVC, i.e., Truly Variable Costs such as Raw
Material Price, Subcontracting, Sales Commission, Custom Duties etc.
In the example above, it is the sales price, i.e., $100 minus the money
paid to the vendors $30 which generates T of $70.
Only the money generated by your system gets counted; i.e., raw
materials and purchased services (like heat treating) don’t count. Building
to stock does not generate throughput.
41
The dealers in most American and European companies hold about 90-day
supply of cars. These cars have been reported as sales by the car
companies. The dealers have actually purchased them.
The amazing fact is that, in most cases, the dealer has purchased the car
by borrowing the money from the car company and the collateral is just
the car itself!
When the dealer is stuck with a large stock when the model year changes,
who do you think gives the rebates? – Not the dealer!
As Dr. Goldratt said, “In a supply chain, nobody has sold anything until the
end consumer has bought it!”
Company ABC Corporation has $140 million sales, the majority coming
from its major product line P where they sell 10 million units per annum at
$10. Gross Earning for product P is 30%, material and purchases account
for 40% of sales. Installed line capacity for product line P is loaded to 75%
of max capacity. It is an automatic assembly line requiring no direct labor
— just operators to maintain the equipments.
Overall, ABC Corp is making a loss of 3.6 million per annum. The General
Manager has asked his first line managers to come up with ideas to turn
around the business or they will have to close the plant.
42
The Sales Director turns up with a business opportunity to sell 2 million per
annum more of product P (which is well within the available capacity). The
downside is that the price would be 40% below the going price – in other
words $6. As it is a segmented market, there is no fear that the price in
the main market will be affected.
Summary
Common business sense clearly says that we have to decline that business,
as it will drive us deeper into the losses.
Consequently, ABC Corp will go bankrupt, all jobs will be terminated and
the plant will be closed.
TOC Approach
43
Usually, this does not account for much and so we assume that 0.1 million
are sufficient to cover all our additional operating expenses.
------------------------------------------
There is no question! We have to take the business and ABC Inc. will be
out of the red immediately.
Investment (I)
Investment is all the money the system invests in purchasing things the
system intends to sell. It is the money tied up in the organization.
44
All the money the system spends to turn inventory into throughput is
Operating Expense. All expenses are lumped together and usually
considered as one big expense, e.g., all employee labor expenses are
almost always Operating Expense (direct, indirect, sick, operating, etc.).
Why do we differentiate people who are doing exactly the same task –
converting inventory into throughput, just because some of them happen
to touch the product?
45
What to Change?
It is situation assessment, description of "current reality," and identification
of the core problem or conflict and assumptions that sustain it – diagnosis.
If you ask this question to the people working in any organization, you will
get a long list of problems, only to realize that people are experts in
bitching and moaning! They are not wrong though, since most of them are
working in a department, they have the local view of the problems. Now, if
you have a long list of problems, you cannot possibly solve all of them
together, if you try using the conventional approach of addressing each
problem separately. Obviously, you need a mechanism to prioritize them
and then solve them in that sequence. However, what could be that
mechanism? TOC precisely provides such mechanism to determine what is
important for the organization and lets you to prioritize and focus on the
problems that are critical for the achievement of the goal of the
organization. TOC treats these problems as symptoms and gives the
necessary tools to identify the root cause.
46
Dr. Goldratt calls these "Undesirable Effects" or UDEs. The key is to realize
that the UDEs are not the "real" problem – they are only the visible effects
of the real or "core" problem. The challenge is to map out the interrelated
net of cause-and-effect that links the undesirable effects together. Once
completed, one is generally able to identify the "core problem".
Beware of the fact that our today’s problems have arisen out of our
yesterday’s solutions. So, it is possible that whatever solution that we may
implement today, may cause some problems in future. Fortunately, TOC
provides a way to identify such future problems and to amend solution to
ensure that they don’t arise.
The strategy is not complete until its all potential negative side-effects
have been identified and a means for preventing or mitigating each is
determined, becoming key elements of the strategy. Trimming these
negative side-effects allows an organization to intentionally and
47
If these questions aren’t answered frankly and effectively with the people
who must implement the change, and those who will be affected by it, the
proposed change will not have the buy-in and support to succeed, and like
most changes, will fall by the wayside and fail before it begins.
TOC Tools to answer these three questions are discussed separately in this
book.
48
1.12 SUMMARY
4. What is the typical goal of a for-profit organization and what are the
necessary conditions?
8. Explain “Give me a leverage point and I will move the earth” in terms of
organization’s performance.
i. Throughput refers to
a. Sales value less direct materials and direct labor costs.
b. Sales value less direct materials costs.
c. Sales value less variable cost of goods sold.
d. The cost of total production output.
e. The cost of good production output.
49
ii. Throughput is
a. The money flowing into the system.
b. The money flowing out of the system.
c. The money in the system.
d. Sales value.
e. None of these.
iii. Throughput is
a. Sales value less direct materials related to the units sold.
b. Money flowing into the system.
c. All the money in the system.
d. a. and b.
e. a. and c.
iv. Throughput is
a. Money generated by the company.
b. Sales.
c. Sales minus operating expense.
d. Sales minus inventory.
e. None of these.
50
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
51
FIVE FOCUSING STEPS
Chapter 2
FIVE FOCUSING STEPS
Objectives
Structure
2.1 Introduction
2.9 How Do You Know that You are Managing the Constraint?
2.10 Summary
52
2.1 INTRODUCTION
Once the goal and the necessary conditions are established, TOC prescribes
applying five “focusing steps” in order to continuously proceed inexorably
towards satisfying those necessary conditions. Dr. Goldratt created the five
focusing steps as a way of making sure the management “keeps its eye on
the ball” – what’s really important to success: the system constraint.
53
❖ Competence: People don’t have the skills (or skill levels) necessary to
perform at higher levels required to remain competitive. A competence
constraint occurs when an existing competence is used to its limit and
any improvement in that particular competence will result in more
profit.
• Policy: Any rule or business practice that inhibits progress toward the
system’s goal. Policy constraints are the most insidious of all because
almost every other type of constraint is the result of some policy.
NOTE: In most cases, a policy is most likely behind a constraint from any
of the above mentioned types.
All these types do not really apply to all types of systems. For example,
Material and supplier/vendor constraints might not apply to service
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Five Focusing Steps are at the heart of TOC and the various applications
are derived from them.
• You could compute the capacities of every machine and compare it with
the demand.
• You could just LOOK and see where the blockages are.
• You could ASK those smart ones who do the work. They have been there
for long and they know it.
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• The predicted market demand is more than what the chosen constraint
can produce.
56
If it can’t be easily broken, proceed to the second step. What should be our
next step? We have just identified the constraint. How should we manage
them? The intuitive response is to get rid of them.
But to get rid of a Constraint may take a lot of time. For example, if the
Constraint is in the market, to break this Constraint might take many
months, or years. Or, if the Constraint is a machine, and we have decided
to buy another one, the delivery time might be over six months.
What are we going to do meantime? Sit around and do nothing? That does
not seem like a good advice for a second step.
“Exploit” means to “get the most” out of the constraining element without
additional investment. In other words, change the way you operate so that
the maximum financial benefit is achieved from the constraining element.
For example, if the system Constraint is market demand (not enough
sales), it means catering to the market so as to win more sales. On the
other hand, if the Constraint is an internal resource, it means using that
resource in the best way to maximize its marginal contribution to profit.
This might mean process quality improvement, re-engineering the
workflow through the process, or changing the product mix.
Dr. Goldratt has carefully chosen the term “Exploit” which sounds
somewhat negative. Perhaps he chose such a harsh term just to convey
that we really need to extract maximum possible benefit out of the
constraint.
How should we manage the constraints, the things that we do not have
enough of? At least, let’s not waste them. Let’s squeeze the maximum out
of them. For example, let’s suppose that the Constraint is in the market
meaning there is enough capacity, but the market is not placing enough
orders with you. Then exploit the Constraint means delivering all orders –
100% on-time. Not 99%, one hundred per cent! If the market is the
constraint, let’s not waste anything.
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“Exploit” means
• Don’t spend Constraint time on things that will just be sent to the
warehouse.
• Don’t spend Constraint time on things that will be scraped (Do quality
checks before the constraint).
If we leave them alone, within a very short period of time they will stop
working properly, and their actual availability will shrink to the extent that
they will become constraints!
58
This does not happen on its own. We need to make it happen. Therefore,
the third step is: Subordinate everything else to the Constraint.
What is Subordination?
Subordination means:
• Avoiding the Constraint waiting for work. Making sure that the
Constraint’s time is protected with enough work. It does not starve or sit
idle for want of work.
• Offloading work from the Constraint. Often there is some work that can
be done by non-constraints. If you are able to identify such work and use
the Non-constraints (who by definition have more capacity) to do that, it
will free up some of the Constraint’s capacity which can be used to
produce more.
• Ensuring smooth work flow into the Constraint and avoiding unnecessary
build-up of work-in-process inventory.
59
This step is often skipped, and thereby the majority of financial benefit of
TOC is lost!
Every process has its objectives and Subordination actually redefines those
objectives so as to meet the overall goal of the organization. A process
exists not for itself but for the ultimate goal of the organization. Each
process is supposed to accomplish a mission that’s necessary for the
ultimate achievement of the goal. But among processes, there may be
conflicting priorities, such as competition for the same resources.
Subordinating Non-constraints actually focuses the efforts of every process
on truly supporting the goal of organization. It allows the Constraint to be
exploited in the best possible way.
60
Subordination serves to focus the efforts of the system on the things that
help it to maximize its current performance. Actions that contradict the
subordination rationale should be prevented.
It’s possible that, after completing the third step, the system constraint
might be broken. If so, it should be fairly obvious. Output at the system
level will usually take a positive jump, and some other part of the system
might start to look like a “bottleneck.” If this is the case, go back to the
first step and begin the Five Focusing Steps again. Identify which new
factor has become the system constraint, determine how best to exploit it
and subordinate everything else.
This is the toughest step because you must change your measurements/
culture.
This is the most important and the most difficult of the five focusing steps
to accomplish. Why is it so difficult?
Because -
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• It requires everyone and every part of the system not directly involved
with the Constraint to subordinate, or “put in second place,” their own
cherished success measures, efficiencies, and egos.
• Subordination formally relegates all parts of the system that are not
Constraint to the role of supporters of the Constraint. This can create
behavioral problems at almost all levels of the company.
• It is very difficult for most people to accept that they and their part of
the organization aren’t just as critical to the success of the system as any
other. Consequently, most people at non-constraints will resist doing the
things necessary to subordinate the rest of the system to the constraint.
Subordination simply means that every decision made and every action
taken by the entire organization must be done so based on its impact on
the constraining resource.
Examples:
• Accounting must
• Purchasing must
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• Sales and Marketing must understand that unless and until the current
Constraint is broken, they must not make hollow promises on delivery
dates in order to obtain more orders to supplement their sales
commissions.
• Maintenance must always prioritize their work based upon the needs of
the constraining operation including preventive and reactive maintenance
activities.
63
When the 2nd and 3rd steps are complete and we still have a constraint;
that is the time to move to the fourth step.
However, if, after completing Step 3, the original constraint is still the
System constraint, at this point the best you can be assured of is that
you’re wringing as much productivity out of it as possible – it’s not possible
for the system to perform any better than it is without additional
management action.
In taking this action, it’s necessary to proceed to the fourth step to obtain
better performance from the system.
Some typical alternatives for doing this might be to acquire more machines
or people, or to add overtime or shifts until all 24 hours of the day are
used.
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• Improving Quality after the Constraint so that the parts processed by the
Constraint are not scrapped.
Remember, there is more than one way to elevate the Constraint. Some
alternatives are less expensive than others. Some alternatives are more
attractive for reasons that can’t be measured directly in financial terms
(easier to manage, for example).
• Typically, when you elevate the Constraint and you do not intend to move
it to some other resource, you need to increase the protective capacity of
other resources.
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• This is the time when you may decide to choose some other resource as
constraint.
One of the reasons to favor one elevation alternative over another is the
identity of the next potential constraint. Constraints don’t “go away,” per
se.
It’s also possible that different alternatives might drive the system
constraint to different locations – one of which might be preferable to the
other. Or it could be that dealing with the potential new constraint might
require a much longer lead time than breaking the current constraint. In
this case, if we decide to break the current constraint, we would want to
get a “head start” on the tasks needed to exercise some control over the
new constraint.
• After you have elevated the current Constraint, determine where the
next Constraint would be.
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Do these steps for all the available alternatives. Once this is done, the
ramifications of each alternative to elevate should be obvious, and a
better-informed decision is possible about which alternative to choose.
By the fourth step, we have helped the company to move forward. Can we
stop here or must we add a fifth step?
The Constraint is broken. The performance of the company will rise, but
will it jump to infinity? Obviously not.
The fifth step is: If, in the previous step, a Constraint has been broken, Go
Back to step one. Do not let inertia to set – Don’t become complacent. Do
not let the policy to be the constraint.
What happens if you make the weakest link stronger and stronger? – Once
you solve your number one problem, number two gets promoted. The five
step focus is really the process of ongoing, continuous improvement.
Be careful of what you wish for. By applying these steps, you might get it,
too much, too soon. Surprisingly, companies that implement these steps
become complacent with the rapid and substantial results that they get and
let the inertia set in and do not go back to step one, thereby, miss on
further growth.
67
Even if the exploit and subordinate steps don’t break the system
constraint, the elevate step very likely will, unless a conscious decision is
made to curtail elevation actions short of that point. In either case, after
the subordinate or elevate steps it’s important to go back to the first step
(identify) to verify where the new system constraint is, or to determine
that is has not migrated away from the original location.
The warning about inertia says “Don’t become complacent.” There are two
reasons for this. First, when the Constraint moves, the actions or policies
we put into place to exploit and subordinate to the “old” constraint may no
longer be the best things to do for the benefit of the whole system. If we
don’t reevaluate where the new system constraint is, this deficiency would
never be noticed. Second, there is often a tendency to say, “Well, we’ve
solved that problem. There’s no need to revisit it again.” But today’s
solution eventually becomes tomorrow’s historical curiosity. An organization
that’s too lazy (or distracted by other demands for its attention) to revisit
old solutions can be sure that eventually – probably sooner, rather than
later – it won’t be getting the best possible performance from its system.
If you are suffering from “efficiency syndrome”, i.e., still your organization
is chasing efficiency at some (if not all) non-constraints, you may find that
the Constraint is moving from one place to other every now and then.
However, for some time, if you find that the Constraint is at the same
place, it would mean that you have correctly identified the Constraint and
that other parts of the business are taking actions to support maximizing
its performance. The "subordination" is successful.
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Time Management
• Do you feel that employees have control of their time or are they are
only reacting in a crisis? If you are managing your Constraint well, you
will find that your employees have a good control over their time and are
in a position to spend the time the way it is planned. There will be few
crises here and there but employee will find that to be more of an
exception.
• Can the (working) owners take time off, or do they feel compelled to
stay? Many times, it is seen that things do not work well if the working
owners are not around. They are required to be there to take every
decision and fight every fire. If you are managing your Constraint well,
you will find that a proper system is in place and the working owners do
not need to look into everything and they can afford to take a vacation.
Utilization
69
Improvement
Inventory
• Are inventories low? Do you rarely run out of stock, but come close to it?
Cash flow
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2.10 SUMMARY
The Five Focusing Steps and their iterations set the business performance
rolling (see the Figure 2.1 below).
• There are only few key points, in any system that needs continual close
attention.
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• Most of the data that we collect may not be critical and could only be
“noise” rather than “signal”.
• Most of the parts of the system have significant excess capacity (and that
is not a bad thing! In fact, it is necessary to have it).
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6. Why “elevate the Constraint” is the fourth step and not the second?
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i. Constraint is
a. It is producing at capacity.
b. When it is activated.
c. When it is producing throughput.
d. (a) and (b).
e. (a) and (c).
a. To maximize throughput.
b. To balance the flow of work.
c. To make money now and in the future.
d. To minimize inventory and operating expense.
e. None of the above.
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75
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
76
USING TOC FOR JUDGING VARIOUS ACTIONS AND DECISIONS
Chapter 3
USING TOC FOR JUDGING VARIOUS
ACTIONS AND DECISIONS
Objectives
Structure
3.1 Introduction
3.2 Measurements Drive Behavior
3.3 What Measurements Should Do?
3.4 Typical Judgments Provided by Finance
3.5 Judgment of the Performance of the System as a Whole
3.6 Judgment on Investment in Equipment
3.7 Make or Buy Judgment
3.8 Judgment of Sub-systems
3.9 Judgment of Product/Service Viability
3.10 Decision-making
3.11 Control Measurements
3.12 Summary
3.13 Self Assessment Questions
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3.1 INTRODUCTION
How do we judge any action or decision? The only way to call a judgment
good or bad is by measuring their impact on the organization and then
deciding whether it is good or bad.
In order to make sure every decision and action truly contributes to the
goal of the organization we must have goal measurements as guidelines
judging the impact of a local decision on the organization as a whole.
• Tell me how you measure me and I’ll tell you how I’ll behave!
• Tell me how you'll measure me, and I'll tell you what damned stupid
things I'll do to make the measurement look good!
• If my Performance Measurements are not clear, even I will not know how
I will behave!
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Examples:
It was revealed later that due to the problems caused by the new material,
the company lost $25 million!
And two is, judging major decisions and actions. These judgments are very
important since the actions based on these judgments can change the
future of the company. Also, the measurements set in determine the
behavior of the organization and therefore Dr. Goldratt said, “Tell me how
you measure me, and I’ll tell you how I will behave”.
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Dr. Goldratt believed that the major problem is not the timeliness or
accuracy; the major problem is that these judgments are based on wrong
measurements that lead to enormous distortions.
The main distortion that the financial measures cause in judging the
performance of the system as a whole is the way it treats inventory. Today,
it is very well known that inventory is a liability.
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With this, if you have more inventories, the overheads get distributed over
a bigger base causing less amount of apportionment to the Cost of Goods
Sold. When that happens, less amount of money is charged to P&L and the
net profit appears to be higher.
Conversely, if you reduce the inventory, it will provide a smaller base for
absorbing the overheads. In that case, the Cost of Goods Sold will have a
higher share of the overheads.
This is the conflict that you need to face because of the way Finance treats
inventory. Either way, you stand to lose.
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Let’s see the example given by Dr. Goldratt. Suppose you are incharge of a
company which makes a net profit $3 million. You have an inventory worth
$30 million in finished goods. The added value/cost allocations are worth
50% of the finished goods value.
Now, you decide to reduce the finished goods inventory. You reduce it to
say 50% and are still able to service your customer well. Your sales are
stable. In fact, you achieved the finished goods inventory reduction by
streamlining your operations to be more in line with sales.
What will be the impact on your financial statement? You have reduced the
inventory by $15 million. So, the cost of added value or cost allocations
which was accounted in this inventory will go to P & L A/c i.e., 50% of the
inventory value amounting to $7.5 million will be reduced from your
profits. So, your company which was making profit of $3 million will now
make a loss of $4.5 million!
The reality is that you have actually made the same amount of profit but
the way Finance treats inventory causes this distortion.
We calculate the time saved per part. If the machine produces different
parts and takes different amount of time, we take an average. So, let’s
assume that the average time saved per part is five minutes.
The next step that we follow is we calculate the annual saving in time. If
we are producing say 30,000 parts in a year, we will save 150,000 minutes
(30,000 parts * five minutes saved per part), i.e., 2500 hours in a year.
Then we translate the time saved per year into the money saved per year.
In our case, let’s say that the direct labor is $8 per hour and the overhead
factor is 4, then we calculate the cost per hour as $8 + ($8 * 4) = $40 per
hour.
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Then we apply it to the annual time saved as calculated above, i.e., 2500
hours multiplied by $40 = $100,000 per year.
Even if we discount it assuming that the numbers are not correct and say
that the Return of Investment is 2 years, the investment is justified.
Let us consider the following scenarios: There are only two scenarios –
either the equipment that we intend to buy is the Constraint or is a Non-
constraint.
Scenario 1
To begin with, let us take the most common scenario. Let us assume that
the equipment that we intend to buy is a non-constraint (since most
machines are non-constraints anyway).
The standard process followed with our example leads to the conclusion
that our Return on Investment is one year. Really?
No way!
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Scenario 2
The equipment we are considering to buy is the Constraint. We often avoid
purchasing equipment that will increase the capacity of the Constraint
because the investment seems unjustified.
Dr. Goldratt explained: Let’s assume that the equipment that we are
considering to buy is not twice as fast, but it is only faster by 10%. When it
was 100% faster, the Return on Investment as calculated by the standard
process was one year. Now the ROI will be ten years. The common process
of justifying investment will condemn such an investment.
Since the purchase will add capacity to the Constraint, the justification
should not be done by calculating the cost saving. It should be done by
looking at the additional sales.
Suppose the total sales of the company is $10 million and the raw material
cost is about 50% of the sales value, Even if the new equipment adds only
5% capacity to the Constraint it will add $500,000 per year to sales and
$250,000 to profit (5% 0f $10 million is $500,000 million and the variable
cost of 50% of the sales value, i.e., $250,000).
Raw material price is $5 per unit. Direct labor cost $10 per hour and the
time needed to produce one unit is 15 minutes. Hence, the direct labor
cost per unit is $2.5 per unit. Overhead factor is 4.
84
The internal cost is then compared with the external vendor’s price and the
decision is taken.
Scenario 1
The part that we are considering to outsource is processed by a non-
constraint.
In our example, the standard financial process leads to the conclusion that
our internal cost to produce the part is $17.50 per unit.
Therefore, if a vendor asks for $10 per part, most likely the decision will be
to buy the part, rather than making it internally, so that we save $7.50 per
unit.
Let us clearly understand that outsourcing a part will not reduce the
overheads in any way. On the contrary, it may even increase it.
It does not even reduce the direct labor (unless we fire them). Transferring
people from one department to another does not reduce the labor cost.
Rather than saving $7.50 per unit, we will increase our cost by $5 per unit!
Scenario 2
The part being considered for outsourcing is processed by the Constraint.
The existing make or buy judgment process often prevents outsourcing a
part even though it will significantly increase the profitability of the
company.
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Let say that your company’s sale per year is $10 million. The raw material
content is about 50% of the sales price.
Since Constraint is the resource that limits the sales, freeing 3% capacity
of the Constraint will help us have 3% more sales, i.e., 3% of $10 million
will be $300,000 per year.
Since the raw material cost is about 50%, this will enable us to add
$150,000 per year to the bottom-line.
Such a number can justify even a very high price for outsourcing.
Let’s say that the vendor charges $30 per unit. See the following
calculations:
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Despite the fact that even if the price is higher than the Product Cost,
many companies are losing money. The typical way to respond to this is to
say that the data used to calculate the Product Cost was not accurate. The
reality is that the problem is not in the data; the problem is in the concept
itself!
Do products or services have their own profit? Not really. Only an
organization has profit. We should never talk about product profit. What we
should examine is the impact of promoting a product/service on the
87
Let’s assume that we are running a company and our Plant produces two
products – Product P and Product Q.
Selling price for P is $90 and the selling price for Q is $100.
The market demand for P is 100 units per week and 50 units per week for
Q.
Product P
The price we pay for the purchased part is $5 per unit, while the price we
pay for the raw material is, in each case, $20 per unit.
The first material starts its journey through worker A and it takes 15
minutes to process one unit.
The first process of the second material is done by another type of worker
with skill B and it takes 15 minutes per unit for processing.
88
The second processing stage for both the parts is done by a third type of
worker, a worker with skill C. It takes him 10 minutes per unit to do the
first part, but only 5 minutes per unit for the second part.
In order to deliver one P and one Q, two units of the middle part are
necessary.
The purchase price of the raw material of the third part is $20 per unit.
89
Its first stage of processing is done by the same worker A, who does the
first part. It takes 10 minutes to process one unit of the third part. The
second process is done by worker B, the same worker B who did the first
stage on the second part and it takes him 15 minutes per unit.
The Operating Expenses are $6000 per week and it includes the salaries of
these workers, their fringe benefits, the salaries of foremen, the company’s
sales people, management, and the money that we pay to the utilities for
energy and to the banks for interest. All of it is included in the $6000. But
what is not included?
What is not included is the money that we pay to our vendors for materials
and purchased parts. This money is not operating expense, it is inventory.
90
Take the time now to try and solve the quiz on your own, before continuing
to read.
If we work through this step by step, then the first step is to determine the
contribution, or margin, or as we have called it here – throughput. See
Table 3.1 below.
This is sales price less material costs and for P this is $90 minus $45 =
$45. For Q, it is $100 minus $40 = $60.
91
But let’s check things first. Let’s check that we have enough capacity to
undertake the supply that we committed to.
In order to do this, we must check that the total amount of time required
for each resource does not exceed the total amount of time available.
92
Let’s tabulate that data as shown in Table 3.2 below, so that it is a little
clearer.
Table 3.2: Check the Calculation
Product P Q
Weekly Demand 100 50
Selling Price 90 100
Materials 45 40
Throughput 45 60
Units Supplied 100 50 Req. Avail.
Resource A 15 10 2000 2400
Resource B 15 30 3000 2400
Resource C 15 5 1750 2400
Resource D 15 5 1750 2400
Weekly Throughput 4500 3000
Weekly Operating
6000
Expense
Weekly Net Profit 1500
The problem now seems to be one of how to best maximize the capacity of
resource B and still derive a good profit at the end of the week.
It is now obvious that we cannot meet the market demand with the
capacity that we have. So, we need to decide the product mix, i.e., which
product to produce to its full demand and which product to produce in the
remaining time. Which product really deserves priority?
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Let’s apply these parameters to Product P and Product Q and see what
these parameters recommend. See the Figure 3.2 below:
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Well if you look at the bottom, you will notice that we are incurring a loss
of $300 per week!
Why did that happen? We did exactly the way it is done by Finance.
Before jumping to any conclusion, let’s try doing it the TOC way.
So, where is the Constraint in this process? Which resource is limiting our
ability to do more?
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So, what is the next step? Decide how to exploit the Constraint.
How much time the constraint (resource B) has to spend on each product?
Isn't the Throughput determined by resource B?
The Octane tells us that for every minute that the worker B spends on
Product P, we earn $3 whereas for every minute that the worker B spends
on Product Q, we earn $2!
Let us understand that the above calculation has nothing to do with the
cost. It is not another way to calculate the cost of a product or to do some
cost allocation.
Using Throughput per Constraint unit is the right way to determine which
product to promote. It leads to the product-mix that maximizes profit. It is
much easier to calculate.
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Product-mix Preferences
• Choose the product mix on the basis of T/CU, demand and other
considerations.
97
Let’s come back to our P and Q example. We exploited the Constraint fully
by keeping it busy. However, we overlooked the fact that we need to make
it work on more profitable product first. Now it is clear that Product P is
more profitable.
Which would you now choose as the product to push ahead of the other, P
or Q? P of course. Let’s do the calculation.
Let’s tabulate the result in Table 3.4 below, now fulfilling the market
demand for P of 100 units and then the remainder for product Q.
Weekly Operating
6000
Expense
Weekly Net Profit 300
98
Only by identifying and exploiting the constraint, see the big difference you
can make to your profits! From the loss of $300 per week, it is now profit
of $300 per week!!
The above discussion has made it clear that the distortions in the Finance
judgments in all the five cases stem from the mechanism of cost
allocations used as part of each of the five judgments.
Dr. Goldratt stated that there is an inherent conflict that causes people to
comply with such a distorting procedure.
The conflict stems from two fundamental needs that are essential for the
success of an organization.
There is a need to control costs (OE and I); otherwise the costs will go up
and soon it will go out of hands.
Unfortunately, Throughput and Costs are two different paradigms and they
are in conflict.
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The Cost follows additive rule, i.e., the cost of the organization is the
summation of the cost of all the sub-systems. Cost is drained at each
function.
In our Chain analogy, equivalent to cost is weight since it also obeys the
additive rule – the weight of the chain is equal to the weight of all its links.
Thus, the way to judge actions and decisions is according to their local
impact.
Thus, the “Cost World” paradigm dictates that in order to improve the
performance of a company (global optimum), we need to achieve local
improvements (local optima) everywhere.
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Thus, the way to judge decisions and actions is not according to their local
impact.
In a physical chain, reducing the weight of one link does not reduce the
weight of other links. In organizations, many times, actions or decisions
that reduce cost in one department cause an increase in cost in other
departments.
Some examples:
1. Saving on setup time. Many times, it takes very long to change setups.
In order to maximize the efficiency, departments tend to process large
batches. This is a local improvement. It saves the cost for the
department where it is done. Now, consider its impact on the next
department. Since the batches are larger, they take more time to
process. During that time, it is possible that the next department may
have to wait keeping its machines and people idle – a downtime. And
then once the batch is processed by the first department, they suddenly
find a lot of work and may have to spend on overtime. It may so happen
that during the day machines and people are sitting idle and then do
overtime in the evening. Thus, saving in one department can cause an
increase in cost in other departments.
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So, saving cost locally does not always translate to global improvement.
Every action and most decisions are local and we are warned not to judge
according to local impact. So, how should we judge an action or a decision?
What is the mechanism to judge local actions and decisions in line with
Throughput World paradigm?
The answer lies in the Throughput World paradigm that suggests striving to
make the chain stronger.
So, this takes us to the first step of the Five Focusing Steps: Identify the
System’s Constraint.
The strength of the chain is determined by the strength of its weakest link.
Therefore, the first step is always to find the weakest link.
After we have identified the Weakest Link, we should make it stronger. This
could be done by providing more of what is lacking or by better using what
is available. Since providing more, usually involves increase in cost, we
should make sure that the Constraint is exploited.
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Our decision to exploit the weakest link to its maximum capacity must be
backed up by the way we manage the other links. Otherwise we will not be
successful in implementing such decision.
Let’s go back to our example of product P and Q. What does it mean here?
Worker A seems to have lot of spare time; 600 minutes per week. Can we
utilize it to produce more? What will happen if we decide to do so?
We are not meeting the market demand for Product Q. So let’s our worker
A produce more. He takes 10 minutes each to process the first material for
products P and Q. If we use 600 minutes of worker A, he will process 30
units every week.
But what will happen? Because of our Constraint, these 30 units will never
be used and they will reside in our warehouse. The raw material for this
process costs us $20 per unit. It means it will lock $600 in inventory every
week! Very soon, we will have cash flow problem.
Don’t stop here. Having followed the first three steps, go to the step 4, i.e.,
(Evaluate various alternatives to) elevate the System’s Constraint.
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More Examples
Let us install a new machine that works at both A locations. Suppose such
a machine is available on rent for $100 per week. Let us further suppose
that it will save 5 minutes at each A operation.
It will saves (5 * 100 [time needed for P] + 5 * 30 [time needed for Q]) =
630 Minutes.
630 Minutes at $0.63 (labor cost per minute) = $400 saving in Operating
Expenses.
Really?
Did it go down?
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Let us add a machine for worker B, the Constraint. It only works at middle
B operation and costs $200 per week.
The saved time (2 * 130 [100 P and 30 Q]) = 260 minutes. This will
reduce the labor cost: 260 Minutes @ $0.63 = $165 whereas the rental is
$200.
Really?
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------------------------------------------------------------------------------------
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Let us purchase a pre-processed raw material for the price $5 per part to
eliminate left side process A. As shown in the figure, explain the process
for producing products P and Q. It will save 15 minutes per part.
Really?
Product O doesn’t flow through the constraint. Just uses the left side of the
plant A and C. It also uses $5 purchased part.
This is how our plant will look as shown in Figure 3.3 below:
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Let us say that the product O Sells for $40. Raw Material cost is $25.
Overhead is $15.75.
Really?
We can make lots of quantity of product O and sell them at anything above
$25.
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Hint: The capacity of resource B was 2400 minutes. In order to make all of
P and Q, we needed 3000 minutes from B. How many more units can we
produce and sell now?
Hint: Product P gives more Throughput per unit of Constraint time. We will
have to produce additional 10 units of product P at the expense of product
Q.
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Answer: All resources have enough capacity to meet the demand. We can
now meet the market demand for product Q also. We can now produce
additional 20 units of product Q. Product Q gives Throughput of $2 per
minute of resource B utilized for producing product Q. So, the ∆T =
20 units of product Q * ($2 Throughput per minute * 30 minutes per unit
needed by resource B) = $1200.
Answer: The Throughput gained for product P has increased by $2.50 per
unit. ∆T = 100 units * $2.50 = $250.
Hint: Does the added capacity of resource A enables us to produce and sell
more? What is the Constraint?
Don’t forget step 5: If in the previous steps, a Constraint has been broken
go back to Step 1 (Do not let the inertia to set in).
By strengthening the weakest link, we might reach a point where it is not
the weakest link any more. This does not mean that we now do not have
any weakest link. It only means that our location of the weakest link has
shifted.
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It also means that we now need to identify the new weakest link and
repeat the process through step 1 to 5 again and again. Constraints/
weakest links don’t go away. If one is broken, the next gets promoted.
3.10 DECISION-MAKING
• Will the decision result in a better use of Constraint? (i.e., more units of
product available to sell in the same or less time)
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111
T, I, OE and NP, ROI help us to judge the performance of the entire system,
no doubt.
First let us clarify what is meant by the word “control” – the word that may
be used differently. For instance, today when we refer to “inventory
control” we mean, assembling data that will tell us where inventory is
located and at what stage of processing it is.
Definition: Where things are versus where they were supposed to be.
Deviations
Things that were supposed to be done and nevertheless were not done.
Things that were not supposed to be done but nevertheless were done.
Measurements
• Throughput-Dollar-Days
• Inventory-Dollar-Days
• Local-Operating-Expense
Throughput-Dollar-Days (TDD)
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Suppose there are two managers and their Due Date performance is as
follows:
Manager A
He has delivered 20 orders during a month out of which one order was
late.
Manager B
He also delivered 20 orders during a month out of which four orders were
late.
How will you evaluate their performance? wait. Don’t give your answer
before asking for additional information.
Suppose the order delayed by Manager A was a big order in terms of value
and the orders delayed by Manager B were very small orders in terms of
value.
Suppose Manager A delayed the order by one day and this was acceptable
to the customer whereas Manager B delayed the orders by 20 days and the
customers were very unhappy about it.
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Suppose the order delayed by Manager A was a large quantity but low
value (and Throughput) order and the orders delayed by Manager B were
small quantity and their value (and Throughput) was much higher.
• Selling price
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Here is Table 3.5 showing the list of orders delayed for example:
This value is used for comparing the Due Date Performance over a period
of time. It is not used to judge the performance of any individual. It is used
to evaluate:
If there are multiple items in an order that was delayed, we take all those
items that were delayed, multiply by their price and then multiply them by
number of days delayed.
TDD drives behavior. TDD says, “Don’t miss a delivery (avoid failure). And,
if you do, fix it fast!”
Inventory-Dollar-Days (IDD)
This is a measure of the second type - things that we should not do but
were done nevertheless.
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Usually, it means that some products that are needed are totally missing
from finished goods inventory. In addition, out of the $10 million about $1
million is due to be shipped in next two days or so. Another $2 million is
due to be shipped during the next week and so on. It also means that we
have too much stock of some products. The last million are probably
obsolete.
The focus should be on the last 3 million. Perhaps the last million should be
written off.
These inventories are mainly the result of things that should not have been
done but were done nevertheless (probably in the attempt to increase local
efficiencies, reduce variances or to cover up for a drop in sales in some
previous period).
The time from when a client places an order, until he expects delivery of
the order is CTT.
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CTT may be dramatically different from product to product, e.g., when the
product is a jumbo jet, the airlines have a CTT of more than 3 years. But
when the product is a piece of soap our CTT is not much longer than 2
minutes.
Here is an example:
This value is used for comparing and understanding the changes in level of
inventory, over a period of time. It is not used to judge the performance of
any individual. It is used to evaluate:
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IDD drives behavior. IDD says, “Don’t let Inventory sit around idle in places
where it does no good. Quickly move it to where it protects TDD and then
reduce it both in quantity and in time held.”
Local-Operating-Expense
This is an expense over which the local area has full control. Do not
distinguish between direct workers, foreman and dedicated Process and
Maintenance engineers.
• Throughput
• Inventory
• Investment
• Profit = T – OE
• Return on Investment (or Inventory) = (T – OE)/I
• Productivity = T/OE
• Investment Turns = T/I
• Octane = T/Unit of Constraint Time
• Throughput-Dollar-Days
• Inventory-Dollar-Days
• Local-Operating-Expense
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3.12 SUMMARY
The Five Focusing Steps not only give a mechanism to judge how local
actions and decisions impact the global performance of the company, but
also gives a process of ongoing improvement.
• After you have exhausted all the means to increase T and reduce I, then
look for reducing OE.
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1. Compare:
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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
121
APPLYING TOC TO OPERATIONS/MANUFACTURING
Chapter 4
APPLYING TOC TO OPERATIONS/
MANUFACTURING
Objectives
Structure
4.9 Measurements
4.12 Summary
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Material should flow like brooks into streams and streams into rivers on
and on without dams or disruptions interrupting the flow.
1. Improve flow.
2. Prevent overproduction.
3. Abolish local efficiencies.
4. Have a way to systematically identify blockages and remove them
(Process of Ongoing Improvement).
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There are four basic types of work flows and they are:
The following naming conventions have been used in the Figure 4.1 below:
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For example, in the above diagram, the raw material after being processed
by D1 goes either to department D2 or department D3. If it goes to say
D2, it may go in any one of the streams D4, D6, D7 or D8 and so on.
Typically, the Constraint is at the bottom and may be with very long
running setups.
Many times, it makes sense to produce the most common parts to stock,
and the end products to order.
Industries like Steel, Metal, Plastics, and Paper have this kind of plant.
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The typical characteristic of “A” type plant is, many raw materials are
processed and assembled into relatively fewer end products. In the figure
above, you will notice that there is only one product that is produced by
using many raw materials. Different parts which are needed by the same
assembly are often produced by the same production department.
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• High inventories.
• Long lead times.
• Missing due dates.
• High level of expediting.
Merging orders to one batch cause huge delays and thus pressure to split
the orders is high.
The need for expediting is very high as compared to “V” type plant. Again,
“stealing” is a common phenomenon.
See the following Figure 4.3 below (FG stands for various Finished Goods
and RM stands for Raw Material).
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The typical characteristic of “T” type plant is, the structures combine an “I”
type (discussed below) or an “A” type structure for components and a clear
“V” for the final product. The huge variety is created by various
combinations (configurations) of components. Almost each manufactured
part is required by more than one assembly and almost each assembly
requires more than one manufactured part.
The ‘T’ plant combines the problems of both “I” and “V” plants such as
Synchronization problems and materials availability, stealing, etc.
The typical industries that have “T” type plant are Connectors, Faucets and
Cars.
Please see the Figure 4.4 below. Similar naming conventions have been
used as in the earlier figure.
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The typical industries that have “I” type plants are Bottling of Beer, Wines,
etc.
129
TOC approach suggests that the real cause is “the mode of managing
operations”. If this is true, the implication is you need courage and
consensus to change the mode of operations and if you have it, then you
can have a real jump in performance in a very short period of time by
focusing on lowering variability where it is necessary. For this purpose, a
holistic approach to the UDEs is necessary.
“Chain analogy” has shown us that change in one place has ramifications in
another; we need to look at the Cause and Effect relationship amongst the
UDEs to find out whether they arise from one core problem. If we establish
that they stem from one core problem, we will be able to devise a holistic
improvement initiative.
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Dr. Goldratt said: “In Steel industry ‘Tons produced per hour (Tons/Hour)’
is the prime measurement applied to all the departments. ‘Prime’
measurement means, ‘if you get it, you can get away with anything. If you
don’t get it, nothing else matters’. Departments try to maximize their
performance as measured by Tons/Hour, since most people behave in line
with the way they are measured”.
• in most departments, some items require less time per ton than others,
• The slow items get delayed. When this happens, the Due Date
performance goes down and more and more customers start
complaining.
If
• departments try to maximize their performance as measured by Tons/
Hour and,
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Then, departments tend to produce for stock even when there is no market
request for the short or medium horizon.
• This not only delay other orders but also increases the inventory and
payback period gets extended.
If
Then departments tend to pull ahead orders that enable increasing the
batch size.
• Orders go late.
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• Produce for stock even when there is no market request for the short
or medium horizon and
• Pull ahead orders that enable increasing the batch size and
• “V” type plant produces items that have many divergent points,
“Stealing” here means, using the parts produced for an order for another.
There are two needs to “manage well”. One is to “improve flow” and the
other is to “reduce waste”. Both the things – improving flow and reducing
133
waste – are essential and they are not in conflict. It is correct you need
both so that you can manage well.
On the other hand, people believe that if they find any resource sitting idle,
it is a significant waste. So, in order to reduce waste, we need to use
efficiency as the prime measurement, so as to ensure that resources stay
idle as little as possible.
So, typically, people have a compromise. People use efficiency but when
something is really urgent, they override it by expediting. This way, people
think that they get best of both the worlds!
However, compromise does not solve the conflict. The best compromise we
can find will only satisfy both the needs only to some extent.
If we want to improve the system we must find a better way to deal with
the conflict – not with a better compromise, but in a way which will
eliminate the conflict itself.
A good solution must remove the conflict by showing that one of the
requirements is not necessary. This can be done only by invalidating one of
the assumptions which makes the requirement necessary.
The conflict and the assumption are depicted in the Figure 4.5 below. It is
to be read from left to right as “In order to…”, “We must…”, i.e., “In order to
manage well, we must…”…
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One way to solve this conflict (and this way we “evaporate the cloud” or
eliminate the conflict) is by proving that this assumption is invalid, i.e., let
us prove that “a resource standing idle is NOT a waste”. Let’s further prove
that it is beneficial to take aggressive actions to stop resources from
working from time to time.
135
So, at the end of the day, we have accumulated the inventory of 80 units.
When will this inventory get consumed? Probably on the next day. So, let’s
continue.
It is apparent that every day we will add 80 units to the stock that will
never get consumed. This inventory will go out of the roof and one day,
you will decide to scrap it! So if we activate machine X to 100%, it will
generate more waste. Just the opposite of what we intended!
So, a resource standing idle is NOT a waste; the opposite is very likely to
be true.
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Let us see what happens when we try to activate even one resource to
100% by taking another example where there are say five resources.
Let us assume that there are five resources A, B, C, D and E and the work
flows through them in sequence as shown in the Figure 4.6 below:
Now let us consider that there is some interruption in the work of resource
B, i.e., the machine is down for some time. What is the impact on resource
C? The resource will also have to stop working until resource B is able
work. Similar thing can happen if resource A is down for some time. Hence,
resource C cannot work at 100% capacity if there are interruptions from
time to time.
The only way to constantly keep the resource C working is to create a bank
of work in front of it, so that it can continue to work by consuming the
bank of work even when the upstream resources are interrupted and are
not working for some time.
Once the disturbance has been overcome, all upstream resources will
rebuild the bank of work, while at the same time, continuing to supply
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work to resource C. They need to rebuild it before the resource C runs out
of work.
This is possible only if the upstream resources have more capacity than
resource C. We need this “protective capacity” so that resource C is
activated all the time.
Further, they need to rebuild the bank before there is another disturbance/
interruption. This means they must have considerable protective capacity.
Since they have much more capacity that resource C, they will create
mountains of inventory. Lead time will increase and we will have major
waste.
These two examples (there are many more) relate to an investment that
was consciously made – not in order to increase “productivity” – it was
made to protect “productivity”. So, in effect, the “system” accepts that in
order to protect its performance it must maintain some level of protective
capacity.
138
Conclusions:
• Sometimes, resources not standing idle are the major cause for waste. If
we wish to avoid waste, we should stop resources from overproducing,
when the bank of work is full.
• When the Constraint is outside the operations (i.e., not enough orders),
no resource can be utilized to 100%. Activating resources to 100% will
not make more money, but more inventories.
We removed the main block – the conflict. But this does not mean that we
have found a solution. How can we reduce waste and increase flow?
Therefore, Dr. Goldratt said, “An hour lost at the Constraint is an hour lost
to the entire system”. The lost hour is wasted. You can never recover it.
He also said that it will be correct to say “An hour saved at a non-
constraint is a mirage”. Since by definition, non-bottlenecks have more
capacity, trying to save time of a resource that already has spare time will
not gain any additional Throughput.
139
Dr. Goldratt said that in order to achieve this, we need to do the following:
140
• Also, Resource “B” is much less efficient – it will take twice as much time
to do this work.
• The sales are $5 million per year and the raw material content is 50% of
the sales price.
A. Never!
B. Three years.
If your answer is not “About two weeks” look at the following calculations:
Investment = $5,000.
ROI = ~ 2 weeks.
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We look for efficient resources. We are willing to pay more for such
resources and we believe it to be a good decision. However, Paying to have
a more efficient resource which is not a bottleneck is usually a waste.
Let us suppose that there is a proposal to add a new machine for resource
D in the example above. It will give us additional 50% capacity for
$100,000.
But resource D has ample protective capacity and we have “No layoffs”
policy.
142
Dr. Goldratt said this can cause considerable damage for the following
reasons:
• The Constraint may starve since it may not get the parts that it needs.
• The products thus produced may sit in our warehouse for a long time if
there is no market demand and later we may have to scrap it.
The current work ethics force people to “Look busy”. It demands that all
the resources should work as much as possible. Thus, the upstream
resources produce mountains of unneeded inventory.
They learn to slow down and after some time they become the Constraint.
This is very harmful for the company; but the current work ethics could
lead to such behaviors.
The new work ethic (TOC work ethic) suggests that resources need to
follow the Roadrunner rule:
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This work ethic resolves the problem faced by downstream resources. But
what will prevent upstream resources from building too much inventory?
To achieve this optimum flow, the entry of work orders into production is
synchronized with the current production rate of the Constraint.
Let us see the meaning of each of the terms, i.e., Drum, Buffer and Rope.
DRUM: The Drum is the Constraint (ideally beating to the pace of the
market demand), rather the schedule of the Constraint of the production
system. It is called a “Drum” because it establishes a pace, or frequency,
to which the whole organization synchronizes itself.
It means, if the Constraint works faster, i.e., the drum beats are fast or the
rhythm is fast, the whole organization runs faster and matches the speed
of the Constraint.
Conversely, if the Constraint slows down, i.e., if the drum beats are slow or
the rhythm is slow, again the whole organization slows down to match the
speed of the Constraint.
When you accept orders from your customers, you commit to supply a
certain product, in certain quantity, by certain date. Traditionally, people
release the material to the shop floor as early as possible, with the hope
that it will enable them to deliver as desired. If you also follow the suit, it
will be a sheer chance that you will keep your commitments without good
planning.
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We cannot process all the orders at the same time because we don’t have
infinite capacity. Which work center has the least capacity? Of course, the
Constraint. Thus, we should first schedule the Constraint considering its
limited capacity. Suppose that the Constraint processes one unit in 30
minutes. What could be the schedule of the bottleneck?
The list of work for the Constraint is called the Drum. It is called so
because all the resources should be managed so that the Constraint can be
utilized as much as possible. Therefore, the list of work for the Constraint
should be the drum beat dictating the pace of the entire operation.
The Drum is the means for exploiting the System’s Constraint. It dictates
the pace of the shop floor and matches it to the Constraint’s capabilities.
The actual Drum is the master production schedule. However, it is
recommended that one may not really make an exact schedule and leave
the same to the operators who know what should be sequenced after what.
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The Drum is the key for synchronization of the work of all other resources.
What are the considerations for sequencing the work at the Constraint?
• Which product requires more lead time from the Constraint until
shipping?
BUFFER: The Buffer is a time, rather than things or material. It is not the
stack of WIP waiting in front of the Constraint. It is the units of WIP
planned to arrive for processing some period of time before the Constraint
is scheduled to begin working on them.
We make sure that the right work is available for the Constraint by
releasing the respective material to operations enough Buffer time before it
is due to be worked on by the Constraint.
Any planning should contain buffers against the natural “noise” in the
system. Buffers should be accumulated and placed only in areas that are
truly critical. The System Constraints are the critical areas that need
protection from disruptions in non-critical areas.
146
The bigger the Buffer, the higher is the protection; but bigger the Buffer
the higher the inventory and lead time too. So, we need to carefully choose
the size of the Buffer.
147
Tying the Rope is the act of choking the release of material in accordance
with the Drum and the Buffer. Rope is the schedule for material release.
In our example above, the release schedule will be as shown in the Table
4.1 below:
Table 4.1: Release Schedule
Start Time at the
Product Material Release Time
Constraint
Should have been released
A 0.00 hours
already
Rope also implies that you should not release the work before the
schedule, even if there are work centers without any work.
When orders are released based on the Rope, then any order in the shop is
truly required within buffer time. This is not the situation in the vast
majority of the shop floors. Material is released whenever the gating
operation (the first operation to work on raw materials) has some spare
time. The belief is: early release improves the chance of delivering on time
and achieving better efficiency is also good.
148
DBR Assumptions
• Continuous flow at small batch sizes is better (faster, more flexible) than
large batches and queues.
• The output of the entire system can never exceed the capacity of the
Constraint.
• The net processing time of one unit of a product is very small compared
to the actual production lead time.
• Not all excess capacity in the system (e.g., at work resources other than
the Constraint) is really waste. Some extra (protective) capacity, or time,
is required everywhere—even at the Constraint—to offset disruptions to
flow that can’t be avoided.
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The best way to identify the Constraint is to go and ask the people who
suffer from its existence.
Caution: Under the current system, it would be difficult to get the correct
answer. No departmental manager will want to say that his department is
the Constraint and that he is the trouble-maker. No manager will also want
to say that he is not the Constraint and by that way, invite trouble by
admitting that he has excess capacity (and by saying that invite you to
trim it). Hence, we are not likely to get the correct answer.
Asking people at the higher level may also be futile since they are carried
away by efficiency paradigm and most likely they will debate amongst
themselves and never come to a conclusion.
The only person who would probably give you the right answer is the
expeditor. This person is the only one who is operating with orders in mind
and not the local efficiencies. Ask the expeditor as to which department he
needs to visit more often for expediting.
The expeditor may tell you that the Constraint is wandering, or the
management may give you several different answers. In such situation, act
as though there is no internal constraint. The current orders from the
market will serve as the Drum. DBR prevents the impact of local
efficiencies and oversizing of batches. The flow becomes smooth. If there is
a Constraint, it will reveal itself.
There are two ways to determine the size of the Buffer. One is to do
complex calculations. But the data may not be accurate.
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The best and easiest way to determine the size of the Buffer is to take the
existing lead time and cut it into half. Later, this size can be refined.
They will produce exactly what the Constraint needs in the exact sequence
without paying attention to their local efficiencies.
Generally, Support Functions do not participate in the flow of the work. So,
should we leave them alone? No. They play a crucial role for the
maintenance of the flow (like the resource fixing the machines etc.).
The work priority for Support Functions should be fixed based on the Drum.
For example, if there are two machines that need some servicing by the
same resource, the machine that is working on the parts needed by the
Drum earlier should be serviced first.
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Also, as the business continues, we may have to modify the Buffer size.
• If you are expediting much less than 5% of the work, the Buffer is too
big – you are wasting lead time and inventory.
• If you are expediting much more than 5% of the work, the Buffer is too
small – you are wasting efforts and risking Throughput.
• If you are expediting about 5% of the work, the Buffer size you have
chosen is just fine.
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Buffer is a liberal estimate, i.e., a fairly long estimate of the lead time
between two internal points.
The situation where an order is not at the protected site (i.e., the
Constraint or Assembly point or Shipping point), it is referred as a “hole” in
the buffer. There can be holes in any of the three zones. These holes can
153
Let us see how to deal with the “holes” in the buffers at various “Protected
sites” and when and what actions need to be taken.
Actions to be taken:
• A hole in Zone 3 means variation is cause for attention, but not action,
given that the order should be in the production process somewhere
(most likely it will be somewhere before the Constraint), but you don’t
need to worry about it. Material release should have taken place at the
beginning of Zone 3, and you might check to be sure that it really did
and there is no problem with the availability of the material itself.
• A hole in Zone 2 (Yellow zone) results from normal process variation and
is cause for attention, but not action, given that the material has already
been released and is somewhere before the Constraint.
• A hole in Zone 1 (Red zone) indicates a serious problem with the order.
Only holes in Zone 1 trigger corrective action, usually expediting,
because only a short time remains to bring the order in on time. Zone 1
(Red zone) orders can be considered as potentially late orders.
You need to try and finish the processing within the Buffer Time so that the
Assembly Buffer is not penetrated.
Actions to be taken:
• A hole in Zone 3 (Green zone) means that the order should either been
processed already by the Constraint or being processed by the
Constraint. You don’t need to worry about it. You might check to be sure
that the order is likely to be processed by the Constraint soon.
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• A hole in Zone 2 (Yellow zone) results from normal process variation and
is cause for attention, but not action provided that the order has been
processed by the Constraint. If the order has not been processed by the
Constraint, it means, the Constraint Buffer has been exhausted and the
Assembly Buffer has been penetrated. It may call for urgent action.
• A hole in Zone 1 (Red zone) indicates a serious problem with the order.
Only holes in Zone 1 trigger corrective action, usually expediting,
because only a short time remains to bring the order in on time. Zone 1
orders are likely to be late.
You need to try and finish the processing within the Buffer Time so that the
Shipping Buffer is not penetrated.
Actions to be taken:
• A hole in Zone 3 (Green zone) means that the order should either been
processed already by the Assembly operation or being processed by it.
You don’t need to worry about it. You might check to be sure that the
order is likely to be processed by the Assembly soon.
• A hole in Zone 2 (Yellow zone) results from normal process variation and
is cause for attention, but not action provided the Assembly operation
has been done for the order. If the order has not been processed by the
Assembly operation, it means, the Assembly Buffer has been exhausted
and the Shipping Buffer has been penetrated. It may call for urgent
action.
• A hole in Zone 1 (Red zone) indicates a serious problem with the order.
Only holes in Zone 1 trigger corrective action, usually expediting,
because only a short time remains to bring the order in on time. Zone 1
orders are considered to be almost late.
You need to try and finish the processing within the Buffer Time so that the
order is not delivered late.
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You will find that the Buffer Management actions are almost the same and
they differ only to a small extent. At any given time, you need to monitor
only one Buffer for an order.
The kernel of the idea behind buffer management is to monitor the cases
when the protection mechanism is nearly exhausted!
Look for the following signals from the Buffer Management System:
• An early indication of the hole in Zone 3 (Green zone). This will not only
tell you that the order is likely to be late, but will also leave sufficient
time for you to expedite.
• If there are more than one order in Zone 1 (Red zone) at a time is an
indication that the system is destabilizing. If there is only one order in
Zone 1 (Red zone) at a time, but it happens many times during a short
period, the system is still likely to be destabilizing. Examine the load on
the whole system and decide what actions to take to restabilize the
production system.
• Many orders penetrating in Zone 1 (Red zone) also indicates that a new
Constraint may be emerging. Investigate in to the case and take suitable
action.
At any given point of time, orders will be in one of the three buffers
depending upon the stage of the orders. You need to check the relevant
buffer zone and decide whether it warrants action or not.
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Generally, market is the real constraint. Of course, from time to time, there
could be some fluctuations in the demand and when the demand is at its
peak, you may find that some resources are capacity constrained, though
temporarily. Identify such Capacity Constrained Resources (CCR). Typically,
the CCR is the internal constraint that you identified while implementing
DBR.
But, by and large, you may find that the market is the real constraint and
you generally have more capacity, most of the time, than what the market
is demanding.
If this is the case, you can move to SDBR. SDBR has only one buffer –
Shipping Buffer. The Shipping Buffer is the only Buffer and it encompasses
the entire production time plus the required pad for uncertainty and
variation. There is no “Zone 2 (Yellow zone)” in SDBR – Just a “Green”
zone and “Red” zone and they are not in exact proportion. The Green zone
is larger.
You need to release the Material Shipping Buffer time ahead of the delivery
due date. For example, if the due date of an order is say 25th March, and
the Shipping Buffer time (i.e., the liberal estimate of time that you would
need to complete the order) is 14 day, subtract 14 working days from 25th
March to arrive at the material release date and release the material on
that date – not before, not after.
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Refine the Quoted Lead Time based on the current load on the CCR so that
the CCR doesn’t get overloaded. Verify the CCR regularly. Any significant
change in demand has a high probability of shifting the location of the CCR.
You need to frequently review the size of the Shipping Buffer. Products with
very different production routings may need different sizes of Shipping
Buffers. The Shipping Buffer depends on the excess capacity (i.e., more
excess capacity, smaller the Shipping Buffer and less excess capacity,
larger Shipping Buffers). Since excess capacity varies over time, it is
necessary to check the adequacy of the Shipping Buffer regularly.
4.9 MEASUREMENTS
• Throughput,
• Inventory,
• Operating Expenses,
• Throughput-Dollar-Days,
• Inventory-Dollar-Days,
• Productivity.
• Inventory Turns.
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• Find out and record the events when the work bank has gone below
2/3rd of the size and why. Take suitable action, as necessary.
Every month, compare this data with the previous period and establish the
cause and effect relationship by identifying the actions that you took and
the effects caused by such actions. Share this information with your
people.
Success
Upstream resources will occasionally be idle – have less than full utilization
– so they won't overwhelm the constraint with work. And downstream
resources will likewise occasionally be idle because they're waiting for the
constraint to complete its step. But if all goes well, the constraint itself will
have consistently high utilization, excess WIP will disappear, and more
orders will ship on time.
A good implementation of DBR system will cut the lead time and improve
on-time deliveries. Due to the drastically improved service to the market,
an increase in sales can be expected.
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The Danger
Even a modest increase in sales drastically reduces the protective capacity
of non-constraints. Not having sufficient protective capacity will cause
shortage in the bank of work.
The Defeat
Shortage in the bank of work will deteriorate due date performance and
thus deterioration of service to the market. A market that has been
“spoiled” by very good service overreacts to the deterioration in service
levels. The result might be a net decrease in sales.
The goal of the organization is not zero inventories. The damage caused by
not delivering on-time dwarfs the damage that is caused by a modest
increase in inventory.
At the end of the month, we should summarize the data check where we
had to expedite the most. This is the place where we should focus our
efforts to improve the local efficiency.
Dr. Goldratt has elaborated the role inventory plays in business and what
impact it has on competitive edge.
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The same pattern holds true for price also. The company with highest
margins (lowest cost) will have more flexibility on pricing. Lower
investment per unit also gives a competitive edge since it has lower break-
even point.
Responsiveness also has similar two parts. Better due date performance
gives an excellent competitive edge. Shorter quoted lead times increases
responsiveness and gains competitive edge.
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Management now has time and ability to find and eliminate the cause of
the problem.
How can it be that Inventory has an impact even here? Let’s see.
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challenge. You already have lots of WIP on the shop floor and generally it
cannot be used for the new product/model or you may have to carry out
huge amount of rework. You need to take a decision to get rid of it (by
scrapping). Otherwise, the implementation of engineering changes may get
delayed.
Also, you are likely to have Finished Goods in your stock as well as in the
market, i.e., in your distribution chain and it is very likely that once you
announce the new product/model, it will be very difficult to sell the existing
stock. You may have to get rid of it by offering a high discount. Otherwise,
introducing new product/model may get delayed. The market need remains
unfulfilled for a significant amount of time and there is a risk that your
competitive edge may be lost.
Low inventory environment: It will be easy for you to deal with the WIP
since the quantity involved is relatively small. The rework is not likely to be
significant. Even if you have to scrap the WIP, it may have a small financial
impact.
You are likely to have very little Finished Goods inventory with you and in
the market and it will be comparatively easy to sell it quickly with or
without discount. Even if it is sold with discount, the impact will be small.
So, the new product/model can be launched quickly and thereby gain the
competitive edge.
Increase in sales and market share as the superior product will be available
without competition for a significant period.
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In this situation, you are under pressure and are forced to spend more on
overtime, outsourcing etc. So, it increases your operating expenses and
thus reduces the margins.
Even the liberal doses of overtime are insufficient to handle the load. This
causes the purchase of even more excess capacity. More investment per
unit - causing loss of competitive edge.
We are able to manage with the existing capacity and there is no need to
invest more.
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This causes lower investment per unit which gains a competitive edge.
Common Complaints
• We miss due dates because our customers are constantly changing their
minds!
Almost every company has a forecast of demand which is quite reliable for
some period of time into the future, and then the validity of the forecast
drastically deteriorates within a short period of time.
It’s no wonder that due date performance is a problem where we have high
inventory. When we operate in lower inventory mode than our competitors,
we enjoy an enviable position that gives us an inherently more accurate
forecast. Therefore, our due date performance is much better.
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When the client is pressed for time, we can even offer it for free and it will
not help us to get the order if the Quoted Lead Time is longer than the
client’s need.
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4.12 SUMMARY
DBR gets its name from the roles that specific elements play during
scheduling and management of production.
To appreciate those roles, it helps to know the problems DBR was originally
intended to solve.
Thus, a third problem is that it is hard to predict when each job will be
completed. Once jobs are released into the shop, they are hard to control.
Some jobs may finish early, but too many jobs finish late, which leads to
customer dissatisfaction and missed sales. So as production slows, jobs
may be started earlier, thereby further increasing WIP, slowing production,
and perpetuating the push cycle.
Work also gets pushed into and through the factory by the desire for high
utilization, a measure of how long each machine and each worker are
actually performing tasks in the production process. The underlying
assumption is that anything less than high utilization on every machine and
every worker represents a lost opportunity for production.
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In DBR system, the Drum sets the pace and the rest of the organization
dances on the Drum beat, i.e., moves faster or slower with the Drum going
faster or slower.
A likely place to see WIP is ahead of the constraint, because it can produce
less than any other step, by definition. Therefore, that WIP is sometimes
mistaken for the buffer, but the drum buffer is actually all work scheduled
on the constraint, even if it is currently at an earlier step. That is, the
buffer is measured in time, not physical WIP units.
If all jobs ahead of the constraint are early or on schedule, the amount of
work needed to keep the constraint busy is adequate, and the buffer is said
to be in the green zone. However, when some jobs are behind schedule
and the possibility that the constraint could run out of work becomes
significant, the buffer is in the yellow zone.
Because normal variation causes some jobs to run early at the same time
that others run late, it is possible that the constraint won't actually run out
of work. Hence, a yellow buffer does not automatically trigger action.
However, when many jobs are behind schedule and it becomes clear that
the constraint will indeed run out of work without action, the buffer is in
the red zone.
Upstream steps then have to sprint to refill the buffer, and thereby keep
the constraint busy, while downstream steps may have to sprint to finish
late jobs on time.
In addition to the drum buffer, which contains WIP, the shipping buffer
contains Finished Goods. Because the market is the ultimate pacesetter,
the shipping buffer protects customers from late delivery, just as the drum
buffer protects the constraint from overloading.
The third and final element of DBR is the ropes, which govern when gating
events occur. The shipping rope governs work on the constraint needed to
meet market demand and keep the shipping buffer green. The constraint
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rope governs the release of raw materials to start new jobs that should
keep the drum buffer green.
Under DBR, jobs are released much closer to their due date than in
traditional manufacturing because they will spend less time waiting
between steps. Like the buffer, the length of ropes is measured in time.
The benefits of DBR are substantial. One literature review found the
following average improvements across 82 companies:
Because the market is the key driver of DBR, how demand ripples back
through the distribution chain from customers to factory affects DBR. This
connection leads to the next TOC application.
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2. List the various types of plants and describe the typical problems faced
by them.
3. What are the common problems faced by operations? What is the cause
of their existence? Why?
iii. An hour lost at the constraint is an hour lost to the entire system and
an hour saved at a non-constraint is a mirage.
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v. The rope:
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b. Authorizes production.
c. Protects the pace.
d. Sets the pace.
e. None of these.
a. In the warehouse.
b. Downstream from the drum.
c. Upstream from the rope.
d. Upstream from the drum.
e. Downstream from the rope.
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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
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USING TOC TO IMPROVE DISTRIBUTION SYSTEM
Chapter 5
USING TOC TO IMPROVE DISTRIBUTION
SYSTEM
Objectives
Structure
5.1 Introduction
5.2 Background
5.3 Characteristics of a Distribution System
5.4 The Problem
5.5 Replenishment Time
5.6 The Conflict
5.7 Batching and its Ramifications
5.8 Five Focusing Steps
5.9 Solution
5.10 How to Make the Solution Work?
5.11 Next Step
5.12 Buffer Management
5.13 Procedures for Retail Stores
5.14 Setting Good Criteria for Variety Decisions
5.15 The New Mantras
5.16 Operational Measurements
5.17 Advantages of TOC’s Distribution Solution
5.18 Summary
5.19 Self Assessment Questions
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5.1 INTRODUCTION
How much is the cost of the drugs, medicines? Isn’t it about 30% of the
money spent on Healthcare industry? If Distribution is not done correctly,
will it not bring the industry on its knee?
It is just not that you are impacted by Distribution but you can impact
Distribution too. This is irrespective of whether you are the first in the
Supply Chain, or second or somewhere in the middle or end; you can and
should impact the Supply Chain.
5.2 BACKGROUND
At the beginning of the year, we have our annual forecast. We make our
Sales and Marketing department to work hard, carry out surveys, use
software tools etc. and produce a highly reliable forecast.
Usually, the forecast is done for the existing markets as well as for new
markets that you want to target. The forecast is broken down to regions,
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towns, areas, months and weeks etc. This is done for every product and
our plan is in place. This plan is the basis of all our actions during the year.
Sales people are given targets accordingly. Factory is supplied with the
forecast and asked to produce according the plan. Even the Purchase
Department gears itself to procure the material keeping in mind this plan.
The Factory produces according to the plan and pushes the products to the
market. If there are distributors involved, the products are dumped on
them and they in turn try to do the same thing with Retail Stores. It is
Push, Push, Push, all the way. After all, we believe that more the stock
near the customer, better the chance of sale.
However, the market demand fluctuates and sales do not happen as per
the detailed plan. Nevertheless, the Factory continues to produce according
to the plan given to them (after all, they are measured on that) and keeps
pushing the products. As a result, the distributors and retailers have some
products in excess whereas some products in short supply. We are amazed
to know that the products which are in excess in some places are exactly
the same products that are not available in other places. We wonder why
this happens since we never exceeded the “Max Level” of stock at any
location and we placed orders as soon as we reached “Re-order Level” of
stock. Many sales opportunities are lost due to shortages – which are
actually in surplus elsewhere. Lots of cash is tied up in surplus products
and lots of cash is spent on cross-shipments. At the same time, lots of
money is lost due to shortages and we do not have even a fair estimate of
such a loss.
We take feedback from the market. We pull up our Sales people for not
meeting their targets. We revise our plan considering what happened since
we last planned. We revise the targets for Sales people. We incentivize
them. We pull up the Factory people since we found some gaps between
the plan and what they actually produced.
Now Sales people are more determined to meet their targets. They start
pushing hard. Factory people are more determined to produce exactly as
per the plan.
For some time, we find that the sales are growing. However, after some
time, we start seeing the same old problems all over again.
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We find more and more inventory everywhere but despite that, we have
more and more shortages everywhere. Now, we have more problems with
the Retail Stores who have started demanding more margins and more
credit period. We have a tough time with our suppliers for paying them as
per our commitments. When we want to introduce new products/models,
we have to incur a big loss by scrapping a huge quantity of the old
product/models or get rid of them by offering a deep discount. At times,
we wait till the existing stock is exhausted before introducing new products
and then we find that we are late in the market.
Despite all our sincere efforts, our customers are dissatisfied with us – our
products and their availability. We have more problems within our
organization – people start finger pointing to save their skin, to justify the
missed target. The Sales people blame the Distributors; Distributors blame
both – Sales people as well as Factory. The Factory people blame
Purchasing people for late procurement and Distributors for urgent orders,
so on and so forth.
Once again, we investigate, find the culprits and punish them. We once
again go back to the drawing board and have fresh forecasts and the
vicious cycle – the negative loop continues…
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• The consumption locations are away from the location where we produce
our products.
• The time that we take to make our product available at the point of
consumption is longer than the tolerance time of our customers. For
example, what is the amount of time you are willing to wait to buy soap
or a toothpaste? Perhaps a minute or so? What will you do if you don’t
get it in a Retail Store when you need it? Perhaps you may never visit
that Retail Store again!
• When the customer tolerance time is much shorter than the time it takes
to make the product available at the point of consumption, it becomes
obvious that we need to hold inventories close to the point of
consumption so that we can make use of the business opportunity.
However, when you look at the details, you find that there are some items
that are totally missing. And there are some items we have so much that
they will even be enough for your grandchildren!
• Generally, we have one of more factories of our own. We may also have
some suppliers who supply certain products. We may have a combination
of the two or we may have any one of the two.
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This is a typical push behavior: pushing the products to the market in order
to feed consumption in time.
The first fact is that the narrower the aggregation, the worse the answer
becomes. It means that the question of "how much will be sold from the
product overall?" will yield a much better answer than the question: "How
much will we sell from the product at this specific location?"
This phenomenon stems from the fact that fluctuations average out on the
aggregated events (assuming they are independent events). If we predict
the sales at 100 different locations, we might get an answer that sales in
an average location will range from 10 to 25 units a day. If we ask the
same question on the overall quantity that we need to manufacture, we will
get a much more accurate answer – probably something like ranging from
1650 to 1850.
If we would just take the lows and highs of each consumption point and
aggregate them, we will get a much worse answer – from 1000 to 2500.
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fairly large number of Retail Stores, while others will be left with a lot of
stock they can't sell. The fact that we got an aggregated sum does not
mean that it can be applied to the points that make out this sum.
Another problem is that no forecasting model can take into account sudden
change in consumption patterns. In today's dynamic market, such events
are becoming quite frequent.
Let us try to determine how much inventory we need to hold at the selling
point. Let’s look at an example given by Dr. Goldratt.
So, how much inventory will you keep so that you can deliver the product
to your customer when they ask for it?
The answer is obvious. You will keep one month’s inventory. But then you
need some inventory on the way since it takes so much time from placing
the order and receiving it. So how much inventory should be on the way?
Another month’s inventory. Right?
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So, you have two month’s inventory – one month’s inventory in hand and
one month’s inventory on the way. Now, you believe that you can service
your customer whenever he wants.
Now, look at this. What does “Average one month” means? It is not exact
one month but there is a variation. We all know it. It means sometimes it
will take less than one month and sometimes it will take more than one
month. What happens if it takes more than a month to receive the
product? If the factory has some more important orders in hand, it may
delay your order. It could take two months or even more. If customers
come, you are unable to service them. Also, if some customers demand
more than the average, you do not have enough inventories to meet this
increase in demand and your customer service is jeopardized.
So, what do you propose to do to protect your sales? Obviously, you will
want to keep two month’s inventory in hand and two month’s inventory on
the way. It doesn’t sound to be a great idea, but nevertheless, you will
keep four month’s inventory – two months of inventory in hand and two
months of inventory on the way – in order to protect your sales.
Now, look at the transportation time. It is not uncommon to see that the
transport is not available when needed or a truck carrying products for you
gets stuck on the way or they are simply late etc. etc.
This will jeopardize your customer service. You will want to be paranoid
and will keep three months of inventory in hand and three months of
inventory on the way.
And what if the shelf life of the products is six months or less?
In this example, we considered only one product. What if you have several
products and the market demand is fluctuating over a period of time and
the reliability of different suppliers is different?
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How does the Replenishment Time impact the level of inventory – at the
selling point as well as on the way?
For that, we need to understand the different elements that comprise the
Replenishment Time as explained by Dr. Goldratt:
• Order Lead Time (OLT) – This is the time it takes from the moment a
unit is consumed until an order is issued to replenish it. In other words,
this is the frequency of ordering of the same product. It is the time until
an order is placed for replenishment or the time difference between two
orders.
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At our Factory, we club all the orders and batch them together and produce
them. It takes an average of a month. So, our Production Lead Time is 30
days.
This means, if the Retail Store places an order today, it is likely to receive
the delivery after about two months.
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time etc. At times, we take much longer. This could get even longer if the
Retail Store has ordered multiple products.
Even though we have produced the products, unless we have a full truck
load going to the area where the Retail Store is located, we do not deliver.
The unreliability factor is 1 when the Retail Store always gets the products
within the agreed time, i.e., two months in our example. So, considering
the past experience, the Retail Store easily considers the Unreliability
Factor. Let us say to be 2.
So, while placing the order, the Retail Store needs to forecast as to how
much inventories it will need in order to protect the sales during next 120
days, i.e., the Replenishment Time (60 days as calculated above multiplied
by the unreliability factor of 2).
The Retail Store knows that there are days when nothing is sold, there are
other days when some sale happens and there are yet other days when
there is a lot of sales. So, the Retail Store considers all that, gets
somewhat paranoid and places an order of 600 units.
However, we also need to reduce cost and therefore we must hold fewer
inventories because more inventories mean more investment, more limits
on cash flow and more obsolescence.
Any level of inventory you may choose will turn out to be unsatisfactory
compromise.
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Read the diagram from left to right. Read it with “In order to… we must…”.
This is shown below the Figure 5.1.
Can we invalidate any of the assumptions shown in the above diagram? Let
us consider:
186
Let us look at the way the Distribution business happens and see if we can
invalidate some of the assumptions.
187
Let us look at the Retail Stores. They are ordering according to their
forecast. If they need to hold three month’s inventory, it means what they
order now is likely to get sold after three months. Do they really know
what they are going to sell after three months or so? What is the level of
accuracy of such forecasts?
If the Retail Stores have estimated too high, the inventory will accumulate
at the Retail Stores. They will have too much of inventory. At the same
time, some other Retail Stores may have guessed it to be too less, they will
have too little inventory.
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are not enough inventories causing orders on the factory to produce more.
And this demand from the Retail Stores is urgent since they don’t have the
inventories. So the factory is, all the time, under pressure even the total
amount of inventory is enough or bigger than what is really needed.
This becomes such a big problem because we prevent a smooth flow of our
products. According to Dr. Goldratt, the biggest reason that prevents flow
is “batching”.
One batching is done at the Retail Store’s level and there are three reasons
for that:
• We don’t want to forecast every day because we don’t have time for it.
So, we issue orders once in two weeks or even once in a month. When
they do that, they have already done batching.
So, we batch a whole truck, a whole train and sometimes a huge shipment
in a ship. A huge amount of batching.
The factory receives many urgent orders. They have setups. They have
efficiency measures. They batch the various orders to save their setup time
and have better efficiency.
These are the three places where batching is done at a mammoth scale
and that prevent the smooth flow.
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• High investment,
• High obsolescence.
Now, let us look again the conflict that we discussed earlier. It showed us
that in order to protect sales, we must hold high inventories because:
If we are able invalidate any one of the above, we probably can services
our clients with much less inventories.
Let us walk through the first three steps of Five Focusing Steps:
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Identify “the thing” if you have more of it, you would have more
Throughput, you would have sold more. If you are under Distribution
system and you have plenty of right inventories, what is “the thing” that if
you had more, definitely you would have got more Throughput? What is
the Constraint of a Distribution system?
Many times, one has to look for a Constraint; it appears that everything is
a Constraint. People find it difficult to identify a physical constraint.
The second step is to “exploit” it, don’t waste it. If a client has entered to
buy, sell him – sell him what he wants or find something that he would
want to buy. But how? What does it take to “exploit the Constraint”? In our
case, it means you must hold the right inventory, at the right place, at the
right time – is the way to exploit the Constraint.
Easier said than done! It is not easy to determine what is meant by right
inventory – how do you answer the question “how much inventories of
different products should be held so that we can always satisfy our client
who has come to buy?”
Since the answer is not simple, people believe in “more the merrier” which
turns out to be a disaster, eventually.
If you don’t hold the right inventory at the right place, the client that
comes in to buy will say “Sorry” and maybe he will not visit you again.
The timing is also important. There are seasons and there are peaks and if
right inventories are not in place, we end up in losing sales.
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Not being able to satisfy a customer who comes to buy, is the opposite of
“exploit”. How many times have you gone to a Retail Store, liked a pair of
shoes and had to leave the Retail Store without buying it since the shoes
that you liked are not available in your size?
5.9 SOLUTION
Let's look at the Retail Store and the different entities operating in this
environment.
• Fast Moving Items – These items are sold very fast, enabling the
retailer to reach high inventory turns.
• Slow Moving Items – These items are items the retailer just can't get
rid of – items which are running very slowly with low inventory turns.
• Regular Running items – These items do not fit the above categories.
What is bound to happen with the Fast Moving items? By definition, the
market demand is high for them relative to the amount of inventory we
keep from them. Therefore, they are the ones most likely to be sold out. If
we go to a retailer and ask him how many shortages he experiences, the
most likely answer would be: very few, maybe 2-3%.
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There is a lot of misconception here – since if we'll ask him: let us say we
stand outside your store and ask people whether they found what they
were looking for – in how many cases will we get an answer of "no" even
though you're supposed to carry what they were looking for? The most
probable answer would be: OK – probably 10-15%.
A very interesting factor comes into play when analyzing those missing
items. The 10-15% consists of mainly the Fast Moving items! If the retailer
would have known these items would be sold so quickly, he would have
bought a whole lot more. Therefore, the amount of lost sales he
experiences is far more than the 10-15% he will actually admit to! This is
true especially in the fashion business. Goods are bought by the retailers
once for the whole season. Therefore, the fastest running items will be
missing almost throughout the season! For example, an item which sells so
fast that the entire inventory is consumed in 2 weeks in an 8 week’s
season has lost sales of 3 times as much as was kept of it!
The other side of the coin is the Slow Moving items. These items are not
sold as the retailer had envisioned when he bought them, otherwise he
would have avoided them. The phenomenon that happens here is absurd –
the retailer will invest a lot of efforts to sell these Slow Moving items and
block his display space at the expense of the other items in the Retail
Store! This behavior, while expected from the psychological side, is
counter-intuitive in the business sense – huge efforts that will be invested
by the shopkeeper to sell the Slow Moving items could have yielded much
higher revenues from the Fast Moving items or Regular Running items.
Some industries have adopted even phrasings to hide the fact they are
operating in a counter-intuitive way, because they have become desperate
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trying to solve these problems. The industry glorifies the stock-outs of Fast
Moving items (in TOC it is called lost sales) by calling them "sold out"! The
industry simply ignores the Slow Moving items phenomena by marking
them as "on sale" and investing huge efforts in selling them.
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What is the level of accuracy of the forecast at Retail Store level? In one
week, they may not be able to sell a single item of a product and in the
next week, they may sell 10 items. The variability is too high.
It means the accuracy of the forecast at the RDC is far better than the
accuracy of the forecast at Retail Stores. The accuracy of the forecast
improves at the square root of the number that you aggregate. It means if
a RDC is supplying to 100 Retail Stores, its level of accuracy of forecast at
RDC is 10 times better than the accuracy of forecast at Retail Store level.
The same thing is true when we are going from the RDCs to the Factory.
The demand from the Factory is the aggregated consumption of all the
Retail Stores it feeds. Statistical fluctuations average out. The relative
variability of demand at the Factory is far too smaller than that at the
Retail Stores.
Now, we realize that the more reliable places in the Distribution system are
the supply points; the further from the end consumptions, the more
reliable the forecast.
What will happen if, against all instincts, we hold most inventories NOT at
the points of consumption but at the source of supply, i.e., Factory? As Dr.
Goldratt said, “If you want to service your customers better, hold
inventories away from them!”
Let’s suppose that we will hold the inventory at the point where the
accuracy of the forecast is very high. The most accurate point in the
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system is at the source, i.e., at the Factory – that is where we have the
biggest aggregation.
Let’s hold inventory there. Let us call it Plant Warehouse or rather Central
Distribution Center (CDC). Usually, it does not exist, because you produce
and you ship it immediately. This is because when you ship, it looks like
you sold! (“Tell me how you will measure me, I will tell you how I will
behave!” … Dr. Goldratt). If at all it exists, it is filled with unused WIP – the
WIP for which you are not able to find market.
• The variability of demand at the CDC is much smaller than the variability
of demand at the RDCs. So lower the variability, lower the “maximum
forecasted consumption within the Replenishment Time”.
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If you hold the inventories of all the products at the CDC, what is the
Replenishment Time from the CDC to RDC?
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Now, what is the Replenishment Time from the RDC to Retail Stores? A day
or two? Certainly not months anymore! Because, most of the time they will
have what the Retail Stores ask.
What we have done is, we are now holding all the inventories at the CDC
and thereby have decoupled the Production Lead Time for Replenishment
to our RDCs.
Now, if we do the same thing at the RDCs, we will cut the Replenishment
Lead Time from the RDC to Retail Stores not by factor of 2 or 3 but much
more.
Suppose our Replenishment Time from the RDC to Retail Stores was 30
days. Now, we can replenish the Retail Stores within one day. So, we have
cut the Replenishment Time by a factor of 30!
There is much more than this. If we can guarantee that all the products are
available at the CDC, then we can also guarantee that they are made
available at RDCs too. In turn, we can guarantee the Retail Stores to have
whatever products that they want.
All this is done very quickly by simply holding inventories at the point of
aggregation, i.e., CDCs and RDCs.
By doing this, we have not only cut the Replenishment Time and level of
inventories but we have increased the reliability drastically. We have
reduced the unreliability only to the function of transportation rather than
the unreliability of production and vendors to the production (which is
causing the majority of the problems).
Now, the question is: how much inventories we should hold everywhere
and how much in the system?
That’s not difficult to figure out. Let us look at the formula again.
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Replenishment Time between the Factory to CDC is not small; let us say it
is two weeks. Here, you need to consider the paranoid consumption of the
whole country. That is not small and you need to multiply it by the factor
that would cover the variability of resupply. We will have to hold here quite
a lot of inventory.
But how much we can trim from the RDCs? How much inventory do we
need there?
Production Lead Time is now out of the equation for the RDCs since we are
already holding the inventory at the CDC. So what happens to the
Replenishment Time between the CDC and RDCs? It shrinks drastically only
to the extent of Transportation Time. So, we can now shrink the inventory
held there substantially!
The same logic applies to Retail Stores where the paranoid is very high.
But we have reduced the Replenishment Time so drastically that the Retail
Stores don not need be so paranoid now and can hold much less
inventories.
The vast experience tells that if you are able to have 85% availability –
meaning 85% times when clients need something, you have it – with this
system in place, you can raise it to 99% with only 1/3rd of the inventory
that you were holding before!
We believed that we need to keep the products close to the customers and
now we are doing exactly opposite. We have been pushing the products in
the market. From that, we have now changed from “PUSH” to “PULL”.
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• Create a CDC if you don’t have. Calculate the inventories that you need
and get it done from your Factory.
• Retail Stores need to report what they sold on daily basis. They don’t
need to place any orders. What RDC will do is to replenish what they
sold; nothing less, nothing more. By doing this, we are minimizing the
Order Lead Time drastically. Earlier, we were placing orders once in two
weeks or even once in a month. By reporting daily sales, we are doing
away with the hassle of placing orders. Also, we used to place orders
based on our forecast. We are doing away even with the forecast. We are
only replenishing what has been consumed.
• RDCs will quickly replenish what has been sold by the Retail Stores.
Every day, they will report to CDC what they have dispatched to Retail
Stores.
• The CDC will quickly replenish what they have dispatched and maintain
their level of inventories. There is no need to place any orders or do any
forecasts.
• The Plant, in turn, will receive from CDC the dispatches made by them
every day and will arrange to produce and replenish the CDC what they
have dispatched.
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Thus, the market will PULL what it wants and our Distribution system will
subordinate to the market needs and will work at the pace of the market’s
drum beats.
Let us see how this can be achieved. Let us begin with RDCs.
However, the use of computers makes it easy to report daily sales to CDC.
Also, it is possible to negotiate with the suppliers to give quantity discount
based on the quantity supplied over a period of time say a month or a
quarter.
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We start with the inventory that we calculated using our formula. Let us
call it “Target Inventory” or “Buffer”. The term “Target Inventory” means
this is the maximum level of inventory that we intend to hold for a product.
The term “Buffer” indicates that this is the amount of inventory we hold to
make sure that we are able to supply the products within Customer’s
Tolerance Time.
Now, we divide this Target Inventory in three equal zones and we name
each zone as Red, Yellow and Green.
Red: If the quantity goes down to “Red” level, i.e., below 200 units, it is an
indication that we have low inventory. The inventory at the consumption
point is at risk of a depletion – units in transport/manufacturing
(depending on which consumption point it is) should be considered for
expediting efforts and an urgent replenishment order must be put to the
supplying source if nothing is available on the way to the consumption
point.
Yellow: If the quantity is between the lower and upper limit of yellow
zone, i.e., between 200 to 400 units, it is an indication of having adequate
or good enough inventory. The inventory at the consumption point is
adequate but there is a need to order more units from the upstream supply
chain.
Green: If the quantity is between the lower and upper limit of green zone,
i.e., between 400 to 600 units, it is an indication of having high inventory.
The inventory at the consumption point is high – providing more than
enough protection for now.
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Every day, you need to update the receipts and issues and arrive at the
stock level and map it to the zones in the buffer to know the Buffer status.
When the sales happen, the level of inventory goes down and when they
receive the products, the level of inventory goes up. This is explained in
the Figure 5.4 below:
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The above diagram shows that the Buffer status is Yellow when we map the
current level of inventory to the Target level. The value of 40% indicates
we have consumed 40% of the Buffer (100% is the Target Inventory).
The above diagram shows that the Buffer status is Red when we map the
current level of inventory to the Target level. In this case, we have
consumed 80% of the Target Inventory.
Check the colors for all the products every day and take actions as
described below:
• If the Buffer level for a product is in red, check the order position for
such products and expedite, if necessary. Typically, some orders should
be on the way already.
• If the Buffer level for a product is in yellow, you need not take any
action; the level of inventory is OK.
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• If the stock level is higher than the Buffer level for a product, it is an
indication of excess stock. Take quick actions to get rid of this excess
stock before it becomes obsolete.
You may not really have to check this manually. If you are able to set up a
suitable computer system, it may highlight the products in red zone where
some immediate action is needed.
Why changes in Buffer level are needed? Generally, the business situation
is dynamic and very few things may remain static. For example, the
following may create a need to change the Buffer levels:
All these may call for changes in Buffer levels of existing products or
defining Buffer level for new products/models. It is important to set a
suitable signaling system for the same.
What does this signaling system mean? How should we use it?
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• If the Buffer level for a product remains in red for two or three
consecutive Replenishment Periods, increase the buffer level for that
product by 30%. You need to place fresh orders for this purpose.
• If the Buffer level for a product remains in green for two or three
consecutive replenishment periods, reduce the buffer level for that
product by 30%. Cancel the existing orders or stop issuing new orders till
the new level is reached.
• When you increase or decrease the buffer level for a product, it may take
some time to reach the new level and to have some degree of stability.
Wait for two or three replenishment periods to settle it down. Do not
change the buffer levels during this period unless there is sudden
massive change in demand.
From time to time, you may need to increase or decrease the buffer level
in anticipation of start of a season or end of a season. Also, you may have
to take such action when you are launching sales promotions or advertising
campaigns.
This is the most important and most useful phase. Here, you collect some
real-time data and chart it in such a way that it directs the management
attention and action to such areas and products that run the risk of losing
sales.
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Following are the assumptions that must be valid before you set up the
Buffer Management System:
• You have daily ordering system in place. In case, it is really not feasible
to place orders daily, orders are regularly placed at whatever frequency
feasible.
• You have done away with Minimum Order Quantity. Nobody holds back
an order so as to reach this number.
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Make sure that these assumptions are valid before implementing the Buffer
Management System.
This is the way in which you will ensure that you have right quantity in
place with respect to market demand. You will also notice that you have
created some ability to cater for some fluctuations in the market demand.
The procedures for Retail Stores are almost the same as for the RDCs. As
with the CDCs and RDCs, even the Retail Stores need to report their sales
on daily basis. These sales reports are treated as orders. This way, we do
away with cumbersome process of ordering and do away with the issue of
finding time to do so.
It is important to make it sure that the space so released is used for our
products only and not used for competitors’ products. This is very
important and we need to protect the space – storage as well as display
space – assigned for our products.
Henry Ford once remarked; “You can have any color of car, as long as it is
black”. The quote highlighted what Ford had to offer, as a choice set, to its
customers in the early 20th century. The Model T was produced in only
black color.
Today, no marketer can dare make a statement like Henry Ford. They know
that the customers of 21st century are already spoilt for choice. As more
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and more categories and products are moving away from being just a
utility item to a differentiated, preferred brand, the marketers of competing
brands are trying to beat each other, while trying to overwhelm the
customer with choice.
However, from seller’s point of view, there are three types of products/
items – Fast Moving items, Slow Moving items and Regular running items.
However, it is not enough to know the quantity in which several items are
sold, it is important to know also their financial value. Just knowing from
the items which are Fast Moving items and which are the Slow Moving
items will not help much in driving any operational decision. There are
other criteria that must be considered. It is important to know the financial
value of such items.
The goal of setting such criteria is obviously relevant when the Retail Store
owner needs to choose which items he would like to keep and which ones
not to keep. This is only relevant when the variety of products is very large
and the ability of each Retail Store to keep a large amount of products is
limited. Just taking into account the inventory turns will not help. Some
items are sold at such a low Throughput that even if they are Fast Moving
items they are not giving much to the bottom-line, but certain items can
be sold only once every year (an obvious Slow Moving item), and the
margin is so high relevant to the investment that it is a great item to have.
For the manufacturer/distributor, a measurement like that can be used to
determine which products he would rather not have at all, signaling a new
product design is needed.
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In TOC financial terms, this is the way this return is measured: How much
Throughput does one gain from this product over a period of time. The best
time period to look at is a year, to take into account the effect of sudden
peaks in demand (usually stemming from seasonality).
• The inventory kept at the Retail Store is the one covering the demand.
Taking these into account, the best number to represent the investment
needed to generate this product’s Throughput is the buffer size. By
multiplying the buffer size in the Truly Variable Cost (TVC) of this product,
the real Investment needed to generate the sales of this product is
realized.
Therefore, the formula is very simple – to calculate the ROI, all that is
needed is taking the yearly T from this product and divide it by the TVC per
unit from this product multiplied by the (average) buffer size throughout
the year.
• Star items – These items represent a very quick ROI – meaning keeping
them is very good for business – and for the manufacturer/distributor
this is a kind of product he would like to keep at all the Retail Stores he
services.
• Black Hole items – These items take a very long period in order to
return the investment done in them. For the manufacturer/distributor, an
item in this group signals the possibility to stop producing/purchasing.
However, this is not conclusive, as some items (usually referred to as
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Strategic) are a must to have even though their margin is so low that it
puts them in this group.
It is obvious that there is a correlation between the Fast Moving items and
the Star items, but this is in no way a 1 : 1 correlation, as is clearly
demonstrated by the extreme cases discussed earlier.
The decision how to set the limit between the different groups is up to the
specific environment, but the general guidelines are taking the high 10%
as stars and the low 20% as black holes. One of the possibilities to treat
black hole items is to try and change the price tag of some of those
products – making them more lucrative if they can be sold at the higher
prices.
• Remember “If you want to service your customers better, keep the
inventory away from them”. This is counter-intuitive, but we have seen
above how it helps to dramatically improve the customer service and
availability.
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• “Pull, don’t push”. Sales at the Retail Stores should pull the products
from the RDC and that should pull the products from the CDC. Let the
Factory produce what has been dispatched from the CDC. Do not produce
based on some other forecast and then keep pushing the products to the
market.
Let us assume that we have put the new Distribution system in place. We
have set the new rules.
Periodically, we will want to know how well we are doing. So, we will
calculate Throughput, Investment and Operating Expenses and judge the
performance.
Concentrating on what is done properly will be good for the morale. But will
it trigger corrective actions?
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Concentrating on what was not done properly will trigger corrective actions
– fast improvement. And highlighting the improvement relative to previous
results will provide positive motivation.
Reliability
Missing the commitments made to the clients is the end result of “things
that should have been done, but were not done”.
Missing on something that had the sales value of $10,000, is not equal to
missing on something had the sales value of $100.
Similarly, missing by one day is not equal to missing by one month. Missing
an order by a day is not same as missing an order by ten days.
Effectiveness
Dr. Goldratt said that the end result of “Things that should not have been
done but nevertheless were” is excess inventory.
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• Primary Measurement
• Secondary Measurements
❖ Inventory Dollar-Days
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• Faster replenishments.
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5.18 SUMMARY
The simplest way to explain the TOC Distribution and system is by looking
at what happens every day with a soft drink vending machine. Typically, it
is replenished every day or even twice a day. The person who replaces the
items has a clear visibility by design of the vending machine. He can easily
figure how many bottles of Coke, water etc. have been consumed. He
replenishes precisely what is consumed – nothing more, nothing less. The
vendor is holding his inventory at the next highest level, i.e., the vehicle –
the truck, which makes it easy to distribute his product to various vending
machines.
So, after completing his rounds for the day at each vending machine, the
truck driver returns to the RDC and replenishes his truck for the next day.
And the RDC is replenished by the CDC and so on. The overall inventory is
held to the minimum value, thus tying up much less cash.
What are the things that we must stop doing to help reversing the negative
loop?
Whatever is purchased by the end consumer gets pulled through our chain
starting with Retail Stores right up to the Factory (and even beyond). This
is an important change – we move from producing fixed quantities at
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We bring down our Production Lead Time by implementing TOC solution for
Manufacturing.
“If you want to service your customers better, keep the stock away from
them!” is our new system and “Order Daily and Replenish Frequently” is
our new Mantra.
1. What to change?
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• At each place and for each product, establish the inventory target
according to the formula.
Expected Results
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3. Explain how the first three steps of the Five Focusing Steps are applied
to a Distribution system.
5. Explain briefly the TOC solution for Distribution and what actions are
necessary to make it work.
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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
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CRITICAL CHAIN PROJECT MANAGEMENT
Chapter 6
CRITICAL CHAIN PROJECT MANAGEMENT
Objectives
Structure
6.1 Introduction
6.2 The Vicious Cycle
6.3 The Problem
6.4 Time Estimates in Projects
6.5 How Safety in Estimates Gets Wasted?
6.6 The Learning
6.7 Critical Path and Critical Chain
6.8 The Solution
6.9 Guidelines
6.10 Buffer Management
6.11 CCPM in Multi-project Environment
6.12 Execution Management
6.13 CCPM and Five Focusing Steps
6.14 CCPM Culture
6.15 Summary
6.16 Self Assessment Questions
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6.1 INTRODUCTION
Do most projects deliver just what the client needs, when promised, and at
or under the original cost estimate? Worldwide experience says otherwise.
Projects usually have great excuses for not meeting one or more of the
necessary conditions for success of a project. Usually, it can be blamed on
someone or something, "Out of our hands." You may have heard about
some of the big ones: the Chunnel (late by 19 months, cost overrun by $3
billion), the Denver Airport baggage system (late by 15 months paying
$1.1 million per day as interest), the Super Conducting Super Collider
(project was terminated), several defense projects etc. Some do get
done...eventually. Later than promised, at higher cost, and usually missing
scope at 'completion.' The Chunnel finally opened, it just couldn't transport
passengers. So did the Denver airport, but it still ate passengers baggage.
Since projects show the same symptoms across many types and sizes,
over a long period of time, and even across many countries and cultures,
isn't it likely that there is a fundamental flaw in the way we manage
projects? The major innovations made in project management about fifty
years ago, computerized critical path scheduling and Earned Value, or Cost
Schedule Control Systems (CSCSs), do not seem to remove the symptoms.
Many of the biggest project failures have had great CSCSs.
Some Statistics
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We are giving estimates. We know that we are going to be judged how well
we are standing on our own estimates. We are padding them because we
want to be realistic and reliable. So, we add enough safety in our estimates
at the task level to make sure that considering our past experience, our
current estimates give us enough safety to complete the tasks within the
time.
Meanwhile, we start on more projects and there are more problems. Then
we do more multitasking. So, it takes more time until we solve the
problems. By then, we have yet more problems. So, we become more and
more paranoid in our estimates.
Things become worse and worse until there is a limit put by the external
world which is “Sorry, if that’s really your estimate, then there is no
project”.
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Project Management experts feel that apart from keeping the Scope,
Budget and Schedule, it is necessary to manage three more things such as
Quality, Risk and Customer Satisfaction as represented by the Golden
Hexagon shown in Figure 6.2 below:
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• Scope is identified late and can change after work has started, at times.
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• Updating plans works for only a few days before the project again
deviates from plans, many times.
• Many times, people perceive they have more work to do than time
available in which to do it.
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• There is often a conflict between doing things well and getting to specific
date-based milestones and this causes trouble later.
• We don't know how to say, "No" to new projects; requests for task
switching; scope changes etc.
People generally believe that each project is unique and has its own
challenges and these challenges stem from the uncertainties that do exist.
In view of this, they try some of the following (and even more):
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• Huge spending.
• Insignificant improvements.
• Problems do recur.
• Uncertainties remain.
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But what is meant by 8 tasks? We just said that there are “about” 8 tasks,
isn’t it? Here, you need to interpret the term “about”. As you know, in
project environment, it is extremely difficult to know the exact number of
tasks before starting a project. So, based on your experience, you may
interpret the term “about” as 8 tasks ±1 task.
Similarly, each task is likely to take “about” 8 days. So, here again, you
need to interpret the term “about”. Let’s assume that here also your
interpretation is 8 days ±1 day.
People want to give reliable estimates. They intuitively know that there
would be some problems, some interruptions, and some delays when they
actually do the task. So, while estimating, they look at their recent worst
experience and give such estimate that they are reasonably sure of
meeting.
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This also means that they keep a lot of safety in their estimates. They
become paranoid (if not hysterical) to make it sure that their estimates are
reliable.
Would you like to try an example? Please do this with your team.
Then ask: at what time will you start from your home? (Note the time they
mention).
What is the best time that you have ever taken to travel this distance?
(Note the time they mention).
Further tell them: suppose you are told that you will be meeting the top
boss and he will give you promotion letter! And if you are late, he will not
give you promotion!!
Now ask them: at what time will you start from home? (Note the time they
mention).
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Now ask them to explain the difference among the time you have noted:
the normal time, the best time and the paranoid (or hysterical?) time.
People will realize that they put in lot of safety in their estimates.
“I love deadlines. I like the whooshing sound they make as they fly by.”
— Douglas Adams
“Project Management: The art of declaring man hours with a straight face
when you know perfectly well they're 100% fiction.”
So, knowingly and unknowingly, they build lots of safety in their estimates
and it is for every task. Ironically, the more experience you have, the more
safety in your estimates!
What is the element of safety built-in in our estimates? The typical answers
will vary from 5% to 15%. Perhaps, this is explicit safety or contingency.
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Further, every level of reviewers adds its own safety. Even the “global cut”
by the customer is anticipated and built-in.
If this is the case, then our estimates are full of safety and if it is true then
no projects will ever have any overrun. Will they?
Is there something wrong in the logic that states that we have lot of built-
in safety or there is something fundamentally wrong in the way we use the
safety and that safety since hidden and unknown is wasted?
Let us discuss the reasons as to why the safety in projects gets wasted. We
list five main points below and discuss them:
1. Multitasking
2. Murphy’s Law
3. Student syndrome
4. Parkinson’s Law
5. Dependencies
1. Multitasking
What is multitasking?
In simple words, working on more than one task during a period of time —
typically it means leaving a task incomplete and starting on another and
may be yet another. It is about having multiple tasks open – and available
to work – making incremental progress on many without finishing any.
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• Remembering where you were last time you worked on that task.
• Recreating the train of thought that got you to the current point on that
task.
• Work on that task for some time and then it's time to switch again!
The fact is, when we attempt to Multitask, we usually switch tasks poorly.
That is because we tend to just drop one task and start another. We do this
without carefully leaving the task – or de-engaging. To de-engage, we
must note information like the task status and devise and update the task
triggers for future re-engagement. Not doing this causes a host of
problems. When we de-engage improperly, the following deadly things
happen:
• We lose our place and it will now take longer to come back at the same
place when we return to the task.
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Another example:
Let us assume that there are four projects to work on and all of them are
expected to take four weeks each (too simple an assumption. The reality is
much more complex). Let us further assume that you have only one
resource who could work on these projects (another simple assumption).
So, the resource is working on four projects and he devotes one week for
each project. Here is how the projects would progress (see Figure 6.3
below).
In this case, the first project with four week duration will get delivered in
13th week, the second in 14th week and so on.
Now, look at the Figure 6.4 below which shows if he devotes continuous
time for each project, how the delivery would happen:
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At least the three projects would get delivered faster than the earlier way
of doing them. (Actually, in the earlier way, it could take much longer as
explained before).
It makes sense that if you try to do two things at once — read a book and
watch television, for example — that you're going to miss important details
of one or both.
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money and time when chances are good that it will do neither. This
unintelligent intransigence is all the more troubling because most of us
intuitively recognize the problems multitasking can pose. We cringe at the
thought of someone operating a lathe while scanning the crawl on CNN or a
teenager talking on a cell phone while driving.
As a result of this action, if the stuck project starts moving ahead, this
action is called as good Multitasking. If however, the stuck project, after
this resource has resolved the issue, gets stuck somewhere else, it would
be a bad Multitasking.
A Clarification
People often confuse between multitasking and managing multiple
responsibilities. These two things are not the same. One may have many
responsibilities and is required to spend time on multiple things during the
course of a day. However, it is important to ensure that they do not leave a
thing incomplete and switch to the next and leave that task incomplete and
again switch the task.
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Number-Alpha Game
Instructions
Recognize the series in Number and Alpha. You will quickly find out that
both are incremented by 1, 2, 3 and so on and so forth.
Fill in rest of the table. When you reach alphabet "Z", you need to go back
to alphabet "A" and continue. Use different color pens for Number and for
Alpha.
Now, assume that you are the only resource on two projects, viz., Number
project and Alpha project. You need to work on both the projects
simultaneously, i.e., increment a number and then increment an alphabet
and then again the next number and the next alphabet and so on. Take two
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pens with different colors and decide which color you will use for Number
project and which color you will sue for Alpha project.
Write an arbitrary number in the first row under "Number" project; say, for
example, you may write the number "137". Also, write an arbitrary
alphabet, say "M" in the first row under "Alpha" project. This is your
starting point.
Now, you start working from this point onwards. At the end of it, note the
time that you took. Check the work you did and count the defects (don't
count the cascading impact) and note it. Write down how you felt while
working in this way.
Then work on one project at a time. Work on the "Number" project first,
finish it off and then work on "Alpha" project. Again, write some arbitrary
number, say "181" and some arbitrary alpha, say "Q" in the first row.
Remind yourself about the colors to be used for the respective projects.
Note the time as soon as you finish the "Number" project. Then continue
on the "Alpha" project. Note the time you took at the end of it. Note the
number of defects found. Write down how you felt while working in this
way.
Then, compare the time taken to complete each project. Compare the
number of defects found. Then compare what you felt while working on
these two experiments.
You will observe that there is often significant frustration and quality
problems with the first approach. The difference is much more than speed.
Then imagine what will happen if there is a third project say drawing
symbols like circle, triangle and square in a sequence.
Real projects are much more complex. What would happen to them, if they
multitask?
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2. Murphy’s Law
Do you believe that “if anything can go wrong, it will”? If you do, then you
are a staunch believer of "Murphy's Law”.
Here is how this law originated. Edward Murphy, an engineer, was part of a
team of an engineering project in an air force base. During one of the pilot
tests, his assistant committed an error due to which the test failed. In
sheer frustration, Murphy said, "If that guy has any way of making
mistake, he will”.
This witty and cynical law has now captured universal imagination in most
areas of life, including money.
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• If there is a possibility of several things going wrong, the one that will
cause the most damage will be the FIRST to go wrong.
• The chance of the bread falling with the buttered side down is directly
proportional to the cost of the carpet.
• For the poor people, the bread fells always with the buttered side into the
floor.
• You will always find something in the last place you look.
• If you are looking for more than one thing, you'll find the most important
one last.
• No matter how long or how hard you shop for an item, after you've
bought it, it will be on sale somewhere cheaper.
• Anything you try to fix will take longer and cost you more than you
thought.
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• Any time you put an item in a "safe place", it will never be seen again.
• The worst golf shots always occur when playing with someone you are
trying to impress.
• The light at the end of the tunnel is another train coming in.
• Whatever you want, you can't have, what you can have, you don't want.
• Whatever you want to do, is not possible, whatever is possible for you to
do, you don't want to do it.
• Anything that can go wrong has already gone wrong! You just haven't
been notified.
• Whenever you cut your finger nails, you find a need for them an hour
later.
• The file you are looking for is always at the bottom of the largest pile.
• The one emergency for which you are fully prepared will never happen.
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3. Student Syndrome
Student syndrome refers to the phenomenon that many people will start to
fully apply themselves to a task just at the last possible moment before the
expected completion time. This leads to wasting any buffers or safety time
built into individual task duration estimates.
In reality, most students will have other tasks or events that place a
demand on the time they fully intended to commit to improving their paper
or project. In the end, they will often end up close to the same situation
they started with: wishing they had more time as the new delayed date of
completion approaches!
It's a fantasy for students and project managers. A student who sits down
to study will inevitably be thrown off track by an impromptu party in his
room, a power outage, or some campus mischief. A project can be thrown
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off for any number of reasons thanks to that other law, Murphy's Law,
which states, "Anything that can go wrong, will." And when it does, the
original time estimate whether padded or not, will be far too short.
When we get enough safety, we have enough time, so why hurry? The
irony is, we ask for time so that we can complete the task within that time
and once we are granted the time, we intuitively know that there is a huge
safety that is built-in, we start wasting it (or using it for something else).
When do we sit down to do it? At the last minute. That's human nature,
isn't it? Only once we start the work can, we find out if there is a problem
or not. If there is, we start to work frantically and burn a lot of midnight
oil!
But we have already wasted the safety, so now we are going to be late.
4. Parkinson’s Law
Do you ever spend all day in front of the computer without getting much of
anything done? Me too!
It is so easy to just work on stuff, spend our time and not be terribly
productive, especially if there's no deadline looming.
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Parkinson's Law states the amount of work increases to fill the available
time for completion. At times, we even exceed the time! If people finish a
task early, they have the tendency to "polish" it or improve it.
Parkinson's Law – work expands to fill the time available for its completion
– means that if you give yourself a week to complete a two hour task, then
(psychologically speaking) the task will increase in complexity and become
more daunting so as to fill that week. It may not even fill the extra time
with more work, but just stress and tension about having to get it done.
Parkinson's Law works because people give tasks longer than they really
need, sometimes because they want some “leg room” or buffer, but usually
because they have an inflated idea of how long the task could take to
complete. People don't become fully aware of how quickly some tasks can
be completed until they test this principle.
Most employees who defy the unwritten rule of "work harder, not smarter"
know that, despite the greater return on investment for the company, it is
not always appreciated. That is related to the idea that the longer
something takes to complete, the better quality it must inherently be!
If you give yourself three months to write a report, it will take you 3
months, but if you give yourself three days to write the same report you
will write the report and probably exceed the quality of the three month
report (due to greater focus).
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When you give yourself only two hours to complete a "full-day's work" you
become super-efficient and you have incredible focus, moving smoothly
from one task to the next.
The thing is, Parkinson's Law doesn't just apply to productivity. It also
applies to other aspects of life. For instance, a school boy, no matter how
big a bag he had, it is always full. He starts with a small bag and fills it, so
next year, he gets a larger bag. He then fills that too! A few years in and
he realizes that half the stuff he is carrying, he doesn't need, so he empties
it out and starts with an emptier bag.... which he fills again!
• The more time you have for completing a task, the more time you will
waste.
• The demand upon a resource tends to expand to match the supply of the
resource and the reverse is not true.
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Employees are given unimportant paperwork and other tasks just to keep
them busy till the end of the working day. They waste their precious time
shuffling papers, making coffee and doing other useless activities causing
zero productivity to the company. Companies' disregard to the Parkinson's
Law causes them to lose a lot of money and time.
• Run against the clock. Make your To-Do List, prioritize it and estimate the
time needed. Then give yourself just half of the time to finish those
tasks. If a task can swell to fill the time allocated, then equally, the effort
given can be limited by reducing the allocated time, down to the least
amount of time actually needed to complete the task. You have to win
against the clock; strive to beat it as if it were your opponent in some
sport or game, without taking shortcuts and producing low-quality
output. Decide what is most valuable and insert that into your To-Do-List.
This is using The Law of Displacement, illustrated by inserting something
into a bathtub full of water and it will displace the water. Keep putting in
more good stuff and the other stuff gets displaced. (The guy, who
realized this first, was said to have exclaimed “Eureka!”)
• Crush the pests that eat into your productivity. Look for those little time-
fillers, like email and feed reading, that you might usually think take ten
or twenty (or even, god forbid, thirty!) minutes. These are the "pests" of
the productivity – little pests that do nothing but make your life a painful
– pains that you can't seem to get rid of, no matter how much you run
around the house with a shoe or bug spray. Instead of doing the leisurely
20-30 minute morning email check, give yourself say five minutes. Don't
give these tasks any more attention until you've completed everything on
your To-Do List that day, at which point you can indulge in some email
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You can experiment with Parkinson's Law and squashing your deadlines
down to the bare minimum in many areas of your life. Just be conscious of
the thin dividing line between 'bare minimum' and 'not enough time' –
what you're aiming for is a job well done in less time, not a disaster that's
going to make you repent.
HEED THIS LAW OR... Your life will be filled with mediocrity, with the
randomness of whatever comes into it. You'll being "at the effect of"
circumstances. And you'll always be too busy to do what really matters...
too busy to have a good life.
If you want to be happy and have a good life, it is essential that you heed
this law!
Dependencies
A delay in one step is passed, in full, to the next step. An advance made in
one step is usually wasted. This is true for sequential steps. In sequential
steps, deviations do not average out. Delays accumulate, while advances
do not. Therefore, safety disappears!
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Let us say that there are four tasks A, B, C and D that are required to be
completed before Task E can be started. Let us also say that the tasks A, B
and C are finished five days ahead of time and Task D is delayed by 15
days.
In this case, the early finishes do not matter since the task E cannot be
started unless the task D is also completed.
The task D is late and takes 15 days more. So, this delay of 15 days, and
not the advances made by the other tasks, is passed on in full to the next
task, i.e., task E.
In the case of parallel steps, the biggest delay is passed on to the next
step. All other early finishes do not count at all! This way, most of the
safety put in doesn't really help.
Further, early finish almost never gets reported due to the following
reasons:
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• You are not liked by your colleagues who are struggling to meet their due
dates.
So, for these reasons, the early finishes rarely get reported and the safety
put in to the estimates is wasted.
Safety
We try to protect the performance of each step. Most of this protection is
wasted. Despite so much of safety, the project as a whole is exposed.
Perhaps, putting safety at step level may not be a good idea.
Some propose that 'float' or 'slack' in the project network helps protect the
project from this reality. Unfortunately, not only does project network float
not depend on uncertainty of the activities in the network path, but it is
usually inversely proportional to the protection you need. That is, the
longest non-critical project paths, which usually need the most uncertainty
protection, have the least float.
The only thing that counts is the performance of the project as a whole. We
don’t have to win all the battles, as long as we win the war! Similarly, it
doesn’t matter how many steps are not completed on time…as long as the
project is delivered when promised.
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They assume if each activity has a high probability of getting done within
time; the project has a high probability of getting done within time. This
idea is similar to the thought that if each machine in a factory can keep up
its efficiency, the factory is efficient.
Managing Safety
We either need a crystal ball which will take us ahead in time to see what
is going to happen so that we know where the safety will be needed or we
need to find a better way to manage the safety.
Before we take a look at it, we need to get an idea about what is “Critical
Path” and then what is “Critical Chain”.
Critical Path
Critical Path is the longest chain of dependent events, longest in time. The
critical path determines the time it will take to finish the project. Any delay
on the critical path will delay the completion of the project.
There are non-critical paths that meet the critical path at some point of
time during the project.
We have an option to go for an Early Start or for a Late Start for non-
critical paths.
We need to build a plant. We need to construct the building and then make
it functional – meaning install electrical lines, the water and furniture, etc.
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We also need to select and contract the various vendors to build our
machines, and allow enough time.
Once the building and machines are ready, we can install them.
And this way the plant will get ready. Let us draw a simple diagram (Figure
6.6 below).
Look at the above figure. Path A has “Build Building” which will take 90
weeks and “Make it Functional” will take 30 weeks.
Path B has “Contract Vendors” which will take 15 weeks and “Build
machines” will take 90 weeks.
When the building is functional and machines are built, we can install the
machines in the building which will take 30 weeks and our project will be
completed.
Path A will take 120 weeks (90 weeks plus 30 weeks) to complete and path
B will take 105 weeks (15 weeks plus 90 weeks) to complete.
Which path A or B is the critical path? Which is the longest path? Of course,
path A.
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The critical path in our example is, the path through steps to construct the
building, making it functional and installing the machines in it. A total of
150 weeks.
The Critical Chain is the longest chain of tasks that considers both task
dependencies and resource dependencies.
This is different from the definition of the Critical Path, which is defined as
the longest chain of tasks based upon task dependencies.
Further, there are non-critical paths that meet the critical path at some
point of time during the project. In real-life projects, there are several
tasks that are not on critical path. We have an option to go for an Early
Start or for a Late Start for non-critical paths.
Early Start
If we start all the paths at their earliest start, the project leader will have
too much on his hands. He is bound to lose focus. Typically, Project
Managers are tempted to opt for early start. This helps him to show some
progress somewhere when the project status review is conducted by the
project sponsor. He may look good for a long time until delays on critical
path/chain start showing up. Here, “hope” seems to be the only strategy
and the project managers sincerely hope that the variations will average
out (but they don’t).
Further, if investments are required for certain paths, “early starts” could
force early investments with the risk of high interest burden and the risk of
obsolescence.
If we have many “early starts” and as it happens many times, there are
scope changes, and the risk of rework is very high.
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Late Start
If we start a path on its late start, then the path doesn’t have any time
slack which means that any delay on that path will also cause a delay in
the project. So if we start everything on its late start, everything becomes
important.
TOC asserts that every system has a constraint. TOC demonstrates that
constraint time is much more important than non-constraint time. What is
the value of time lost at the constraint of the project? Could you have
many non-constraint activities done ahead of schedule and the critical
activity very late on a project? Does the use of Early Start scheduling make
this even more likely? If so, your Earned Value may look good early in the
project. What shape is the project really in? What is going to happen when,
somewhere near the end of the project, the paths merge? Then, reality will
tell you where the constraint was.
How do we protect our projects from the uncertainties and variations? How
do we resolve the dilemma of Early Start versus Late Start? How do we
make use of the huge safety that we build in our estimates?
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The Constraint
The critical path, no doubt, gives us some direction towards the constraint.
It separates the path where any delay on it would delay the entire project.
It takes care of task dependencies. However, that is not enough. Typically,
projects have resource dependencies too.
When a new path is drawn after considering the task dependencies (critical
path) and resource dependencies, it is called CRITICAL CHAIN. Critical
Chain is the constraint in the projects which limits the performance of the
project execution. After having identified the constraint, we need to exploit
the constraint and then subordinate everything else to the constraint. We
will see how this is achieved.
Project Buffer
How to use safety/buffer? If Critical Chain is the constraint, how do we
exploit it?
We need to make it sure that the project managers focus on it. The tasks
on Critical Chain should receive the highest level of priority. However, this
is not enough. In order to ensure that the variability of the tasks do not
delay the Critical Chain, we must protect it by adding time buffer between
the Critical Chain and the delivery date. This buffer, called Project Buffer, is
created by pooling the safety that got built-in at task level while
estimating. In this process, we need to trim the safety at task level where
it may get wasted and pool it together at project level so that it becomes
feasible to absorb the consolidated impact of the uncertainties and
variations. This way the early finishes will set off the late finishes since the
step level buffers are pooled together. When we aggregate the safety that
is spread across the task, the variations average out.
In other words, the critical chain approach suggests the shifting focus from
assuring the achievement of individual task estimates (sub-optimization) to
assuring only the project completion due date, that is the global goal of the
project. To protect the project due date, and to avoid wasting task safety
times, Critical Chain Project Management (CCPM) approach prescribes that
safety times should be eliminated from the individual task duration
estimates. We must aggregate them in the form of time buffers at strategic
locations in the schedule because an aggregation of task safeties in the
form of buffer provides a better protection. The Critical Chain Methodology
exploits the statistical law of aggregation by protecting the project from
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uncertainty of the individual tasks in a task path with time buffers at the
end of path in the project network. The protecting time buffers are not
slack time. They are an integral part of critical chain schedule with
shortened or aggressive task duration estimates.
This also removes the risk of Student’s Syndrome and Parkinson’s Law
since people get a challenge to meet the reduced time made available for
tasks. If Murphy’s Law strikes and wastes time, the Project Buffer will take
care of it. This finally leads to saving of time for the project as a whole.
CCPM shifts the safety times associated with the Critical Chain tasks to the
end of the Critical Chain in the form of a Project Buffer to protect the
project due date promised to the customer from variation in its Critical
Chain tasks. This improves the reliability of the overall due date as well.
The promised delivery date of the project is then the sum of the Critical
Chain duration plus the Project Buffer duration.
Feeding Buffer
After having set up the Project Buffer, we need to synchronize the rest of
the paths to Critical Chain. This is called “Subordinating everything else to
the constraint” in TOC terminology. As we know, that the non-critical
chains have the potential to delay the Critical Chain. The uncertainties and
variations coupled with Student’s Syndrome, Parkinson’s Law and Murphy’s
Law could eventually delay the Critical Chain and hence we need to protect
it from such delays.
Here again, we trim the safety that is embedded at the task level for each
of the non-critical path and pool it together at a place where the non-
critical path meets Critical Chain. This is called Feeding Buffer.
Feeding Buffers are another type of time buffers in CCPM that are inserted
whenever a non-critical chain task joins the Critical Chain. Their aim is to
protect the Critical Chain from unforeseen difficulties and disruptions on
the non-critical tasks feeding it, and to allow Critical Chain tasks to start
early in case things go well. When the project network consists of only one
path, no feeding buffers are needed.
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Resource Buffer
CCPM has introduced the concept of Resource Buffer. This is not a physical
buffer. It is an early warning or a wakeup call for the tasks that are on
Critical Chain so that the next resource is aware of the priority. Resource
Buffer is an early warning for them telling them to be ready for certain
critical tasks. This is necessary because CCPM is not governed by due dates
of individual tasks. The resources are expected to work as fast as possible
and complete the tasks irrespective of the due dates. People don’t wait for
the due date to arrive before they start or finish the task. In this process, it
is important to alert them for priority tasks.
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But we need some guidelines to decide how to create a Critical Chain, how
to create and manage buffers. In the next point, we have some guidelines.
6.9 GUIDELINES
Ideally, which tasks should be on Critical Chain (CC) and which should be
on non-critical chain? Many times, you may not have such a choice since
the plan is prepared based on task and resource dependencies. If however,
it is feasible, keep in mind the following guidelines:
• You may have some tasks, which are very important to the success of
the project and you want to give them priority treatment. Put them on
CC.
• The tasks that are less important may be put to a non-critical path.
• The tasks that need more scrutiny or there is inherent ambiguity should
be brought on the CC.
• The tasks that do not need any scrutiny may be put on a non-critical
path.
• The tasks that have resource dependency need to be adjusted for their
positions on critical and non-critical paths.
• Create the Project Buffer and Feeding Buffer by cutting 50% of the task
time and pooling the same at the end of the CC.
• Don’t trim with a razor blade a cut made with a hatchet. Many times, due
to the pressure from the customer, the estimates are already trimmed.
Trimming them further by 50% may not make sense. If using the full
50% buffer presents an unacceptable delivery time, you may have to
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trim back the buffers. We are looking at creating aggressive but possible
schedules that gives us challenges as well as a safety net.
• There is no hard and fast rule for buffering. The buffer can be smaller
when the process is highly predictable whereas the paths that have
highly variable tasks may need larger buffer. Buffering on some ‘well-
known or stable processes’ could be reduced. Buffering on some
“experimental processes” could be increased.
• If a path has several tasks, you may keep a smaller buffer so that the
variation gets averaged out, i.e., some tasks may take lot more time,
which is offset by some tasks that happen faster.
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• The paths that meet the CC late in the project may be given lower
priority. Similarly, the paths where there is little or no buffer penetration
may be given lower priority.
After all this discussion and worry about buffer size, remember the system
has so much variability in it that you will never know if you picked the right
buffer size.
Buffers are created at the beginning of the project. When people take more
time for task completion, they consume the buffer. When people finish their
tasks before time, the buffer is replenished. This activity goes on and on till
the end of the project. As the project progresses, the buffer consumption
and replenishment is measured.
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If the buffer consumption rate is high so that whole of the buffer are
expected to be consumed before completing of the tasks leading into it,
corrective action should be taken.
The use of Buffer Management is like the use of statistical process control
(SPC) in production environments, helping differentiate the impact of
common cause variation (related to anticipated, accepted risk in the
project world) from special cause variation (unanticipated or unplanned
risks). It is based on straightforward methods of assessing both the
consumption of buffers relative to project completion and the trending of
that consumption, and requires minimal data gathering to facilitate its
calculation. As a result, buffer reporting becomes a tool that is usable by
top management, project managers, resource managers and task
managers. It helps the managers to assess and appropriately act on risks
as they raise their head.
On regular basis, the project manager ensures that the following for the
tasks in progress: collecting “how much more time is needed for task
completion?” This is the only data element that is required to be collected
preferably every day and it is highly critical to ensure that it is so collected.
All reports, predictions and task priority depend on this single data
element.
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This way, the measurements become simple. Most of the metrics calculated
out of a traditional system tell us that something is wrong, when it is too
late, whereas CCPM provides us in-process control; it gives us warning
signal beforehand, so that it is feasible to take corrective action and keep
the things from going late.
The buffers are divided into three equally sized regions (Green, Yellow, and
Red). If the buffer consumption is in the green zone, no action is required.
If the consumption enters the yellow zone, then the project manager
should assess the problem and think about possible courses of action. If
the buffer depletion reaches the red zone, then the project manager should
act.
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a task is 90% completed very quickly, and then spend just as long or
longer finishing up the last 10%. Hence, CCPM tracks progress through the
team members’ estimates of remaining duration rather than work
performed.
The formula for calculating Chain Per Cent Complete for Critical Chain is:
Absolute Method
Buffer Management started with a simple tripartite "Red-Yellow-Green"
process as shown in the Figure 6.8 below.
The buffer is divided into three equal parts for the life (duration) of the
project. If consumption of the buffer is less than 1/3 of its original size,
project health is considered OK (green).
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If the buffer consumption crossed the 1/3 line into the middle (yellow), it is
deemed that appropriate action is to watch and plan possible buffer
recovery actions.
The weakness of this method is, it ignores the fact that by very nature of
the system, there would be penetration and fewer and fewer buffers are
needed as the execution progresses.
Also, this method does not capture the severity of delays early in the
project.
Relative Method
It is important to catch with the possibility of major problems going too far
too quickly. A refinement of this approach – sort of a SPC-like approach –
added a watch on the trend of buffer consumption.
It is a fact that as the project approaches completion, less and less buffer
is required to protect against uncertainty. Therefore, the original straight
division of buffer into thirds is transformed to a sloping set of thresholds,
with larger and larger "green" portions of buffer as the more of the project
progresses. This is depicted by the chart below.
These charts are often called “Fever Charts” indicating that these charts
show the health of the project and suggest whether any action is needed.
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Watch the project in the above Chart 6.1. Watch the movement from
yellow zone to red zone to the border of green zone and then again to the
yellow zone as it nears the completion.
These "fever charts" have also been adapted for quick views into the
relative health of multiple projects, as shown in the Chart 6.2 below:
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In the above chart, all the projects are shown. Also, their movement from
green to yellow zone and from yellow zone to red zone and from red zone
to yellow zone is shown.
This way project monitoring and control becomes easy. By measuring the
percentage of buffer consumption relative to the percentage of the Critical
Chain completed, the management is able to measure the status of the
project at any given time. There is a clear focus on managing the Project
Buffer which protects the Critical Chain. And there is an insight into non-
critical paths by way of penetration/replenishment of Feeding Buffers.
• The earlier we start each project, the earlier each project will be finished.
• The more the number of projects we start, the more the number of
projects we finish in a window of time.
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It is not important how many battles are lost, as long as we win the war.
Similarly, it is not important how many tasks are delayed, but it is essential
that the project is delivered on time. Our old paradigm – Keeping all the
resources busy all the time – is really counter-productive and it causes
delays.
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Flow is the number one consideration. Projects need to move, rather than
getting stuck somewhere or waiting for something. People are in a hurry to
start projects; but what is really important is not “how many projects you
start” but “how many projects you complete”.
The statement, “the earlier we start each project, the earlier each project
will be finished,” is not correct for multi-project environments (not only the
first elephant, but also the last elephant will go through a door much
faster, if they go in procession).
So, how to increase the flow? The way is by reducing the number of open
projects. This action can reduce bad multitasking without causing
starvation of work and therefore significantly reduces the lead time of all
projects – it increases the flow.
• Freezing projects
There can be two extreme cases; one when there are very few projects
and two when there is too many projects.
When there are too few projects, it causes starvation of work and it lowers
the rate of projects completion.
In the opposite extreme, when there are too many projects in execution,
“Bad Multitasking” lowers the rate of projects completion.
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For this purpose, the organization needs to prioritize the projects and start
freezing the projects from the bottom of the list until about 25% of the
workload is frozen.
Projects that are at a very advance stage may be considered for higher
priority.
Freezing 25% workload enables the Project Head to release some of the
resources. These resources are not kept idle; but they are used for
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accelerating the open projects. You need to determine the optimal number
of the various types of resources needed for each open project. Then use
these freed resources to prudently strengthen the open projects. For this
purpose, you need to go in the sequence of the project priorities that you
have decided, as discussed above.
Full-kit Preparations
We believe that the project teams can catch-up later. Moreover, the
preparations that are necessary before the start of the project are not
defined many times. The resources dealing with preparations are caught in
a never-ending catch-up cycle.
Freezing of projects frees up, for a while, ample capacity of the resources
dealing with preparations. You need to use this reduced load on resources
that do the preparations to ensure that “full-kit” practice becomes the
norm.
The things that are missing are usually the things for which there are some
difficulties to complete. Therefore, if given the option, resources working
on preparations would prefer to focus on preparing for the new projects
about to be released rather than relentlessly chasing the preparations gaps
on open projects.
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Once it becomes a habit to always make full kit available, the people start
seeing the advantages and once they see the advantages, they voluntarily
follow the new procedure of making the full kit.
Project Planning
“All too often only the original plan and scheduling data are ever produced,
they continue to cover the office wall long after they are obsolete and bear
little resemblance to the current progress of the job.”
• Match the current rate of completion out of the virtual drum. (A plan
must predict outcome which is at least as high as currently achieved).
• Not cause overload on key resources. (Overload is defined as loading
resources with more demand than they have capacity to perform).
It is necessary that all projects plans are built by creating a proper network
of tasks (using templates, where appropriate). As per CCPM guidelines,
the time estimates are cut in half and are inserted towards the end of the
chains as project buffer and feeding buffers as discussed above. Then the
projects are staggered or pipelined as explained below.
It is critical to ensure that resources are aware that their estimates are
regarded as just estimates - they will no longer be judged according to
meeting their time estimates at task level.
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Flow is the number one consideration (it is not important to finish each
task on time, it is essential to finish each project on time).
Shifting the safeties from the tasks to the end of their respective task
sequences (paths) not only places the safety in the place where it should
be but also requires much less safety than the sum of safeties removed
from the tasks. This requires that resources will no longer be judged by
meeting their time estimates.
Critical Chain Methodology provides a proper guide for where and how
much safety should be inserted in project planning. To get excellent
control, it is necessary to keep the number of tasks in Project Plan Network
to less than 300 (for huge projects zooming might be needed). It is
advisable to create and use templates (when applicable). It significantly
reduces the planning time and reduces unneeded variations in the way the
projects are planned.
Too detailed Project Plan Networks, i.e., the plan having more than 300
tasks are counter-productive as far as the execution and control is
concerned. Vast experience shows that a plan that is too detailed (over 300
tasks) is useless as a tool for execution (that is the main reason for
neglecting the plan much before the projects are finished). In most multi-
project environments, Project Plan Networks do not exist or they are much
too detailed.
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• A task that takes less than 2% of the project’s lead time must have a
very good reason to appear in the Plan. This rule will help to keep out the
detailed tasks.
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times, project managers need to fight for certain resources that are
required for other projects at the same time.
Can we really deal with the resource contention within and across projects?
If we try to do that, it will be a futile and exhausting exercise. An effective
way to deal with resource contention across projects is to do good enough
smoothing of the load on each resource type. The temporary peak loads
that remain in the plan (and the many more peak loads caused by Murphy)
are absorbed by the buffers.
Projects have several non-critical paths. Most of them meet the Critical
Chain at some point or the other. Typically, it is the capacity to handle the
integration of various paths becomes the Constraint and you will find many
projects are waiting for the integration to complete. Sometimes, a resource
type is the Constraint.
Start in the order of project priorities. Take the project having topmost
priority and see when the integration resources are needed and assign the
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time slot. The Critical Chain is, thus, anchored and the rest of the legs, i.e.,
paths follow accordingly.
Then take the next project in the priority list and repeat the action. Then
continue with the rest.
During this exercise, you may find that the same time slot is required by
more than one project. You can continue assigning the time slot as long as
there is enough capacity. Once this capacity is nearly exhausted, you need
to assign a different time slot. This will typically change the date by which
the project can be completed. Inform the customer accordingly.
This is how projects are staggered and due dates are determined.
This also helps in making due date commitments for the new projects.
The role of execution is to carry out the planning – as long as the planning
is good enough, meaning it is doable and there is no change of priorities.
Planning is a set of decisions that consider the system as a whole, look into
the future as far as practical, thus ensuring high level of performance.
Planning tries to draw optimum results from the system. The decisions are
taken ahead of time to allow the chain of all necessary actions to take
place.
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The execution should trace the deviations from the planning and take
corrective actions. Sometimes the execution needs to override the planning
directives. Note, those involved in execution are focused on their local area
and on the short time frame.
Monitoring the actual usage of the buffers highlights any threat to the
planning. The execution should react to the generic priorities and warning
generated by the buffers.
The plan must be approximately right and not absolutely wrong. The
execution must take care of the normal variations in the process. Plan only
what is absolutely necessary – determining only those parts that any
deviation might impact the planning objectives, providing protective
mechanisms (buffers) to protect the planning. The execution is given some
flexibility to maneuver the less sensitive operations, provided the planned
instructions are executed as it is.
The organization's decision-maker must insist that all the buffers of all the
projects, particularly the project buffers, be updated at least weekly; if
possible daily. The organization's decision-maker must also make sure that
the enterprise-wide buffer report is distributed widely and regularly
throughout the organization.
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Pretend that you are one of the managers. Your boss holds you
accountable for preventing any project buffer from being consumed
completely. If you want your boss to conclude that you are doing a good
job of managing the system, then you strive to avoid excessive
consumption of any project buffer. In the event that one project appears to
be getting into trouble, you are very likely to shift resources from some
other project, putting those resources to work on the troubled project for a
brief period.
How do you know which project is getting into trouble? The enterprise-wide
buffer report tells you, way in advance of the crash, letting you and the
other managers take appropriate evasive action.
How do you know which project can afford to release resources, even for a
brief period? Again, the enterprise-wide buffer report tells you. The
enterprise-wide buffer report shows you and every other manager how to
allocate resources dynamically, in real time. It lets the entire management
team make the most effective use of available resources, constantly. In a
very real sense, your enterprise-wide buffer report becomes your team's
management information system.
Your enterprise-wide buffer report also lets you manage the downstream
components of your supply chain, your clients. By sharing key parts of your
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buffer report with your clients, you provide them with a clear look ahead,
letting them anticipate early project completions. In other words, you can
manage your clients far more effectively.
In addition, as you build your clients' trust in your team's ability to deliver
on or ahead of schedule, your clients begin to lose trust in your
competitors. In the eyes of your clients, you become a most valued,
trusted supplier. Your competitors, of course, end up being measured
against the standard that you set.
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5. If, as a result of the previous steps, the constraint has alleviated, return
to Step 1.
CCPM calls for a different culture and not adapting to the culture may lead
to failure of CCPM. The following are the salient points:
• Ensure and demonstrate support for the priority system created by Buffer
Management.
• Buffers are a project resource and should not be tampered with. Top
management is often tempted to trim the buffers. They need to
remember that, by such actions, they are jeopardizing the project
success.
• Measure the project progress only on the basis of Chain Completion and
Buffer Penetration.
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• Offer help; ask, “is there anything I can do to help you complete the
task/project faster?”
• Examine the impact of the help given in the past reviews and determine
and give further assistance, if required.
• Ensure that the project teams are engaged in managing buffers rather
than eliminating uncertainty/variation.
• Ensure that uncertainty/variation is handled by improvement teams
based on POOGI – Process of Ongoing Improvement.
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• Projects need safety; not for every step but it is to be placed at strategic
place. Safety is a project resource.
• Flow is the number one consideration (it is not important to finish each
task on time, it is essential to finish each project on time).
❖ Bad Multitasking.
❖ Unreported Task Completions.
❖ Incomplete preparations.
❖ Delayed task starts and procrastination (Student’s Syndrome and
Parkinson’s Law).
❖ Unclear Completion criteria.
• Review daily the list of tasks penetrating the most into the project buffer
and check if recovery actions are taken or required to ensure that the
project is effectively progressing.
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i.e., the rate of consuming the project buffers is higher than the rate of
completing the Critical Chain.
• Identify which tasks are essential to check with the corresponding task
manager if proper actions have been taken and if help is needed (and
therefore also knowing which tasks do not require intervention).
• Ensure and demonstrate support for the priority system created by Buffer
Management.
• Offer help; do not ask why there was a delay and who is responsible for
it.
• When you remove the safety from a task, you must accept the fact that
this task has a good probability, say 50%, of exceeding the estimate.
This is not bad; it is normal.
• You can’t have an environment where tasks’ actual time are analyzed
against estimates, and reported and treated as problems.
• Ensure that the resources are protected from Multitasking. One may
assign multiple tasks to people for the sake of operational convenience.
However, it is important that clear priorities are set and managers explicitly
discourage the Multitasking behavior that people might demonstrate.
• Flow is the number one consideration. Ensure that the tasks are not
stuck.
• Avoid Bad Multitasking – Once you start a task, work it through to its
end, without stopping and as fast as possible.
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• Talk to your Resources every day and offer help for faster completion of
tasks whenever needed.
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The goal of a relay race is to win the race. Each runner runs his leg as fast
as possible and hands the baton off to the next runner.
See this is reflected in the culture that the resources need to follow:
• When one task is getting close to completion, the next task’s resource is
on the track and ready to go as soon as possible.
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• Report delay reasons (“what are you waiting for?”) regularly and ask for
help whenever a delay is not solved so that the task completion
positively impacts the attached buffer.
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6.15 SUMMARY
Peter Drucker said that a great deal of new technology is not new
knowledge. Innovation is new perception. It is putting together things that
no one had thought of putting together before, things that by themselves
have been around a long time.
The question that we should therefore answer is not whether the ideas
underlying CCPM are really new, but rather whether CCPM puts things
together in an innovative way that could be beneficial to the practitioner.
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• Limit the task detailing. Let a task represent a group of work. Even a
very large project may have less than 300 tasks with zooming in, as
appropriate.
• Create, use and modify templates and keep them updated, wherever
applicable.
• Actions are taken to ensure that due dates for new projects are
committed only according to the Staggering mechanism (or top
management’s decision to postpone a specific existing project).
Execution Rules
• Ensure flow.
• Follow priorities.
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• Manage Buffers.
Features of CCPM
CCPM provides
• Information as decisions
• New ethics and code of conduct for the PMs, RMs and TMs
Pitfalls addressed
• Student’s Syndrome
• Bad Multitasking
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• Parkinson’s Law
• Murphy’s Law
Benefits of CCPM
• In-process controls.
• Competitive edge.
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i. The earlier we start each project, the earlier each project will be
finished.
ii. Reducing the number of open projects can reduce bad multitasking.
iii. The bigger the uncertainty, the bigger the safety embedded in the
task’s time estimates.
iv. More the number of tasks in the Project Plan Network, more the
control.
vii.Putting safety for every step protects the project from delays.
ix. A plan that is too detailed (over 300 tasks) is useless as a tool for
execution.
xi. A plan is an excellent tool as “reminder list” for the Project Manager.
xii.A task that takes less than 2% of the project’s lead time must never
appear in Project Plan Network.
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10.What is Staggering?
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17. Explain the concept of Fever Charts and how they are used.
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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
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USING TOC TO IMPROVE MARKETING
Chapter 7
USING TOC TO IMPROVE MARKETING
Objectives
Structure
7.2 Marketing
7.11 Summary
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“Marketing is spreading the corns for the ducks to come and sit. Sales is
taking a gun and shooting a sitting duck. If the duck is not sitting and
moving like a mosquito, don’t blame the sales person; blame the fact that
you don’t have marketing.”
– Dr. Eliyahu M. Goldratt
Sales is using the prospect and to close the deal. If you think shooting a
sitting duck is easy, try doing it. But remember if you miss the shot and
the bullet goes near its ear, the duck will fly away.
Good marketing is having a lot of sitting ducks with glue on their feet.
“If selling were the same as shooting sitting ducks while they ate corn by
the side of a lake, then advertising would be the same as spreading corn
for the ducks to see and come ashore to eat. Marketing would be figuring
out that ducks ate corn in the first place.”
7.2 MARKETING
What is the core problem that prevents companies from doing a good job
of marketing?
The problem is still the notion of local optima to reach the global optima.
And this is what creates the real conflict for marketing.
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Due to this local approach of looking at the thing and trying to optimize
each part, we have increased drastically one of the perceptions of value
that exists in the field. When you have a product or service, there are two
different perceptions of value of the same product or service.
One is the perception of the value of the supplier which is based on the
efforts that have gone into providing this product or service. The more
efforts, the more money and the more time that you took to provide this
product or service, the more you think it is valuable.
However, there is another perception of value for the same exact product
or service. This is called “market’s perception of value” and it has got
nothing to do with your costs or your efforts to bring the product to the
market. It is solely according to how much benefit the product or service
will bring to the clients. It has everything to do to satisfy the client’s needs,
but nothing to do with your efforts. Suppose you have put in huge efforts,
but this product is not satisfying the needs of the clients or is satisfying the
needs to a small extent; the market’s perception of value will be small.
• On one hand, to generate demand, one must act upon the client’s
perception of value which is determined according to the benefits
expected from the product/service. Also, different clients have different
perception of value.
• But on the other hand, one also must act upon the supplier perception of
value which is according to the investment in the product/service. The
perception is that the total sales should generate profit.
When the tension between the two different perceptions of value exists,
the unavoidable marketing conflict emerges.
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These two perceptions of value generate a conflict and this conflict is at the
root of jeopardizing our efforts in marketing. Let’s have a look at the
conflict in the Figure 7.1 below:
In order to arrive at good pricing decisions for the company, we must get
good sales volume. In order to get good sales volume, we must act upon
market’s perception of value.
As long as this conflict exists, the marketing has both hands tied. We have
to find a way to resolve this conflict and this is actually the Marketing’s job.
The first assumption is the connotation of local optima coming from the
word “product margin” which is calculated based on product cost. In order
to “Arrive at good decisions”, we must “get reasonable product margin”
because having positive product margin for each product/service
guarantees that the company is profitable.
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Company ABC Corporation has $140 million sales, the majority coming
from its major product line P where they sell 10 million units every year at
$10. Gross Earning for product P is 30%, material and purchases account
for 40% of sales. Installed line capacity for product line P is loaded to 75%
of maximum capacity. It is an automatic assembly line requiring no direct
labor – just operators to maintain the equipments.
Overall, ABC Corp is making a loss of 3.6 million per annum. The General
Manager has asked his first line to come up with ideas to turn around the
business or they will have to close the plant.
The Sales Director turns up with a business opportunity to sell 2 million per
annum more of product P (which is well within the available capacity). The
downside is that the price would be 40% below the going price – in other
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Summary:
Conventional Approach
Common business sense clearly says that we have to decline that business,
as it will drive us deeper into the losses. After all, we are expected to sell
at a price which is below our product cost and it will cause negative
margin.
Consequently, ABC Corp will go bankrupt, all jobs will be terminated and
the plant will be closed.
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TOC Approach
What about the rest of the operational cost? We have enough capacity. If
we keep it running, the only additional cost will be energy and
consumables such as oil, compressed air and some similar type of cost.
Usually, this does not account for much and so we assume that 0.1 million
is sufficient to cover all our additional operating expenses.
There is no question! We have to take the business and ABC Inc. will be
out of the red immediately.
So, the assumption “any sale which has negative product margin reduces
company’s profitability” is invalid.
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The conflict still remains. We are stuck between the rock and the hard
place, i.e., between the supplier’s perception of value and market’s
perception of value.
We claim it only in one case where the market is not willing to pay us
enough. If the client’s perception of value is much higher than the
supplier’s perception of value, we don’t have any conflict.
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The core problem is to find out how to raise the client’s perception of value.
Most people may say that if we want to do it, we will have to come out with
innovations for new products. May be, however, it is not necessary. What
most of us don’t realize is all that there is a way to do it for existing
products.
Once you create a sustainable Decisive Competitive Edge, you can create
suitable offers for different market segments. Let us understand them in
detail.
When you don’t have a DCE, – one that is good enough to persuade
prospects to take their business away from existing suppliers and give it to
you - the price inevitably appears to be the key, and your “value
proposition” becomes irrelevant and meaningless.
You know your products, service, quality and price are highly competitive,
but your customers want all the performance advantages and to pay less,
year after year.
How are you supposed to respond? Offer improved performance? If you do,
they’ll simply make that performance as a “standard” and still demand the
price reductions!
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So, do you cut your selling price? Beware! Your competitors can match you
in no time. You can trigger a price war and everyone loses.
So do you resort to cost-cutting? Look at the past and tell how successful
have your efforts been, unless you took the path of lay-offs? And how long
is it before cost-cutting of this kind reaches bone, and actually translates
into lost profits?
The problem can also take another, disturbing shape: even though you only
own a small part of the marketplace, if you don’t have a DCE then a
downturn in the market becomes a downturn for you.
You perhaps own 5% of the total market (but probably less) … so a dip in
overall demand still leaves the total market demand as being many, many
times the volume your plant could ever produce. So why should your
demand go down?
Because without a DCE, you can’t take some business away from your
competitor. Not without cutting your price – which is usually the world’s
worst tactic.
Winning Offer
What should you do? You should create a DCE and create a winning offer
for the market.
The Marketing needs to come out with a winning offer – the offer has a win
for both – for the company as well as for the client.
• The offer should bear minimal risk for the company and not require
excessive investment.
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What is different about the reality of a company that has a winning offer?
Let us understand that having a winning offer (having a DCE and breaking
the conflict) means a new reality for the company:
The term "decisive competitive edge" describes itself well; but it will help if
we define it clearly. A clear definition is mandated if one is to know when
you have arrived at your objective. Many times, we are incorrectly labeling
many nice "competitive advantages" as if they are "decisive competitive
advantages." This may lead to disastrous effects from a false base
assumption.
Competitive
If you are "competitive” means you have little, if anything, to distinguish
yourself from your competition and often have to resort to "bribery" to win
the business (i.e., discount, additional service that is a true cost,
something very special for a specific customer, lunches, tickets to sporting
events, etc.).
Competitive Advantage
A "competitive advantage" affords you the ability to gain market share
when the advantage is presented to the target client. However, this too can
be offset by a significant price reduction by your competitors. But the price
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A significant need of the clients is one that, when satisfied, the client
improves (in order of magnitude) his level of performance.
When a DCE is reached and has been prepared and sold as an appropriate
offer, the expected result is a significant increase in sales.
• Build a DCE.
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• Sustain in time, the DCE and capitalize continuously over it, identifying
the few projects that increase the operative response of the company
(synchronization between Operation, Marketing, Sales and Finance).
• By offering something of equal or greater value than the price you are
charging,
A DCE cannot be offset by the competition with a price reduction. The Post
Office could not give away free postage to compete with "absolutely,
positively overnight anywhere in the world" offer by FedEx. The market
receives a tremendous value that is not provided by anyone else. A true
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If you struggle to increase your price and sustain business, your offer
should be examined to see if you are solving your market's problem at the
level of "decisive." Maybe you have a competitive advantage, but not a
DCE. You may be the most reliable vendor in the world, but if that
reliability only converts into minimal pain relief for the market, then you
still only have a "competitive advantage" and can be subject to losing
business on price competition.
We not only have to identify what are the problems of our market but we
will also have to identify what is the core problem of the market vis-à-vis
our industry.
If we can solve the core problem of the market – the problem that leads to
other problems – we will bring in excellent value.
An URO is an offer so good that your customers can’t refuse it and your
competition can’t or won’t offer the same.
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An URO is a sustainable market offer built on this advantage. URO can only
be created by satisfying a significant need of the market to the extent that
no other significant competitor can.
You will have to collect all such problems – the Undesirable Effects (UDEs)
– and connect them to your products (and your competitors’ products) to
see how they get generated.
Such an URO helps us to answer the question “Why should we buy from
you?” and the answer is different than what our competitors would give.
The typical answers are:
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• We are trustworthy.
This is what most people will say, maybe with some variation depending on
your industry.
However, it typically does not vary much between you and your
competitors. And that’s really the point. After you create such an offer,
your answer will be different than that of your competitors and you will be
providing compelling reasons for your customers to buy your products.
After all, the list above does not explain your offer in the sense that these
are not the qualities of the offer. Your competitors say the exact same
thing. All good companies have these qualities or they wouldn’t be in
business for long. An Unrefusable Offer is not a list of strengths,
subjective, or offered by the competition.
More importantly, it gives you a very good reason to change. You are more
motivated to make the operational improvements. The operational
improvements occur faster.
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shorter lead times because you feel guilty about your past performance.
Therefore, it may be worthwhile to create your URO first, and then make
the operational improvements necessary to deliver your offer.
However, before you make your offer to your clients and prospects, there
are some things you must do. Getting your operations in shape is
paramount. The fastest way to kill an URO is to not be able to deliver it.
So, make sure you can deliver your offer by doing a couple of dry runs.
Pretend that several of your orders are for your offer and see how you do.
Alternatively, if you are going to guarantee a shipping date, determine how
much you would be paying in penalties if every order were guaranteed.
Protecting yourself and looking out for your interests is what caused the
negatives for your customer in the first place, so don’t back track. But at
the same time, don’t put your entire business at risk.
The DCE can be different for different companies based on their significant
needs. The following is a list of some significant market needs:
• Inventory Turns.
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The Reliability offer is not used merely to get specific orders, but mainly to
get “Business” – being the preferred supplier, getting volumes of good
Throughput orders etc.
The following are the direct and indirect consequences of frequent late
deliveries for the clients:
• The clients may end up in losing their clients and may lose sales
opportunities.
• The clients may have to hold excess inventories to protect their interests.
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• The product is highly customized and not typically sold again or the
customer purchases a high number of products.
• The purchase price is negligible relative to the selling price, e.g., about 5
per cent.
• The standard lead time in the industry is relatively long say about six
weeks or so.
• The standard Due Date Performance in the industry is relatively poor say
less than 80%. The meaning of good Due Date performance (DDP) is:
• Supplying in full (full quantity and all the different products included in
the order),
And this performance is less than 80% which is not really good. So, what
does it tell us? It only tells us that the Reliability is the significant need of
the clients.
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• Regular prices.
• Same quality.
What is the DCE here? We are benefitting from the internal improvements
carried out by us which has reduced our lead time significantly. Now, it is
much lower than our competitors. We are capitalizing on this advantage,
which is not easy for our competitors to copy, and establishing ourselves as
the most reliable supplier. This will be a great reputation and we will be
profiting with it.
There are some pitfalls while making such an offer. Let’s look at them.
However, it may dilute the power of the offer, and make it more difficult to
sell. The power lies in reliability. We would like to stand out as the most
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Caution: If the current prices are already higher, it may dilute the power
of the offer, except of course when there is an additional justification such
as product quality or market position (brand).
Here the assumption is that either there is a justification, or that the prices
are not consistently higher. The offer will lose some of its strength if this
assumption is invalid.
While making this offer, we do not tamper with the current pricing. Again,
the assumption is that our prices are already acceptable to the market.
However, if we have reason to believe that our prices are too high which is
supported by low hit ratio, consistent drop in sales etc., we need to re-
examine the pricing policies. Most likely these include cost factors that
unnecessarily inflate the price.
However, by doing this, we will be diluting our focus on the significant need
of the clients. If we have identified reliability is the significant need, we
should just solve that problem rather than offering something more. (If
rapid response is also a significant need, we will address it in the second
part of this offer – by charging a premium.)
Further, if we offer shorter lead time, it will increase the load on operation
and we may struggle to remain reliable. If it causes us to quote longer and
longer lead times for other clients (which actually defeats the purpose), we
will be forced to elevate capacity earlier than needed.
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If reliability is the significant need of the clients – they are suffering a lot
due to the failure of the suppliers to supply within committed time – do we
really need to digress from it and divert client’s attention to such a thing
that the client will not believe?
We know that almost all of our competitors are taking much longer than
what they promise, i.e., the standard quoted lead time. In view of this, will
it be advisable for us to quote little longer lead time (so that we are
absolutely safe)? Absolutely not. If we quote longer lead time, it may dilute
the power of the offer and make it more difficult to sell. We intend to stand
out as the most reliable supplier while being equal in all other promises
that our competitors make (unless there is an additional differentiator in
the product itself). Quoting longer than industry lead time will jeopardize
the perception we would like to create.
Note: Having slightly longer than industry standard Lead Times will be
accepted by clients (who know competitors are promising shorter Lead
Times but regularly miss deliveries). However, the company should not
take the initial position of quoting longer than industry standard Lead
Times. This might happen with selected clients only when the load
increases.
At times, some clients are given preferred service by their current suppliers
and therefore typically enjoy shorter than industry standard Lead Times.
Quoting reliable standard Lead Times to these clients will not create the
desired DCE. However, we need to examine the reality to know whether it
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regularly gets delivered in such shorter time. Because if this is the case,
the industry standard Lead Time will reduce.
If there are preferred clients that do normally get shorter Lead Times, we
should first check if we want to get their business by examining the
volume, Throughput etc. If so, check how short is the normal Lead Times
that they require relative to the industry Lead Time. If it makes sense to
offer this Lead Time as our standard offering, then consider such clients.
What should be the size of penalty? Should we try to cover the client’s
damage?
• Offer to pay high enough penalty to build the confidence of the client in
our commitment.
• Caution, since Murphy’s Law can cause delays at times, it should not be
high to the extent that it risks our business.
Typically the penalties are set as a percentage of order value. Penalty is not
set to cover the damage caused by the late delivery. It is not needed to
build the confidence of the client and block competition.
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The penalties should be set to be per time interval (depending on the Lead
Time, usually the penalties are per day). This creates the impression that
in case the delivery is delayed, the company will do its best to deliver as
fast as possible. It also enables to reduce the size of the penalty for the
first day or two of being late. Usually, the penalties are caped at full order
price.
Use the risk of penalty to minimize the quality issues and thereby minimize
the risk. If our current rate of defects (and therefore rejection) is high, we
need to fix it before we launch the offer and this is not easy.
• Produce more than the order quantity to create a buffer against defects.
There is a penalty even if we deliver the order partially. The partial delivery
may happen for any of the following reasons:
• Some parts may get rejected due to defects/scrap and hence our delivery
is partial.
• Many times, we start the production process before having all required
material in place. This may result in producing insufficient quantity for
some of items in the order.
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There is yet another reason for late/partial delivery. Often, the client
makes changes in his requirements. The changes may be in the nature of
changes in quantity/time/scope and may risk DDP. We need to examine
how frequently the client makes changes and choose to communicate
clearly that any change introduced by the client may trigger a new delivery
due date.
Depending upon the industry practice, we need to decide whether our offer
is for guaranteeing “to the door delivery” or for guaranteeing “ready to
ship”. Should the due date be considered as the date the shipment arrives
to the location of the client? Or should the due date guaranteed be
considered as the date the order is ready to be shipped from our plant?
Obviously, the first option enhances the power of the offer; however it
carries the following risks that should be mitigated:
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• Another risk of guaranteeing “to the door delivery” is having the client
not willing/unable to accept the order (for reasons like warehousing
policies). If this risk is valid, it should be dealt with by the terms and
conditions of the offer.
In most cases, it was found that the offer is strong enough when the due
date is set to be “when order is ready to be shipped”.
There are industries where the client arranges for transport. In this case,
“ready to ship” is the norm and any transportation delays are not treated
as delays on our part.
Many times, there is some designing and engineering work for which some
development time and client’s approval before producing is needed. We can
produce only after such work is completed and approved by the client.
Ignoring this fact while creating an offer may cause problems.
It depends upon the industry practice. Does the Reliability offer apply only
to the production Lead Time enough to generate a DCE?
Even when engineering is not included in the Lead Time guaranteed, you
still need to take measures to ensure fast engineering process otherwise,
when sales grow fast it will quickly become a bottleneck.
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At times, we outsource certain work and if those vendors are not highly
reliable, it could jeopardize our reliability. While creating the offer, we need
to consider the reliability of such vendors.
• On time,
• In full,
• To specs,
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The assumed significant need of enough clients is Rapid Delivery, and they
would pay a premium for it when they suffer from unavailability and are
willing to pay a premium to cover the damage.
• There is already some delay and the client is trying to recover a delay in
the client’s project.
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The conditions discussed so far most likely mean clients occasionally suffer
from unavailability. But to make sure this is the case, one more condition is
needed, i.e., “Difficult to pursue alternative solution”.
• It is not likely that there is always a supplier that can produce it rapidly.
• High price per unit and since the client needs relatively high amount of
quantity, it calls for a significant investment.
• Quality risk.
• Being more expensive.
• Takes too long to amend or to find.
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However, the fact that the clients suffer from unavailability does not yet
mean that they would be willing to pay a premium to receive it rapidly.
There are two criteria when clients will be willing to pay premium:
• The cost of the alternative solution (if exists) is higher than the size of
the premium.
• For standard lead times at regular prices, we add the commitment to pay
significant penalty for missed delivery.
This offer may fit in situations where at least some of the following
statements are valid:
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• The shelf space and/or storage space is limited with the retailer.
• Forecast is the basis for the retailer for placing orders on the
manufacturer/distributor.
• Most of the shelf space is occupied with relatively large quantities of slow
movers.
• Slow movers are discounted after holding them for some time.
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When clients suffer from surpluses and shortages, Inventory Turns become
a significant need of enough clients.
• Cost of Goods Sold divided by inventory (typically average level for the
measured period). This is commonly measured by middle level to top
management.
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❖ Order lead time means the time from receiving an order to re-ordering
the same product.
❖ Determine the order lead time by the frequency of orders of the same
product.
• When clients place orders and maintain stocks based on their forecast.
If…
Order lead time is significant;
Clients stock for forecast;
Clients deal with many products; and
Cash/space is a constraint…
• When customers do not find what they are looking for, they may not
always ask for it. So, the shortage goes unnoticed.
• Even if customers ask, the salesperson may not always report the stock
out.
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• Even when the store reports the stock out, it may not always get
registered in the system.
• One cannot really assess the lost sales of not stocked items (limited
range).
So, the level of shortages is much higher than what people consider it to
be. It would be safe to say that about 20% to 30% sales are lost due to
shortages.
We need to set the initial inventory levels. Too high will dilute the offer, too
low will risk availability.
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• It is not possible to accurately assess by how much sales will grow and
we will certainly not commit to it with the retailer.
• We need to remember the four reasons we deal with that currently drive
sales down:
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• The more we have reasons to suspect these reasons exist, the higher the
likelihood sales will grow due to our solution. We assess it by verifying
the existence of the conditions:
iii. It is possible that the client will hold the same and possibly higher
number of units in inventory, if there is an increase in sales and
variety. The reduction in inventory should be measured in days or
inventory turns not in terms of units.
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A third-party logistics provider can also be involved to make sure that the
buyer has the required level of inventory by adjusting the demand and
supply gaps.
VMI makes it less likely that the client will unintentionally become out of
stock of a product and while simultaneously reducing the level of inventory.
Furthermore, supplier representatives in a store benefit the supplier by
ensuring the product is properly displayed and store staff is familiar with
the features of the product line, all the while helping to clean and organize
their product lines for the store.
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As a second phase, “In mature partnerships, the company has the ability to
command higher prices or at least to successfully defend against pressures
to lower the prices.”
This offer may fit in situations where at least some of these statements are
true:
The objective is that the manufacturers grant business for proven excellent
availability coupled with lower inventory and less hassle at good prices.
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One of the keys to making VMI work is shared risk. In some cases, if the
inventory does not sell, the supplier will repurchase the product from the
buyer (retailer/manufacturer). In other cases, the product may be in the
possession of the retailer/manufacturer, but is not owned by the retailer/
manufacturer until the sale or consumption takes place. The retailer simply
houses (and assists with the sale of) the product in exchange for a
predetermined commission or profit (sometimes referred to as
consignment stock) or a manufacturer allows the supplier to use his space
for keeping the inventory.
This is one of the successful business models used by Wal-Mart and many
other big retailers. Oil companies often use technology to manage the
gasoline inventories at the service stations that they supply. Home Depot
uses the technique with larger suppliers of manufactured goods. VMI helps
foster a closer understanding between the supplier and manufacturer by
sharing timely information.
Suppliers benefit from more control of displays and more customer contact
for their employees; retailers and manufacturers benefit from reduced risk,
better store staff knowledge (which builds brand loyalty for both the
vendor and the retailer/manufacturer), and reduced display maintenance
outlays.
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A company that delivers projects can create this Decisive Competitive Edge
(DCE) and capitalize on it.
This DCE may fit in situations where at least some of these statements are
true:
• Late delivery of the overall project has major consequences for the client.
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In order to make this kind of offer, some of the following statements need
to be true:
Eliminating risk is the significant need that causes this offer to exist. There
are some equipments, machines that are available in the market and many
companies desire them to use. It is not only nice to have them; but their
usage helps in their work. However, these equipments are costly and
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Most equipment suppliers put all the risk of purchase of their costly
equipments on their clients. At best, they might offer a lease or rental
agreement. This URO may reduce your risk only to say 5 per cent of the
purchase price and the clients pay as they use the equipment. Since the
clients pay per use, it serves as an incentive for the manufacturers of such
equipments to maximize the equipment uptime and quality. This enables
the clients to focus on their business instead of worrying about when and
what to buy.
URO can be developed for every product or service and for every market
segment that you service. Some companies will have an offer for each
product, while others will have offers that vary by market segment.
It is common to have one or two offers for the products or services the
company sells in the markets in which they participate. However, there is
no right number. If you need to decide which product or service and which
market with which to start, you can use the following questions:
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URO can be aimed at others besides your customers and prospects. You
can create UROs for your vendors, your employees, your bank, your
partners or affiliates, or for whomever you choose to target.
Once you start thinking along the URO lines, you will also find it useful to
ask, “Why should anyone you interact with, do business with you?” This
line of thinking will help you to make sure that all the interactions you have
are as good as they can be.
There is no limit to the number of offers you can develop or to the amount
you can increase your sales. In addition, UROs are possible for the majority
of companies. The reason that most companies don’t know that they have
one or know what it is, is because they just don’t know how to develop
them.
As you know, there are two perceptions of value; one is the supplier’s
perception of value which is according to the investments in the product.
Due to that, we believe that there is one fair price for our product or
service. This price is typically based on the cost of the product plus some
reasonable margin. The margin is decided based on what the market is
willing to pay or what your competitors are already charging. But there is
one fair price for all and it is amazing how many people think like that.
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If you were to chart a graph, it must start with zero meaning there is a
section of the market that perceives no value for your product or service.
They are definitely not your prospects.
So, we know one point on the graph. There is some percentage of market
that believes that your product or service is highly valuable. That is the
peak in the graph. There is a percentage of market which falls on both the
sides of the peak. We also know that when we go to larger and larger
amounts of value, the perception must decay to zero. Somewhere far
ahead in the graph, it must hit zero again. See the Graph 7.1 below.
As long as you are selling your product in the market, there is some
percentage of market that believes that your product has some value;
otherwise, you will not be able to sell. However, the value is different for
different portions of the market. Nobody knows what the graph really looks
like. What we know is that the graph must start from zero, must peak to
some positive value, remain in a positive range and then again decay to
zero.
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This is the spread of your market – the market that you call a uniform
market is not really uniform.
Now, look what happens when we are superimposing a fixed price on the
graph. By virtue of putting a fixed price, you divide the market in three
parts as shown in the above graph. On the extreme right, there is a section
of market that is willing to pay you more than the price you asked for. For
them, the perception of value is higher than the price that you are asking
for. So, even if you ask for more money, they will be willing to pay. So, you
are not exploiting this section of the market at all.
Then look at the middle section in the above graph. These are the
customers who are buying from you but are always complaining about your
price since their perception of value for your products is somewhat lower
than the price. Since your competitors are not offering lower price and
since they need the product, they are buying it. These are the people they
don’t like you. They think that they are paying little too much. If your sales
people are saying “our prices are somewhat higher”, be sure that you have
such clients. This is a dangerous section since they are not happy. If you
give them opportunities to nail you about your product quality or
something else, they will start bitching. If your competitors lower the price,
they will start buying from them.
But there is a bigger segment that resides on the left side of the graph.
Their perception of value of your product is so low that they simply don’t
buy it.
Segmentation means, clients with high needs pay high price for your
product and at the same time, for the same product (from your point of
view), the clients with low needs will pay low price.
But that’s not enough. You must guarantee that when a client who pays a
lot talks to the client who pays little (don’t fool yourself; they will talk, no
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matter what), the client who paid a lot will say “what you have bought with
much less money is not what I need. No wonder you paid much less”.
The strategic rule that comes out is “segment the market; not the
resources”. This rule is an absolute key because when you are dealing with
strategy; your basic assumption must be “I do not know how the market
will behave in the future. Nevertheless, I must have a company that is
flourishing, now as well as in the future”. This is one of the keys in building
a new strategy.
• The sale of a product in one market segment should not have a negative
impact on the sale of a product in another market segment;
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7.11 SUMMARY
The thing that you must chase out from your mind is “the perception that I
have about my product is the correct perception. My perception is more the
investment in the product, more the market should pay. If they are
refusing to pay me, I will bitch and moan about unfair competition”.
Instead, what you have to tell yourself is “the perception that really is
important is not my perception; it is the perception of the clients which has
nothing to do with how much money and effort that I am putting in
developing, producing and distributing the product. The perception of the
client is to what extent they are going to benefit from buying the product.
That’s what really counts! So when I do marketing, I have to go out of my
way to find how I can bring more value to my clients. And the way to bring
value to the clients is by solving their problems – problems that my
competitors do not solve.”
You need to find out not only the undesirable effects (UDEs) caused by you
and your competitors; but you also need to find out a way to minimize – if
not eliminate – your policies that cause it.
That’s the way to create an Unrefusable Offer (URO). If you are able to
identify your policies that create most of the problems, it is easier to
construct an URO. But for that purpose, you need to change your policies
and that’s not easy. It is far more difficult than deciding to spend $50
million!
Once you have decided to change your policies, you need to write down as
to how these new policies will turn the UDEs of the market into desirable
effects (DEs). A word of caution – the new policies may cause some UDEs
for you. Taking care of them is what will enable you to polish your offer.
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But if, your competitive edge is based on changes in your policy, the
policies that the whole industry is using for several years if not decades it
will take many years before they can catch up.
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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
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USING TOC TO IMPROVE SALES
Chapter 8
USING TOC TO IMPROVE SALES
Objectives
Structure
8.1 Introduction
8.6 Summary
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8.1 INTRODUCTION
“Marketing is spreading the corns for the ducks to come and sit. Sales is
taking a gun and shooting a sitting duck. If the duck is not sitting and
moving like a mosquito, don’t blame the sales person; blame the fact that
you don’t have Marketing.”
The subject of Marketing was discussed in the earlier chapter and let us
assume that the Marketing steps have been done. Sales is a subset of
Marketing. It is the personal promotion function within the company’s total
business strategy and the operational arm of Marketing.
Marketing has done its job – the company has a winning offer. The
Operation’s improved capabilities are in place and the Marketing work has
generated a winning offer to a large enough target market.
Typically, salespeople like to show their products to begin their sales pitch.
However, the prospect starts raising objections as soon as he sees
something and the whole discussion becomes defensive. Therefore, often
there is a conflict in the mind of a salesperson as to whether he should
show the product early or not.
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From one hand, in order to bring a prospect to see your product or service
as the best value for his/her money, you must show value to the prospect.
In order to show value to the prospect, you must show your product or
service, because the prospect understands his/her needs and can evaluate
how much your product/service satisfies these needs. The prospect is the
best person to see and evaluate how good your product is since he knows
exactly what his needs are.
On the other hand, for not to cause the prospect to object, you must not
show your product or service, because the prospect always raises
objections to salesperson’s praising of his/her product or service.
Salespeople believe that more the objections are raised by the prospects,
more the dialogues and better the chances of selling. However, according
to Neil Rackham (creator of SPIN selling)
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Allowing raising more and more objections put the client into a negative
frame of mind. Neil Rackham further said that
Showing product allows raising objections. However, you believe that you
must show the product so that the client can see the value. So, on one
hand, you must show your product and on the other hand, don’t even think
about it. A dilemma.
Dr. Goldratt believes that the assumption “the prospect understands his/
her needs and can evaluate how much your product/service satisfies these
needs” is false. Customers know only the symptoms of their problems and
they do not understand the true causes of their problems and are not
usually able to identify the causes themselves.
To break the conflict, the salesperson has to bring the prospect to agree on
the magnitude of his/her problems or needs, and that they all stem from
one source – the source which the seller knows can be addressed by his/
her product or service. It should be done in a way that does not build
resistance, but builds trust. Then, and only then, is the seller in a position
to show that the way to address the prospect’s needs, and to get the
benefits, is by using the seller’s product.
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Have you ever proposed a great idea but the other side turned it down? If
you reflect on your experience, you may think it is only because the other
person is stubborn/idiot/had something personal against you… or maybe it
had to do with the way the idea was presented.
What could be wrong with the way the idea was presented? You need to
understand that winning offers do not sell themselves! Knowing how to
present the offer is not trivial, but it is not the only challenge relating to
sales.
It takes time (long time) until a winning offer generates leads by itself.
When salespeople know very well how to sell the offer and there is
constant stream of leads to sell to, can we finally stop worrying about
sales?
Sometimes the negative effects of success are our biggest enemy. When
one has a winning offer – the major cause for lost sales is not dealing
effectively with all of the opportunities. Selling an offer is not a trivial task.
There are three common challenges in the field of sales:
• Will your lead time be high? (Are you taking more time to be reliable?).
• You appear to be charging higher price and thereby cover the possible
penalty.
• I may consider you for future business; right now I’m very pleased with
my suppliers.
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• How can I know for sure you will not starve me after you reduce my
safety inventories?
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• When discussing the reasons for the objections, identify when the
objections refer:
This will build the base for further improvement in the way you sell the
offer.
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• People can have different types of resistance – just like an onion has
different layers.
• Not always people (even the same person) have the same number and
type of reservations – just like not all onions have the same number of
layers.
Layer #3: The solution does not address the whole problem!
Layer #5: Yes, BUT there are obstacles to implement the solution.
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Here are some of the characteristics of a business deal sales that makes it
different from a regular sale:
• The prospect would prefer to consult with others, prior to making the
decision.
• A major sale means a major decision – if the decision is wrong, this also
means a major mistake.
In most cases, a business deal sale is not closed in one meeting. This is
because there is a need to convince several people from the prospect's
company and the prospect would like to check many aspects of the offer
and the supplier before the deal is closed.
We cannot simply present the offer, prove its value, and demonstrate the
capabilities to implement the offer in one meeting.
Considering this, we need to develop a sales process with details like what
the company should do, at which step, with whom, by whom, in order to
bring a specific prospect from ignorance to closing a deal.
Most of the meetings should not aim to close the deal. A longer sales cycle
with many opportunities calls for proper management of the sales pipeline
(making sure opportunities are not delayed in a specific step due to
improper attention).
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decision. Since it is something new, the person would like to check the
offer from different perspectives. He may need approval, if he is not the
decision-maker.
We need to make sure the person with whom we talk, really understand
the offer to the level that he can deal with the reservations that other
people in his company may raise.
When the structure is not set to deal with a quantum increase in number of
opportunities, what are the unavoidable ramifications?
• Poor conversion rate (an opportunity that was not dealt with properly is
very difficult to recover).
• Frustration.
• Damage to reputation.
This is not something new as it is very basic marketing and sales concepts.
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• Having a DCE does not mean that leads will be created by themselves (it
may happen in the future when the company’s DCE is branded in the
market).
• Reaching the goal requires more and more clients enjoying the offer.
Usually, it means a much more active role on behalf of the company in
getting new clients.
If the numbers are relatively low – which is usually the case as the
company does not yet have a DCE. If the numbers are quite high (mainly
because they count already lost leads and opportunities as real ones) –
estimate how many of them will actually turn to good contracts. The low hit
ratio is not surprising given the fact the company does not have a DCE.
Our DCE will result in much higher hit ratio than earlier and the salespeople
will have many more opportunities to manage. This may lead to chaos and
result in lost sales.
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The direction for a solution is to limit the number of leads, have a buffer of
leads and monitor progress of leads. This will help to maintain the
workload of the sales people to a reasonable extent so that they can pay
enough attention to each opportunity and they can convert many
opportunities into sales.
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• Hit ratio of first steps in the sales process (if we have high fallout, it may
indicate bad qualification).
• Reasons for delays (in which steps opportunities get stuck and why).
• Reasons for dropouts (in which steps opportunities drop out and why).
What are the actions that a sales person needs to take to increase his hit
ratio?
Let us start with the assumption that you have a real URO. But it will not
sell itself. It is difficult to sell even a win-win solution. Why?
Usually, clients don’t trust what the sales person says about how great his
product is. This is reality. Also, many clients do not have very happy
memories about the suppliers. The suppliers have not been excellent to
their clients in the past. Sometimes, they may have caused a major
problem. So, it means you not necessarily start from zero; on the contrary,
you may have to start from some negative.
Also, many times, the buyers pretend that they are not interested in
buying at all! They are actually trying to play safe.
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The unavoidable ramification of all these is that, when you present your
win-win offer, the buyer is not going to appreciate it immediately; on the
contrary, he is going to criticize it, pointing some small things here and
there and saying “this is not good…”, “I don’t like that…” etc.
On the other side, the salesperson is convinced that his offer adds a great
value for the client. At the same time, the salesperson is not so much sure
that this new generous offer is good for his company or himself.
In this situation, the salesperson does not expect any criticism, not even a
minor objection, from the client. After all, he believes, it is a great offer for
a client and not so great for his own company. So, he expects that the
client will actually be very happy to listen and will give red carpet
treatment.
The better the offer, the client is likely to be more skeptical and the
salesperson is not ready to hear anything negative about it.
This is a sure recipe for collusion and salesperson is highly likely to show a
negative body language.
If this is the case, what is the chance to win the sale? Not really high, isn’t
it?
What does this suggests? It suggests that presenting a win-win offer is not
the way to start.
The salesperson starts presenting his analysis of the problem – the client’s
problem. He does not start presenting the product; he does not start
talking about his company background, history, other clients and such
usual things.
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Now, when the salesperson starts talking about the problems faced by the
client and points out that the causes are the policies of his (supplier’s)
company and the competitors, the client is very much interested in
listening. He is amazed to know that the salesperson is not blaming the
client for his problems; the salesperson is not talking about how good his
product is; but he is talking something that no other salesperson has
talked before. He finds that here is a person who not only knows what the
problems are, but also willing to openly accept that they are created by the
policies of the suppliers.
Do you think when a salesperson presents this, will there be any client who
is not interested in listening?
The result is that the buyer realizes that there is, at last, somebody, who
understands his problem. The rapport is built.
Achieving the rapport this way is far better than what you can achieve by
taking the client for dinner several times, or by giving some gifts etc.
You have achieved the real rapport and this is the way to achieve it. This
way you are overcoming the first layer of resistance by establishing what is
the real problem thereby getting an agreement on the problem.
This is good, but not good enough. Rapport by itself will not start selling
things for you. So, should you start showing your offer? Not yet. It’s time
to set the stage for it.
Then comes the real action that really sets the stage. There comes a
declaration that the salesperson makes it on behalf of his company “my
company now realizes that as long as you are not selling, we are not
selling”. He indicates that he is willing to change the policies. With this
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At this stage, the client is likely to ask, “Are you going to do something
about this?” he is actually asking you to present the offer.
What does this mean? It means, don’t talk about the product; talk about
the features of the product/offer that will remove the UDEs of the client. It
means talk about the major ingredient of the offer and go step by step,
showing how it will remove the undesirable effects of the clients. The buyer
follows the rigorous cause and effect and is astonished!
However, this astonishment is not going to bring you sale. This is because
the client has not forgotten the past. He does not have exactly a great
relationship with the supplier in the past. That makes him to seek “the
snake in the grass”. He suspects that you have something hidden in the
offer and that could prove to be devastating for him.
What is the best way to continue? Can you tell the buyer that there are “no
snakes in the grass”? You can promise, but he will never believe. And then
he will hesitate to accept the offer.
The best way to overcome the fear of the “snakes in the grass” is to show
the snakes!
What does this mean? The salespeople will say something like “Of course,
this is not the whole story. There are things that we want from you in
return”.
Then the salesperson will show him negative branches, i.e., what is that his
company going to suffer if they give the client what is being offered and
what he needs to mitigate that.
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For example, if you are a manufacturer or a distributor and you are making
an offer to a retailer you may say something like this: “Since the inventory
you hold will be reduced substantially, some display space will get released
and we do not want to lose that. Therefore, we want you to secure for us
the same display space. And in case our sales increase as expected, you
will consider granting us more display space so that we can increase our
variety.”
The salesperson will clearly tell what will happen and what he wants from
the retailer. He should not say something like this “Since we are giving you
this, this and this, in return we want from you that, that and that”, because
it does not tell why you want or what you want. The salesperson needs to
tell the reason why.
• One, you are taking care of yourself and therefore he becomes less
suspicious about the snakes in the grass.
• The second thing is, your demands from the client become very
reasonable. You get so much because of the actions of the supplier and
you give so much since it sounds reasonable and logical. A win-win deal.
The client sees the offer as “a dream come true”, particularly when he is
not used to such fairness from the suppliers.
This removes the third layer of resistance; it helps to see that the solution
will solve the problem. It also peels the fourth layer of resistance inasmuch
as the client knows that the offer will not cause any negative effects for
him. He knows that you have not suddenly become generous and you are
taking care of your business and at the same time creating excellent
results for him. So, he understands well as to why this offer is good for
both the parties.
Closing
Though it is a necessary condition to get the client to want your product, it
is far from sufficient. At this stage, typically, salespeople try to talk about
how good the product is and thereby they frustrate the client. Because
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that’s not something that blocks him. What blocks him is something else.
There may be some obstacles that prevent the client to buy. So, it does not
help showing him more and more of how beautiful your product is.
Now, the client is dying to buy your product but there are obstacles in his
way. And the salesperson now needs to address that.
This is the time for role reversal. The salesperson has met several clients
and is well aware of the obstacles that generally prevent them to buy. Now,
he talks like the client and says “You cannot buy this product because…”
and gives a long list of possible obstacles. “You need permissions; you
need to look at your computer system…” There are obstacles standing in
the way.
The client is the best person to evaluate which obstacles are real and which
are not. So, by giving him such list of generic obstacles, the salesperson is
putting the client in his role where the client weeds out the obstacles that
are not real.
Typically, when the salesperson presents such a list of obstacles, the client
says “This is not a problem; for that I can do this; yes, this is a problem…”
so on and so forth.
So, you get a shortlist of the client’s obstacles and then the client consults
with you as to how to overcome these obstacles. And that’s the best thing
in the world that you can have.
It is you and him against the problem now, rather you against him.
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If you have identified the need correctly and taken the correct action, you
must get the predicted result. If you don’t get the predicted result, it only
means either you did not take the action correctly or you need to improve
this process.
So even if you don’t win few selling opportunities, you are the ultimate
winner.
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8.6 SUMMARY
Don’t just show your solution or your product. Bring the client to agree on
the direction of the solution.
Once you achieve that; only then present your product/service. There is
only one way to present the product/service: how the features of your
product/service solve the problems faced by the client.
Once you have done that, you move to negative branches. Use it to
remove the suspicion of the client to believe that the offer is so good.
A good salesperson does his homework well. A good salesperson does not
say “Let me take you for a dinner” but he says, “Let me understand your
problems”. He listens; not just what the client is saying but also to “Why”
the client is saying what he is saying.
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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
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RADICAL BUSINESS PERFORMANCE IMPROVEMENT – REVISITED
At the beginning of this book, I tried to establish that using TOC helps
causing a radical improvement in business performance. But then, since I
had not taken you through the knowledge about TOC, I could not go
beyond a point.
Now that you have studied the most of the aspects of TOC (I am saying
“most of the aspects” and not “all the aspects” because I have not covered
some important aspects such as Thinking Process, Resistance to Change,
Managing People, Building Strategy and Tactics Tree, How TOC can work
well with Lean, Six Sigma etc.), perhaps this is the correct time to consider
how TOC can cause radical improvement in your business performance.
Yes, you are right. You will look at how profits are growing year after year
keeping the customers/suppliers/vendors and employees happy. Isn’t it?
So, you will look at the red curve. There are good measurements for it,
i.e., Net Profit and ROI. There may not be a way to know about the
stability that the green curve represents; but by now, you know that there
in one process – the Process of Ongoing Improvement (POOGI), the
process which is linear and circular, i.e., you go through step 1 to step 4
and then again go back to step 1– people will know what management is
doing and how consistent it is. So, the main process is stable and
repeatable.
The idea of identifying the Constraint and exploiting it, gives immediate
benefits. If you subordinate well, it gives you another jump in
performance.
The next jump comes in when you decide to elevate the Constraint. This
step gives you the ability to go beyond your current horizon and achieve
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The repeated cycles of the Five Focusing Steps makes “Radical Business
Performance Improvement” an habit!
"We very rarely find a company with a real market constraint, but rather,
with devastating marketing policy constraints. We very rarely find a true
bottleneck on the shop floor; we usually find production policy constraints.
We almost never find a vendor constraint, but we do find purchasing policy
constraints. And in all cases, the policies were very logical at the time they
were instituted. Their original reasons have since long gone, but the old
policies still remain with us.”
If you manage to identify such erroneous policies and get rid of them, your
business performance improves radically.
Now let us look at the various TOC applications and see how they help in
this process.
All these applications are based on the essence of the Five Focusing Steps.
If it is so, why did Dr. Goldratt felt the need to create these applications?
The answer is simple. In absence of these applications, every company will
have to reinvent the wheel.
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and he went ahead and proved it. He wrote: “…When I met Dr. Ohno, the
inventor of KANBAN, the JIT system of Toyota, he told me that cost
accounting was the number one thing that he had to fight against all his
life. ‘It was not enough to chase out cost accountants from the plants, the
problem was to chase cost accounting from my people’s mind’…”
What do managers do day-in and day-out? They take decisions and actions
to implement them. We have seen the conventional way of judging various
actions and decisions and have realized that most of them are not likely to
improve business performance since they are based on erroneous
assumptions. We have dealt in depth in the relevant chapter and have
suggested the new TOC approach. Throughput Accounting is based on the
considerations that will exploit the Constraint better and hence the actions
and decisions based on the impact on the Constraint certainly lead to
improvement in business performance.
What happens in manufacturing? The TOC way helps in reducing the lead
time substantially. It also helps in simultaneously improving the due date
performance. What is the impact of this on the business performance?
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With TOC, we are able to dramatically improve the availability (and sales)
while simultaneously, minimizing shortages and surpluses as well as
substantially reducing the level of inventories and pave the way to increase
the variety.
TOC shows us the way to reduce the cycle time of the projects and
dramatically improve the due date performance. It shows the way to
balance the workload while simultaneously minimizing multitasking. It also
shows us as to how to use safety for the benefit of the projects which
otherwise gets wasted.
We believe that “Earlier we start a project, earlier we will finish it” and TOC
says “If you want to finish your projects early, start them late” because “it
is not important how many projects we start; but it is critical how many
projects we finish”.
What is the impact of reducing cycle time and dramatically improving the
due date performance? If we are taking projects from customers, we are
very likely to get more projects. If we are doing internal projects say for
creating new products or design, we are likely to be the first in the market.
The TOC way of selling helps us win more and more customers and thereby
increase the sales.
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These eBooks are meant for Business Owners, Managers, Consultants and
Implementers.
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budget and with full scope, and your project lead time is increasing over a
period of time, the eBook for Projects can certainly help you.
Echoes of TOC
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It’s ideal for the TOC enthusiast, whether new to TOC or an expert in TOC
practice.
We’ve all found seams and traces of TOC gold scattered all over the web –
echoes and extensions of the magnificently simple and profound concept so
well-articulated and conveyed by Eli Goldratt.
“Echoes of TOC” gathers some of the best of these echoes together into a
single easily accessible resource that you can refer to when you want to be
reminded of an insight or to browse occasionally to refresh and extend
your own mastery.
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10.Isn’t It Obvious – Dr. Eliyahu M. Goldratt, Ilan Eshkoli and Joe Lee
Brown.
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22.www.goldratt.com
23.www.goldratt-toc.com
24.http://toc-goldratt.com
25.http://www.vancouver.wsu.edu/
26.http://www.dbrmfg.co.nz/
27.www.focusedperformance.com
28.www.ciras.iastate.edu
29.www.thedecalogue.com
30.http://www.advanced-projects.com/
31.Youtube.com
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