We have significantly improved Operations – what we should do next?

The key TOC applications, so far, are focused on improving the Flow of value to the market. The five focusing steps, DBR, CCPM and replenishment are all target to achieve superior delivery performance to the clients.

The next obvious question is:

How do we capitalize on the operational improvement to achieve much better sales?

In this post I’m not going to focus on how you get your clients to see the full added value of the improved operations to them. It is definitely a non-trivial task.  But, before this task becomes critical there is a need to define:

What is the new offering to the market?

For instance, if the current standard for customer-lead-time is six-weeks, and now Operations can do it in three weeks, should the offer to the market be: “We deliver reliably in three weeks”? If so, should the price be the same?

The ability to truly improve the flow comes from challenging the efficiency syndrome and focusing on the system constraint through exploitation and subordination.

However, one critical factor that might block the flow is temporary, or fixed, lack of capacity. Just to be clear, lack of capacity does not necessarily mean a true bottleneck, where the load is higher than the available capacity.  It is enough that there is not enough protective capacity to cause temporary peaks of load creating delays in the flow.  The less the available protective capacity is the longer are the possible unanticipated delays.

This should not bother us if the demand is kept about the same as before. As long as the offering to the market does not change there is no reason for new clients to come.  As the operational improvements, based on TOC, have revealed considerable amount of excess capacity, the availability of enough protective capacity is guaranteed.

But, what happens when the organization comes with a new offering to the market?

In an ideal deterministic world the offering could contain both added-value, like shorter and guaranteed response time, coupled with higher prices, resulting in the same amount of demand, but the higher prices yield much better total throughput and no additional operating expenses.

The world, unfortunately, is not like that. When you offer more value for more money the result could be much lower demand, or much higher demand.  The situation is relatively easy to control if dynamic pricing, like the existing norm in the airline business, are accepted by the market.  Then simple trial-and-error would bring us safely to superior financial results.   However, dynamic pricing is far from the norm in most other business sectors, and I daresay that even in the airline business it is time to re-consider the full ramifications of dynamic pricing.

What about offering shorter and reliable delivery without, at least in the beginning, asking for higher price?  This could work well when the customers have a lot to gain from faster, yet reliable, delivery.

Problem is: it could be too good to the point of becoming a threat to the survival of the organization. When too much demand is coming in there is no way to deliver according to the new commitment.  This might be disastrous to the future of the organization.

How can we handle the situation where we have an excellent opportunity to gain more market, but we cannot deal with too high demand?

Generally speaking there are two directions of solution:

  1. Be very careful by being slow to introduce changes to the offering. This means the new offering should be only fraction of what can be offered today to the existing market. Then, continue to improve the offering by small changes.
  2. Prepare for the best reasonable scenario. This requires two additional capabilities:
    1. Have a control mechanism in place that checks the incoming demand, translates it quickly into capacity requirements and checks whether it still leaves enough protective capacity.
    2. Have fast means to increase capacity in relatively small amounts, even when the cost is much more expensive than the regular available capacity. In a previous post I called these means “capacity buffers”.

My general observation is that most organizations take the seemingly safer route, but they pay the price of very little impact of their improved offerings. The point is that the second direction can be as safe as the first, but the two necessary capabilities have to be in place.

The required control mechanism, focused on the stream of arriving demand, is based on the combination of two different mechanisms that complement each other: Buffer Management and the Planned-Load.

Buffer Management is based on the idea that if you have included buffers in your planning then you draw valuable information when you monitor the actual consumption of the buffers. The big advantage is that buffer management looks only on the state of the planned-buffer; it does not rely on any other data, which might not be accurate.

Readers who are not familiar with the concept of the Planned-Load are invited to read a previous post “The Critical Information behind the Planned-Load”.

A demonstration of the dilemma and the two ways to resolve it are offered in my TOCICO webinar “The TOC Challenge”. The live free webinar, for TOCICO members, would take place on Saturday, September 9th and a repeat on Sunday, September 10th, 2017. Starting with December 10th, 2017, the recording of the webinar will join the series of webinars on the TOCICO site that can be freely watched at any time by the TOCICO members.

Details can be found on: https://tocico.site-ym.com/events/

Advertisements

Developing the most difficult managerial skill

There is one critical skill that every manager truly needs, but only few have it at the required level. Any manager who leads people to achieve certain objectives, or focuses on business development and other strategic issues, or tries to radiate the unique value of the products, needs to understand the reality as seen by the other people.

We all have that skill to a certain degree. Most of us live with a spouse, family and neighbors where a certain level of understanding the viewpoint of another person is necessary. The difference is that we know these people personally.  This is not the case with managers who need to speculate the response of people they have never met, like most of their clients and suppliers.  And how many executives understand the perspective of the union leaders, with whom they meet, but don’t really know well?

Politicians have to have this skill sharpened to the degree of understanding mass of people.  They watch the crowd through the media and, even more importantly, through chats and blogs and by that develop a deep understanding of the inner fears and desires of the individuals within the crowd.

The term “understanding” means being able to reasonably predict the response to the actions we take.  In order to be able to predict there is a need to construct the key relevant cause-and-effect relationships as viewed by the other person.

An ironic point is that “understanding the other” usually expresses noble feelings, but it is also a pragmatic need for making good managerial decisions.

The mission of understanding the cause-and-effect as seen by people we don’t know is always difficult. A big obstacle appears when we try to understand the behavior of people from different cultures or socio-economic state.  The differences make it hard to identify the key cause-and-effects behind the actions of the other person, because of different values that lead to quite different causes than ours.

An emotional obstacle is raised when the other person is viewed as an enemy or a rival, because understanding means being empathetic to the other person.  Problem is, these are the cases where understanding the other side is most required. Throughout history the successful army generals were able to analyze the perspective of the enemy, but in order to do so they had to restrain the emotion of shying away from such understanding.

The problem of most top managers is that they are not aware that the other might see a very different picture. Managers have to understand what their customers and users truly want, which is quite different than what the managers want.  The analysis of the situation from the competitor perspective is also frequently required.  Yet, such an analysis of the cause-and-effect from the customer, competitor or supplier perspective is not common.

Is it possible to develop the skill to get into the shoes of somebody else and construct the relevant cause-and-effect from that perspective?

There are four categories of people that the managers should be able to understand their perception of reality:

  1. The employees at every organizational level.
  2. Individuals who have an official role within another organization that is, or could be, in direct business relationships with our organization.
  3. Individual customers and users of the product/services of the organization.
  4. Individuals and organizations that have other interests in the organization. These include regulators, media and people who live in the neighborhood.

TOC includes two categories of generic tools that support a view of an organization from the outside leading to quick, yet valid, observations of the key cause-and-effect entities that impact the performance of that organization. It is easier to predict the behavior of an organization, actually the individual decision-makers within the organization, than predicting the behavior of an individual operating on his/her own.  But, part of what works with an organization is useful for understanding a specific person.  The difference is caused by having to synchronize between many individuals and by that forcing the organization to simplify the goal, values and procedures.  Organizations also try to be rational, which is not necessarily true for most individuals.

The first category of tools to understand other people, or an organization, is the group of insights, notably the five focusing steps, that simplify the seemingly complex and uncertain environment and provide us with the effective FOCUS on what truly counts. This is true also when we look on another organization.  Being aware of the inherent uncertainty is part of the insights that allows us to focus just on the right elements, whose impact is stronger than the uncertainty (noise).

For instance, when employees are required to subordinate to a scheme that its rationale is unclear, we can imagine the resistance. The use of any specific performance measurement impacts behavior in a way that is easy to predict, when one asks the question: how should the employees react to the measurement?

The TOC Thinking Processes (TP) is another, but highly related, category of tools enabling us to predict the response of an organization, a group of potential customers, or an individual to a certain act.

Let’s examine the overwhelming negative response of many individuals who have witness how a passenger has been dragged by force out of a flight. Fact is that this harsh response came as a surprise to United Airlines management.  Was it too complicated to consider the possibility that other passengers might record the incident and make the video viral?  Was it too complex to predict the social networks and media responses? How long should have taken the local managers to understand the huge developing threat?  Eventually top management had to humbly apologize, pay hefty compensation to the passenger and suffer severe damage in the company reputation.

Here is a simple cause-and-effect branch outlining the situation:

The key question is: How come the local management did not predict the response of the passengers? The simple answer:  they are not used to think of the possible response of other people, because it seems too complex.

The TP are usually focused on OUR own cause-and-effect with one clear exception; a conflict between two parties, which is depicted on one cloud, so both needs are recognized and verbalized. However, the same cause-and-effect tools can support a careful buildup of small cause-and-effect trees that focus on the possible ramifications of a change from the perspective of other people.  What we lack in intuition can be gained by logical reasoning and a-priori focused search for meaningful information.

Let’s consider a case where a manufacturing company contemplates to stop producing a specific product family. The arguments are relatively low T per unit and, at the same time, high capacity consumption from a loaded critical resource that currently prevents the sales expansion of other products.

Should the company consider how the distributors, the immediate clients, react to such a decision?

Assuming there are good reasons not to ask the opinion of the distributors before taking the step – is there a way to predict how the distributors will behave?

Goldratt complained that too many executives don’t have a clue on the business of their clients and suppliers. This is quite similar to the lack of interest to understand the other perspective of reality.

What can someone who never worked in distribution know about the perspective of a distributor?

Let’s put some simple facts about distributors:

  • They deal with very large number of SKUs.
  • Most of the clients of a distributor buy many different items.
  • Some of the SKUs offered by the distributor, but definitely not all SKUs, have replacements that are acceptable to most of their clients.
  • Logistics is a big player in running the business.

When you look on the very short, pretty obvious list, you can easily deduce when a supplier pulling out a family of products creates a big problem to the distributors forcing them to react.

From the distributor perspective there is a difference whether he is already carrying replacements of that product family that his clients accept as good enough. When the answer is positive then the distributor should not grossly suffer from the supplier’s act.

However, when no acceptable replacements are available then some clients might look for such replacements elsewhere and shift their purchasing to another distributor. Forcing the distributor to look for acceptable replacements from another supplier raises the risk that many more items would be supplied by the new supplier.

Another cause to be concerned with is the emotional reaction of the managers of the distribution company against such an action that causes them considerable damage.

The need to predict the behavior of business partners should be obvious to everyone. However it is not.  It is critical not just to predict negative response, but also what would generate great positive response.

The skill to understand the perspective of another organization can be vastly improved by TOC. It requires being aware that this is possible, beneficial and truly required.  It is part of recognizing the inherent simplicity.

The generic conflict in healthcare and its severe consequences

Managing a healthcare organization is very challenging due to a huge generic conflict that deals with life, death and money. The emotions the conflict stirs are so enormous that an open rational discussion is almost impossible.  This state only makes the situation worse.

Goldratt commented that managers are subject to three critical fears: Complexity, Uncertainty and Conflicts.  Eventually managers and leaders are measured by their ability to handle these areas.

A crisis in an Israeli hospital in Jerusalem, called Hadassah, raised wide interest in the wider human aspects of managing healthcare in general and a hospital in particular. The crisis peaked when all the six senior physicians, plus three junior doctors, quit the Hemato-Oncology department for children in Hadassah claiming that the hospital management is forcing them to reduce the level of treatment to their very young patients.  Their idea was to build such a department in another hospital in Jerusalem. The collective resignation created a huge problem for the young patients and their parents, the hospital, and the government.  It also raised the concern of the other hospitals that this move might become an example for other specialized departments to demand higher budget by threatening to move the whole department to another hospital.  The parents of the children backed up the doctors, whom they fully trusted, in spite of the fact that their action left their children without good enough ongoing treatment.  The government and the Supreme Court vetoed the move to build the department at the other hospital.   Right now there is no resolution of the crisis!  Israel now lacks nine doctors specialized in cancer of children and the reputation of a leading Israeli hospital has been significantly compromised.  Israel is a small country and nine doctors is about 15% of the country medical capacity for such a narrow specialization. The end result is the worst that could have happened.

This particular crisis is a direct consequence of failing to manage a key generic conflict, which exists in every healthcare institution in the world.  It is a tough conflict to universally resolve.  Still, management has a duty to manage conflicts in a way that would not cause such damage.

The root problem of healthcare is the possible clash between two necessary requirements:

  1. Supporting the right of every human-being to get the best medical treatment whenever necessary.
  2. Providing the infrastructure and the capabilities to treat well ALL citizens.

The first one expresses the ethics implied by the Hippocratic Oath. This is the basic duty of every physician.

The second is the duty of the government and every hospital management, to build and support the necessary infrastructure for treating all eligible patients at the same time.  While every physician looks for the good of every patient being treated right now, the management decides what means can be used and for which patients.  In most countries these decisions are highly regulated.

TOC has a tool to express a conflict is a way that helps to resolve it. Goldratt claimed that every conflict can be resolved without a compromise.  The practical meaning of a compromise is that both needs are only partially achieved.  The tool, called a ‘cloud’, looks to achieve both needs in full by providing the opportunity to inquire the cause-and-effect behind the conflict in order to identify a way to challenge one of the underlining assumptions and by that lead to a solution.

Here is my verbalization of the generic cloud of healthcare.

Healthcare conflict

The conflict starts with the conflicting actions, each action is required for the need it supports, and both needs are required for the objective.

The clash between providing the best treatment to the individual and providing the means to the relevant society exists in all levels of the medical operations. While very rich patients are able to get whatever they need, the vast majority of the society are highly impacted.  Generally speaking there are two different ways to handle the need to provide good health to ALL human-beings.

  1. The Government takes responsibility for the national healthcare.
  2. Medical insurance provides the means for every individual to get the treatment they need.

The usual policy is combining both ways. The government supports the insurance companies to finance those who cannot afford the insurance and controls the regulations.

The common clash between the two lines of action, expressed in the above conflict, happens when an individual physician, or a group of physicians, intentionally deviate from the management instructions, sometimes even rebel against them. The deviation happens when specific cases require more than what the formal instructions provide. As these actions are done according to the universal ethics of the Hippocratic Oath, it is not easy to settle them through regular legal actions.  This is the essence of the inherent difficulty in managing healthcare.

In the particular case of Hadassah the clash was centered on two management actions that the doctors in the department saw as compromising the medical treatment. One is that Hadassah tried hard to bring ‘medical tourism’, meaning patients from other countries who pay hefty sums for their treatment. The problem is lack of enough beds and medial manpower in the department to treat well all patients.  The other clash was a managerial decision to put several children in the adult department, where the overall demand for beds is lower.

Most clashes between the welfare of the individual and the welfare of the society are caused by a constraint, a resource with insufficient capacity to handle all the demand. The ultimate constraint in all public sector healthcare institutes is: budget.  Actually the budget is the ultimate constraint of every not-for-profit organization.  Lack of enough budget causes capacity limitations of several key resources. The one resource that eventually limits the overall delivery of value is the constraint and trying to exploit its performance is one of the most important insights of the Theory of Constraints (TOC).  In hospitals the most common constraint is described as lack of ‘beds’.  Actually it is not so much the bed itself, but the equipment and manpower required 24 hours to treat and control the patients while they lie in those beds.  The real constraining resource, dictated by the limitation of the budget, is usually not clearly identified.  It could be doctors, mostly juniors who stay at night, or nurses that need to take care of all the patients in the department. The direct consequence of the interaction between several resources, each with limited capacity, is lower level of medical treatment.  It makes sense that the threat of shaking the sensitive balance of critical resources in the children-cancer department in Hadassah was the cause for the rebel against the hospital top management.  Introducing one single set of priorities, based on buffer management, as have been implemented by Alex Knight and others who followed the idea, significantly improves the overall state, but does not fully solve the generic conflict.

A direction of potential solution using high level of buffer management of the global budget is allowing more individual penetrations into the overall budget as long as the total penetration into the budget-buffer is not too deep. This direction challenges a hidden assumption behind the conflict itself that considering the budget and means requires a strict adherence to general rules about the patients and their detailed rights. The strict adherence is replaced by a more flexible way based on the remaining flexibility of the budget.  Thus, certain deviations from the rules can be allowed, provided the overall situation is satisfactory.  This would mean that the evaluation of the budget is an on-going matter.  However, the details of a concrete solution have to be carefully developed to keep an overall control and ensuring the collaboration of all doctors.

As long as the global conflict exists, the practical lower-level conflict has to be managed by either finding a specific solution or finding an acceptable compromise. Letting the conflict lead to a crisis, like disrupting a whole department, should never happen. However, it does happen all the same when a conflict between two egos is raised as well.

The generic conflict of healthcare is just part of the even more generic conflict of the government dictating the budget for several departments dealing with the issue of saving life. The Ministry of Defense, the Police and even the Transportation Department, all have to dedicate budget to prevent unnecessary deaths.

Eventually, a tricky and emotionally loaded question is:

What should be the official budget for saving the life of one human being?

My professor at my MBA studies, Professor Zvi Adar, openly asked us the above question, just to demonstrate the power of the issue. Prof. Adar was an economist and he told his students that checking the actual actions taken by various government agencies that deal with life and death revealed a huge gap in the money dedicated to save life.  That gap, meaning one government agency dedicates five times the money to save one life than another agency, is the consequence of not dealing directly with the generic conflict.  Running away from emotionally loaded conflicts is, to my mind, the key conflict of a leader:

Generic budget conflict

I kindly suggest the readers to try to find a universal resolution of the two key above conflicts by revealing the hidden assumptions and then challenge at least one of them. Each one of those has considerable impact on our life and how organizations and countries are managed.

What blocks the organization from achieving more?

The Difference between the Constraint and the Core Problem

The question in the title is one that all managers and consultants, working for an organization, should ask themselves all the time.  The question puts the focus on the goal of the organization. In order to obtain an answer one should look for the relatively weakest point, which currently limits the performance of the whole organization.

The truly wrong, but very common, answer is:  “There are many things that limit the performance…”  On one hand, if the CEO would be more intelligent, the regulations more permissive, the economy supportive of more expenditure, and the competitors less effective, then the organization will do better. But, the impact we have on each one of the above is very limited, if at all.  Such broad answers run away from the task of not only answer the direct question but also explaining how come no actions are taken now to significantly improve the key limiting factor.

Generally speaking TOC comes with two different answers to the question.

One answer looks for what currently limits the flow of product/services/value to the customers.  TOC calls it the “constraint”. The second answer looks for the key practical internal conflict where doing X is absolutely required, but also doing Y is necessary and there seems to be a major difficulty taking both actions at the same time.  The conflict that causes the majority of the key conflicts is a representation of the ‘core problem’, which blocks the performance of the organization.

In order to understand the difference between the constraint and the core problem, let’s consider the following example:

Auto-One is a local producer of cars.  Actually Auto-One only assembles cars, designed by a foreign well known international company.  The idea, backed up by the government, was to provide cheap cars for those who cannot afford the price of imported cars.  So, the assembled cars carry a different brand name, but everybody is aware that it is a replica of the original one.  Because of the perceived superior quality of the original maker there is still sizable import of the same cars under the original brand, but they cost 30% more than the local cars.

Auto-One buys the parts from the original maker and pays for the license to produce.  It is internally constrained by the capacity of the assembly line, causing the supply time of a new car to a client to be over six months.  Many potential clients who would prefer to buy the cheaper car eventually buy the imported car because of their unwillingness to wait so long.

What is the constraint of Auto-One?  What improvement would this identification lead to?

What is the core problem?  What improvement would this lead to?

There is enough information in the short description of the local car producer to deduce the following:

  • Improving the capacity utilization of the assembly line would increase the pace of producing the cars and reduce the supply time. As the current long supply time chases out potential buyers this step would increase sales/throughput, and more throughput will increase net profit.
    • We assume that improving the capacity utilization of the production-line does not require substantial investments or additional operating expenses.
    • The above assumption is also based on the TOC methodology of formally recognizing the constraint and implementing the required exploitation and subordination steps, resulting in faster response and higher quantity of finished cars.
  • Another way is to elevate the capacity of the assembly line. This makes sense when the TOC methods are already used to exploit the assembly capacity, assuming that the still long supply time, even though it is faster than before, still causes loss of sales.
    • When the assembly line is not operational 24/7 then the elementary elevation is adding shifts. This step requires additional manpower. The likely assumption is that the cost of the additional manpower is much lower than the delta-throughput.
    • When the assembly line works 24/7 at the best exploitation and subordination schemes then there is a need to elevate the specific constraining operation within the assembly line.
  • A very different approach is to consider the low perception of the quality as the key limiting factor. Improving the perception of value might not improve the number of cars sold, unless the capacity of the assembly line is elevated. But, it would allow the local company to increase the price. 
    • Question: is the quality of the local cars truly lower than the quality of the import?
    • Another question is what Marketing can do to change the perception of the potential buys? When the quality is truly inferior it is one challenge. When only the perception of quality is low – it is another challenge.  The important realization is that efforts to improve the quality are not sufficient to increase sales.

The constraint is what currently limits the flow of value to the clients.  This means the constraint is the immediate leverage point.  The idea is to exploit it better, and subordinate the rest of the organization to the exploitation plan.  Exploiting the constraint focuses on the short-term.

We know that the constraint of this specific local company lies in its assembly line.  The low hanging fruits point to draw more from the specific capacity constraint – leading to making more cars every month.

The core problem has to be logically linked to the perception of low quality in the market and what prevents the company from successfully dealing with this issue.  Another undesired-effect is that there is an unsatisfied demand, caused by too long supply time, caused by lack of capacity of the assembly line. The core problem has to explain how come there is an internal capacity constraint, leaving unsatisfied market demand?

The elevation step already poses a key concern:  is the investment in elevation economically worthwhile?

The ultimate constraint of any organization is the market demand.  The perception of value by the market limits the current value even when a capacity constraint is active.  More thoughts on that topic were raised by a previous post in this blog: “Short-Term and Long-Term TOC or the Two Critical Flows”.

Dealing with the market perception of inferior quality is risky.  In this particular example there is little doubt that once capacity elevation would take place the quantity of cars sold will grow, the only question is whether it’ll grow enough to generate good return on the investment.  However, trying to change the public perceptions is definitely not guaranteed to succeed. Without changing the perception of low quality there is no way to charge higher price.

So, what is the core problem?

Whenever an investment is required in order to grow the business there is a major concern that it’d fail. There are two highly undesired effects resulting from losing due to unsuccessful investment.

The first undesired effect is the concern of the organization to keep its current state and not let it deteriorate.  Even temporary worsening of the current state causes major concerns both internally and for the share-holders.

The other concern is the personal concern of the CEO and the person raising the idea.  The connotation of failure causes serious negative consequences for the individuals involved with the decision and endangers their career.

Assuming the management does not challenge the low reputation of its quality and also not having clear plans to increase capacity we can deduce that the specific core problem is the ongoing conflict between investing money and efforts to significantly improve the current state of the business and refraining from taking such risks in order not to worsen the current state.  This is a common core problem.

In typical TOC representation of a conflict, called a “cloud”, the conflict looks like this:

basic cloud4

The specific example poses two possible ways to improve the performance of the organization. One is through exploiting and eventually elevating the capacity constraint.  The other is improving the perception of quality and by that the perception of value of the assembled cars.

Elevation of the constraint already looks to the longer time frame as it requires investment of money and efforts (managerial attention).  The core problem is the difficulty in making investment decisions, aiming at improving sales, when high uncertainty is part of the equation.

Overcoming the core problem, resolving the conflict, can be achieved only by challenging one or more of the underlining assumptions behind the entities of the conflict.  The big obstacle is to reveal the hidden assumptions that are shared by all the key people in the organization and usually also by all the competitors as well.

For instance, the bottom leg of the above conflict assumes that there is no big risk to the current state of the organization when no new significant investments are made.  This is usually a flawed assumption as any change in the domestic economic state might impose a negative impact on the demand.

Back to the example of the domestic car producer, a possible threatening change could be that the original maker might reduce its price, or come up with a cheaper model, making the competition in the domestic market fiercer.

Another assumption behind the bottom-leg is that every investment is highly risky.  Challenging the assumption, by employing superior process for checking uncertain decisions, and making the investment gradual, where signals for the effectiveness of the steps taken are carefully observed, could resolve the conflict.  It is possible to be careful enough so the current state is not seriously compromised, while having excellent chance for achieving a major breakthrough.

Recognizing the risks, both the risk of the proposed initiative and the risk of not growing, is a worthy first step.  The challenge of  finding good answers to reduce the potential risk, while being ready to take chances with lower risks, constitutes a direction to resolve the core problem.  A recent technique developed by Dr. Alan Barnard, based on the change matrix of Goldratt, offers a kind of double conflict diagram that nicely states the practical questions that direct the mindset to come with good answers.

The core problem is what prevents management from looking hard at reality and challenge long-held assumptions.  The constraint is the more immediate issue and it is useful to prove to ourselves we can get much better results.  Designing the future of the organization requires facing the core problem, struggling with challenging assumptions rooted in our comfort-zone, and mainly deal with our fears from uncertainty.

The managerial need and the illusion of being “in control”

Living under uncertainty is scary. We invest huge efforts to predict the future and prevent, whenever possible, the truly negative outcomes.  Humans use superstitious beliefs to set clear expectations of the future and make sure it is not going to be too terrible.  Others are using statistics to relax their fears and, at least, put them in perspective.

Being ‘in control’ means having good enough prediction of the future. Some definitions speak of ‘dominating’ the system, but this is more to say that no big deviations from the current status are expected due to who dominates the system.

In order to be in control we need a control mechanism. I suggest the following definition for a control mechanism:

A reactive mechanism to handle uncertainty by monitoring information that points to a threatening situation and taking corrective actions accordingly

Threatening situations are the cause of our fears. When we deduce the possibility of a threat we are able to look for signals that point that the threat is on.  For instance, we fear from burglars breaking into our home.  We put alarm systems to warn us when this happens.  We also need to know what we do when the alarm is on – calling the police or local security provider.

Fears play a very big part in managing organizations. Managers fear from possible negative impacts on their organization and even more from the personal impact on them.  The culture of organizations forces a seemingly rational approach that pushes for optimizing everything even in highly uncertain situations.  Actually organizations use a different set of superstition, especially one that believes that people are always able to meet their commitment to an ambitious target.  When they fail to do so – it is their own failure because they have demonstrated either their incompetence or their unwillingness to do whatever it takes. This kind of widespread behavior actually means ignoring uncertainly and this is a special brand of superstition.

Uncertainty should include, in my mind, not just the natural fluctuations of variables, but also the limitation of the human mind to absorb complexity and digesting huge amount of data.  When Goldratt claimed that every system is based on inherent simplicity he pointed to the practical inability of human-beings to control truly complex human systems.  Organizations simplify the complexity by maintaining excess capacity and buffers so most small disruptions would cause very little damage, if at all.  The irony is that organizations try to hide the massive excess capacity and their buffers, because it clashes with the utopia of optimization. Personal hidden buffers protect the safety of the individual in the organization, and the need to hide the buffer is not too high price to pay. The individual, sometimes groups of employees, fight to be able to commit to targets that are achievable in a very high confidence level.  Once the individual reaches the target he/she are careful not to achieve more, because that would worsen the chance to get comfortable targets in the future.  It is my view that this is the core problem of the vast majority of the business organizations in the world.  Kiran Kothekar has made similar arguments in the TOCICO conference in 2016.

Setting targets is a key common control mechanism. The two objectives controlled by this mechanism are to keep people under constant pressure to perform well and to keep good synchronization between the functions.  Thus, the targets for Sales are translated to targets for Operations.  The targets also serve the construction of the budget, which serves as a synchronization plan for the organization.

Does this control mechanism work?

It does work to a certain limited degree, but also causes serious negative effects. Most organizations have adequate stable delivery performance to their clients.  So, when I go into a supermarket with a list of twenty items I usually go out with seventeen items from the original list plus one or two acceptable replacements.

Do I like the situation of not finding one or two of my priority items?

Well, do I have an alternative? The uncertainty of finding everything forces me to take certain steps, like buying more of some products I suspect might be missing next time.  If someone would solve that problem it’d be of high value for me.

The key point is that most organizations do not behave in a chaotic way!!!

Most of the prior expectations do materialize in the relatively short-term and thus they are “in control”. However, there are still two problems with the current practice of maintaining adequate control:

  1. The performance is far from exploiting the true potential of the organization.  Actually it is also far from the flawed optimization dream. Much better performance could have been achieved with different methods of control.
  2. While most expectations materialize, some are not. The constant fire-fighting with unexpected events raises the level of nervousness throughout the organization. It takes huge amount of management attention to bring the situation to an acceptable control, and eventually very few lessons have been learned.

TOC has been focused on the rules for planning and on the different rules for execution.  The execution phase is part of the overall control – making sure the outcomes are close enough to the planned/expected objectives and targets.

The TOC wisdom has introduced the insights of looking for the weakest-link to dictate the potential limits of the planning, and then add visible buffers to protect the objectives from common and expected uncertainty. The TOC wisdom for the execution phase is to closely monitor the state of the buffers, and when the buffer consumption penetrates its last one-third part to treat the situation as threatening, invoking actions like expediting to fix the shaky situation.  TOC has on-going objectives depending on the limits imposed by the constraint and monitoring the buffers is one of the logical ways to identify blockages.  TOC offers a control mechanism that allows going for much more ambitious objectives, while still protect the performance from too high fluctuations.

However, the current TOC BOK does not do enough to face incidents and events that happen outside the planning and execution, many times originated outside of the organization.

An example: a new competitor offering new products or services that compete with the natural market of the organization.

Another example: A high level manager is publically accused of sexual harassment of an employee.

What control mechanism could cope with such external, yet meaningful, cases?

The two examples above point to two different categories of such threats:

  1. A threat that is recognized a-priori as a possibility. For instance, being aware that a new competitor might emerge with a new technology or offering.
  2. An unexpected threat.  for instance, Someone behaves in an unacceptable and unexpected way.

The first category of potential threats enables management to design the appropriate control mechanism that would be able to identify the rising threat as early as possible and prepare the procedures for handling the threat when it appears.

The second category is tough, because there is no clear control mechanism. Such surprising events break the illusion of being ‘in control’ and send a message that we might, even though not too often, lose the control we think we have. In my last post I dealt with the transition period, which is the time when the company is especially vulnerable and less in control.  The generic advice was to ask the question “what could go wrong?” Answers to the question move some potential threats to the first category.  The other advice was: “be on your toes!”

Eventually managers need to recognize that even unknown threats send us, many times, certain signals that point to the emerging threats. We cannot specifically prepare for these signals of threats we do not think of.  So, who should be constantly looking for signals that something is happening, deduce the threat and what could still be done about it? Every army, preparing for a war where chaos takes over, has intelligence officers who actively look for both the expected and the unexpected.  I think that normal companies need such a role as well.

The role of the Transition Period in implementing a change

For this post I come back to my 2011 presentation at the TOCICO annual conference. Any significant change opens the door to new undesired effects and other signals that need interpretation. TOC implementations certainly involve significant changes in the mindset of managers and their subordinates.  This topic seems to me a most relevant topic to discuss now, six years after the death of Dr. Goldratt, as the responsibility for the success of the change lies on us and the challenge is bigger than it can be judged from the wonderful change management process we have so carefully planned.

An unavoidable ramification of any significant change is a temporary level of confusion.  There is no way that all the outcomes of the change have been properly analyzed prior to the change.  While we definitely should use all our logic and intuition to look for negative branches ahead of time, we are not all that clever and we better acknowledge that fact and become ready to face the consequences.  Confusion means that some people in the organization have different understanding of what to do and what to expect.  Confusion also means we are unsure whether what we see is what we should see.  The consequence of being confused and uncertain is making mistakes causing variable level of damage.  In itself this is not a big deal as quick fixing mistakes usually reduce the damage considerably.

Transition period is the time it takes from the start of the implementation of the change until we feel confident that the system has been stabilized under the new rules of the change, especially that the intuition is satisfactorily restored.

One characteristic of the transition period is:

The rules in the area of the change during the transition period are neither the old ones nor the new

The term ‘rules’ used above is about the actual way actions are handled. The change has some immediate impact on the current way the area is managed.  But, the change itself has not been completed yet, so we might get a mixture of different, even contrasting, actions done by different people.  It is also possible that some of the rules and processes have been temporarily changed with the intent of fine tuning them later.  The implementation plan has to outline the intermediate steps and for how long they are going to apply.  Of course, within the implementation there could be further changes and even deviations from the original plan.

Planning according to TOC includes placing buffers at the critical points protecting from both uncertainty and flaws in the planning logic.  Among them are time buffers, but also excess capacities, excess capabilities and readily accessible management attention for solving emerging problems before more damage in done.

A critical element in such planning of a change is asking a typical TOC question:

What could go wrong?

This is a very problematic question because it radiates doubt in the plan and its underlining detailed logic. The point, made by Eli Goldratt, is “Never Say I Know”, and it is this effect in reality that should force everyone to ask that question.  It is of special relevance for the transition period where the whole system is vulnerable.

There are three different categories of what could go wrong:

  1. Flaws in the logic behind the change and the planning.
  2. Flaws in the implementation. These include:
    1. Misunderstanding of the logic or the instructions given by the champions of the change.
    2. Resistance to the change causing deliberate sabotage of the implementation plan.
    3. ‘Murphy’ – uncertainty that exhausted the planned buffer and caused damage.
  3. External event that has considerable negative impact on the implementation.

Some examples:

  1. Moving from Make-to-order (MTO) to Make-to-availability (MTA) without noticing the need to build the stock buffers before moving to the operational rules of MTA! Building stock buffers defines a transition period that has to be carefully monitored.
  2. The MRP planners took ‘chocking the release’ too severely to the degree of starving the constraint. This could easily happen by defining too short time buffers.  Such a flawed move could be the result of misunderstanding, miscalculation OR intentional sabotage.
  3. A project that serves as the proof-of-concept for CCPM had gone into difficulties due to many new requirements, creating unbearable pressure and delays. Some late additions were caused because of flaws in the planning.  Other new requirements were raised because of new information that the competition had been going to introduce new features.
  4. The planned change required a special budget for additional operating expenses, but then the Bank demanded the immediate return of an old loan, which robbed the organization from its cash buffer.  This is an example for an external  event.

How should the transition period be managed?

Considering the possible answers to the question what could go wrong should trigger specific inclusion of signals that point to a specific potential threat that is actually materializing. For instance, sales people, who are concerned that their clients get the delivery as promised, cite an earlier due-date to press Production to prioritize “their order”.  Checking whether finished goods are actually shipped, within 24 hours, to the clients could note exceptions that show that this is actually happening.

I think that in any operational TOC implementation buffer management should be implemented as early as possible. While this control mechanism is an integral part of the TOC change, its value for the transition period is especially important.

The format of the Strategy and Tactic Tree (S&T) could easily incorporate entries monitoring “what could go wrong” as specific low level entities. In a good S&T one should include the list of signals to be monitored within the Parallel Assumptions part of the relevant entry.

This set of signals should be part of the transition period practice. Most of these monitoring schemes could be shut-off when the transition period is over.

However, this does not address the emergence of an undesired-effect we have not expected. The required general managerial behaviour for this kind of problems is:

Be on your toes!

I highly recommend the champions of the change to be clearly aware of the fact that unexpected problems, sometimes also unexpected opportunities, could emerge in such a period.  It could happen at all times, but during a transition period the probability is higher and the potential damage of failing to notice the unexpected is very high.

What makes Eli Goldratt a true GENIUS in the art-and-science of managing an organization?

ELI_GOLDRATT

There are many brilliant people. There are very few effective leaders, most of them are not even brilliant, but they are charismatic and effective in achieving a goal.  Effective leaders see to it that they have brilliant people to help them achieve the goal they have chosen.

A genius is another matter. It is a person who sees far into the future pointing to necessary changes in the current practices that would achieve a new and better reality for mankind.  That far away broad vision is what characterized a true genius from a typical brilliant person who is able to find a temporary solution, without offering a change in perception.

There are number of true geniuses in art, who dramatically changed the artistic environment. This means it is possible to clearly see the difference between the artistic situation before and after the specific artist. Let me just mention the names of Beethoven, Van Gogh, Picasso, Homer, Shakespeare and Beckett to demonstrate just a few who changed the world of art.  We know, of course, of few scientists who challenged the older paradigms and came up with new ones, like Copernicus, Newton, Pasteur‏ and Einstein.

In order to achieve a true change just being a genius is not sufficient.  There is a need also for one or more opinion leaders to make it happen.  In art it requires some open-minded, but highly influential, critics to persuade the world of the worthiness of the new approach to art.  In the academia there is a need for open-minded journal editors to allow the challenge to the current thinking to make the impact.   The typical genius is looking so far ahead that it is not easy even for the brilliant contemporaries to see the vision.  It could be a very slow process to achieve the wide recognition of the change and its wide ramifications.

Eli Goldratt was, to my mind, a true genius in the field of management. Goldratt perfectly understood the current situation in the world market that is complex and uncertain and the lack of capability of the existing tools of Math, Statistics and Psychology to solve the difficulty to maintain an acceptable control. The problem is that with the accelerated speed of technology, especially in big data and communication, the complexity and uncertainty grow so fast that being ‘in control’ looks like a dream.

Goldratt the genius has found several key insights that together make it possible not only to be on good enough control, but also to see the way to grow in a reasonably stable way.

He taught the world to realize the absolute need for excess capacity, actually also for excess capabilities.  He taught the world to identify the weakest link that currently prevents from achieving more.  He looked for the inherent simplicity that without it there is no way for an organization to act reliably.  He defined the buffers that have to be part of any plan and how to draw from their state the right priorities. All of these insights, and many more, are part of what Goldratt left us to implement in the mind of managers and executives.

Managers are impatient people relative to artists or scientists. It took the world many years to fully recognize the revolution of the music of Bach or understand the ramifications of Quantum Theory.  Managers need answers NOW.  Frightening insights, which might have unexpected or unclear ramifications and also question the wisdom of the managers themselves, are difficult to handle and convince in the short term.  If Goldratt was ‘just a genius’ it would have been impossible to turn his insights into practice.

In order to be able to spread the new provocative ideas Goldratt had to become a leader himself. It is a necessary condition for changing the mind of managers.

A leader needs to have followers who believe in the same goal and are ready to accept the leadership of one person. The vast majority of the geniuses are not leaders.  They are loners who despise the world for not recognizing their greatness.  Thinking of other people as idiots is a normal characteristic of brilliant people and certainly of geniuses, but this contempt is an obstacle for spreading a new message.

Like other geniuses Goldratt thought that all other people are stupid, BUT he recognized that telling someone that he is an idiot does not bring good results, except some minor good feeling for very short time. So, in order to become an effective leader Goldratt had to identify people with relatively good capabilities and convince them to join him.

This mission of attracting good people, even though he still did not truly appreciate their intellectual capabilities, is part of the Theory of Constraints, because being constrained by the capacity of people with fair capabilities doesn’t make sense. The constraint for changing the mind of managers had to be the capacity of Goldratt himself.  To overcome the obstacle Goldratt had to fight with his own basic character of being so brilliant that anybody else was viewed as slow.

Goldratt succeeded in attracting a variety of truly excellent people to help him accomplish his vision. More, he succeeded to attract many more people, who did not work closely with him, but were ready to put efforts to implement the ideas and spread the word to others.  Others just tried their best to implement the insights. While Goldratt philosophy is based on simplicity it does not mean it is easy to understand or to implement, so many new challenges were revealed on the way.

Goldratt died six years ago. Is TOC in 2017 the recognized way to manage an organization? I don’t think so.  After more than 30 years since the five-focusing steps, which, for me, mark the birth of a new pragmatic managerial theory, there are thousands of people who practice TOC all over the world.  Thousands, but not millions!  Eventually Goldratt was more of a genius than an effective leader.

What does that tell us? Goldratt ideas should be widely used in managing organization, but right now this is not happening.  Organizations are NOT managed according to the best available knowledge that exists today.

What do we do to make the knowledge spread and practiced?

TOC is far from being complete and it is far too rich in value to be ignored.  Do we expect another leader to show up?  Would that leader need to be also a genius, or just an effective leader, who listens to others, who develop the BOK further, while the leader finds the most effective way to spread it?  Many questions lie open and the obvious danger is that most of Goldratt ideas would be lost.  The problem of losing control on the performance of organization is still a huge threat to the world economy.  Running away from the challenge of handling complexity and uncertainty together would worsen the situation.

I hope we find the way to spread that knowledge more and more, wider and deeper. I personally think that the key lies in collaboration, rather than waiting for the one leader.  I’m ready to collaborate with those who like to collaborate with me.