My views on the right focusing for the HighX case

This post continues the case and the comments from the previous post. Please, read the previous one first.

The fictional case raised several very interesting comments. I hereby present just my own analysis. I suggest the readers read all the exchange of comments, make up their own mind regarding the case, and then try to generalize the lessons to assist in more general cases of dilemmas what should be included in our focus.

It is customary of TOC consultants to require that the TOC project, most certainly the Strategy and Tactic (S&T) project, gets precedent on any other change project that is running at the same time. The justification is both the assumption that TOC project would generate much more impact on the organization’s future than any other project, and that the level of management attention to the TOC S&T project is significant because it is based on paradigm shift(s).

The effectiveness of the decisive-competitive-edge (DCE), which is based on reliability plus the fast-response option, depends on the existing pain in the market. It also depends on whether the full value of removing the pain is properly recognized today and if so whether HighX, aided by the TOC expert, can accomplish a change in the awareness of the clients in short time.  So, such a DCE could be very effective, but in other cases it is less effective.

There is another relevant variable that impacts the expectations from the proposed DCE: the level at which the other parameters that impact customer satisfaction are judged by the market. In the definition of the DCE as answering a need in a way no competitor can, there is also a necessary condition that all other characteristics of the company products and performance are on par with the competition.

So, it is necessary to re-check the seven projects that add new features to current products. Can those projects wait? The answer depends on the state of the competition regarding those features, assuming also that the features are truly needed.

Suppose that three or four of those projects are critical in order to preserve HighX position in those markets. Would we want to delay those until the launch of the new DCE?  A message that HighX radically improves its delivery and response, but, at the same time is slow to introduce very needed new features, which the competitors already offer, would be very problematical!

A critical question is:

Is there enough management attention in HighX to focus on both the TOC initiative as well as on three or four truly critical developments of new features?

Management attention is a very loose term.  Who are the managers that have to dedicate substantial amount of their attention capacity to the TOC initiative?

Are those managers also have to dedicate substantial attention to the development of the features?

The TOC S&T requires, at the very start, between four to eight days that are fully dedicated to understand the holistic concept, the related paradigm shifts, agreeing to the plan, developing the required actions, and attention, from every function and put it on the timeline. This initial part of the process creates a pressure on the attention and feeling of responsibility of all participants, but the limited duration should not seriously harm the current open projects.

One possible outcome of building the S&T and deriving the detailed plan is to freeze the three or four development projects that are not mandatory to keep the image of HighX intact. Still, three or four critical projects for maintaining the current image of HighX are still urgent.

In order to analyze the required load on management attention we should notice that after the consensus on applying the S&T the main attention burden will be first put on the shoulders of the production managers. They are faced with the new paradigm of choking the release and another of following the priorities of buffer management.

Are the same managers also need to pay a lot of attention to the projects developing new features?

They are definitely impacted by requirements for proto-type production and participating in some meetings to present the production obstacles. When the development is completed they need to introduce all changes into the regular production procedures.  This is relatively routine work, which should not put major pressure on the production managers.

First conclusion: Have HighX focused on the TOC S&T and, at the same time, on several of the key R&D development of new features, while the other R&D projects are frozen until the completion of such a project would let to unfreeze another project.

What about the two bigger projects, which look for two new market segments?

Here we see a much more serious load on the Marketing and Sales Management. The S&T process after completing the build-up of the TOC procedures, policies and measurements in the Production, would face the serious challenge of developing the new value offer to the market! The project will also deal with training the sales force to be able to sell such a value offer to the market.

How would the Marketing and Sales managers be able to go through such challenges, while also preparing two more big moves of opening new market segments? This is where the load on the relevant managers might be way too high.  It seems impossible to deal with two, certainly not three, such critical missions at the same time.

Another result of the introduction of the DCE is the possible dramatic increase of the load on the regular resource capacity in production. In the S&T after the part of ‘Capitalize’ comes the part of ‘Sustain’ – prepare for significant increase in demand in order to be able to keep the new delivery performance intact.  It is clear that succeeding to enter a new market segment might bring more demand. It seems unwise to have the two different efforts to substantially increase the demand to take place at the same time!

Conclusion: The two bigger projects should be frozen at least until the Capitalize part of the S&T process is well established. Then it could be considered to continue, while making sure that the higher level of demand would not harm the delivery performance, which will be, at that time, a key in the image of HighX.

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A Difficult Choice of Focus: A fictional case for open public discussion

HighX is a job-shop manufacturing company, producing 12 different categories of products, each according to detailed specifications from the client. There is no practical way to make-to-stock/availability; it is a pure MTO environment.

Steve, the CEO, got interested in the Strategy and Tactic (S&T) process in order to achieve a decisive-competitive-edge over his competitors. The idea is to offer high-reliability and also fast-response delivery to clients and by that gain a decisive competitive edge.  Clients currently suffer from not-too-good delivery, which characterizes also the performance of the main competitors.

Some clients need, from time to time, much faster delivery. The current order lead-time is four weeks and if that is achieved in high reliability it would relieve much pain from the clients.  If it’d be possible also to offer fast response, say delivering a specific order in just one week, then 25% markup on the original price will be considered fair.  It is predicted, based on actual queries from clients, that 17% of the orders would be for one-week special delivery at the higher price.  TOC operational methodology can achieve the capability of reliable delivery including the faster delivery order.

However, during the initial sessions on the S&T Steve raised the issue of the current improvement initiatives that are already on progress. The R&D department is busy on adding new features to the most lucrative seven categories of products.  These features are demanded by the customers and it is reasonable that the competitors are working on them as well.

More, there are two even bigger initiatives, coupling R&D and business development, of entering two promising new market segments with new categories of products. The two market segments offer higher ratio of T/Selling-Price.  The two projects have been initiated nine months ago and are expected to be ready to launch between six to twelve months from now.

James, the key TOC expert leading the S&T session, said that all those development projects should be frozen until the basic TOC procedures, including the new TOC performance measurements, would be implemented.

Steve reacted that he cannot afford to freeze those projects as they are critical to maintain the position of HighX in this competitive market. James suggested waiting with the S&T for six months until three most important projects would complete and then start the implementation.  He also suggested that while the three most important projects are making progress, the other projects would be frozen until the three are completed and also until the operational part of the TOC methodology is successfully implemented.

What do you suggest Steve should do? How such a decision has to be made?

I call you to write your comments on the above.  It is time to discuss this matter.

Managing peaks as a strategic issue

Most organizations face few peak demand periods and much longer off-peak periods.  A peak is defined as a surge of demand that is above normal fluctuations.  The throughput generated during the peaks is, many times, very substantial relative to the total throughput generated in a year.   Thus, handling the peak has to be regarded as a key strategic issue, setting the relationships between the policies employed for the peak period and the different policies for off-peak periods.  The operational criticality of the peak is that it is reasonable to expect the internal weakest link to become an active constraint during the peak, and be non-constraint during the off-peaks.  This is often caused by the recognition that the level of available capacity maintained by the organization should broadly match the requirements during a peak.

If it is possible not only to prevent the loss of sales and the cost of holding too much inventory but also to strengthen the reputation of the organization then such a move, developing a TOC solution for peaks, has to be part of the overall strategy of the organization.

An important article entitled Peak Management, by Boaz Ronen, Alex Coman and Eli Schragenheim, was published back in 2001 in the International journal of Production Research. A post, publish in May 2016 in this blog, Facing Seasonality, the True Problematic Issue, offered some focused ideas on handling an anticipated peak that repeats itself every year.  The link appears at the end of this post.

Generally speaking we need to discuss three related time periods when we design the most effective way to handle a peak:

  1. The off-peak period before the peak itself, where the appropriate planning and preparations, like producing or purchasing the appropriate stock levels for the peak, are taking place. One generic insight for planning for the peak is to draw some of the typical peak demand to the off-peak periods around the peak. This could be achieved by pricing in a way that encourages customers to buy before or after the peak. Certainly airlines, hotels, and the whole vacation business are well tuned to these means. Others should adopt the generic insight to their specific environment.
  2. The policies, priorities and processes during the peak itself, using most effectively the limited degrees-of-freedom. This definitely includes the actual exploitation of the active constraint, and the subordination. For instance, a policy to offer only part of the product-mix and services during the peak, while offering the whole choice at off-peaks should be seriously considered.
  3. The after-the-peak period has to deal with some ramifications of the peak, which need to be considered in the planning. It is usually not possible to go to “normal” behavior immediately after the peak. The policies that fit the peak are different than during the off-peak. Human resources usually need to rest after the pressure during the peak, causing a true slow period after the peak that is lower than the average off-peak activity. Inventories that were not purchased during the peak have to be taken care of.  Many times such inventories are sold at significantly reduced price in order to reach the normal off-peak stable behavior. The overall success or failure to draw the most from the peak depends not only on what is sold during the peak, but also on what happens after the peak. For instance, the contribution from a promotion depends a lot on how deep is the drop in sales after the promotion.

First let’s distinguish between four different types of peaks defined by two parameters: very short peaks versus long peaks and anticipated peaks versus unanticipated. The post on seasonality is focused mainly on anticipated long peaks of demand. Let’s now deal with the other three types.

Short anticipated peaks

A “short” peak means that during the peak there is no valid way to replenish the stock during the peak. In services it could mean there is no way to add resources that have not been prepared before the peak for such a case.  So, basically what you have at the start of the peak is the maximum you can hope to use.

Consider for instance a major sport event, like the Super Bowl, which generates two different types of short peaks. One is sales of special items connected with the specific event, like hats and shirts with the logo of one of the teams.  There is no valid opportunity to replenish the initial inventory of hats during the peak.  The other type is a service like the police that have to be ready for any possible disruption.  It is not practical in such an event to be able to bring more security people in a hurry to handle a sudden problematic situation, unless they are held on alert very close to the stadium.

The ultimate dependency on early prediction of the requirements within the peak makes it the focus of the analysis.  Hence, the quality of the forecast and the decision rules based on that forecast are the core of the preparations.

As already have appeared elsewhere in this blog, forecasts of one number lead to wrong answers.  The only way to gain forecasting information that can be used for sensible decisions is to come up with two forecasts, one is based on reasonably pessimistic one and the other on an optimistic one.

The pessimistic forecast provides the vital information of what should definitely be prepared a-priori. The optimistic forecast should lead the decision by how much to add risk in the specific case. The possible damage of every quantitative decision, like preparing N items in stock, can be estimated by checking two scenarios. One assumes that the demand would be according to the pessimistic case leaving N minus pessimistic-quantity to be sold after the peak.  The other scenario is according to the optimistic forecast leaving Optimistic minus N of lost sales.  The rule is trying to find the best N that would, overall, yield the least potential damage or loss-of-sales.  Note that it is unrealistic to commit to perfect availability in short peaks.

The planning for the peak itself should include the exact placement of stock or resources at the start of the peak. In the case of selling hats at the Super Bowl event the different points of sale should get an initial amount, while the rest is stocked somewhere in the middle, making it possible to replenish, not from production, but from a central point, to the selling points.  Similarly, in the case of policemen controlling the security during the game, there is a need to have policemen located at several critical locations, while others wait at a central point to help handling situations that are too severe for the stationed policeman to handle.

The focus of managing the after-the-peak period is to return to normal as fast as possible. This might include logistics, dumping large inventories and carrying reduced activity for some time.

Shifting demand from the peak to the pre-peak or after-peak, when applicable, is an important part of planning for short peaks.  It exploits much better the constraint-at-the-peak and reduces the risk during the peak.

Short unanticipated peaks

Some organizations are aware of possible sudden emergence of a peak. For some, like the Fire Squad or the Emergency Room in a hospital, this is a critical part of their goal.  So, certain stock, and/or capacity, are prepared for such a case, even though the actual timing of the peak is not known.  Such organizations have a structured process for such a peak.  Using the first three steps of the five-focusing-steps should be the core of the “book” on how to handle a big, but short, unanticipated peak.

Organizations that are not prepared for such an occurrence have to improvise. Again, understanding the first three focusing steps is a major guidance in treating such a surprising peak.

Long unanticipated peaks

Unanticipated long peaks are pretty rare. When the demand starts to grow in an unexpected way, the challenge is to understand whether it is a trend or a peak, meaning the demand will go back to “normal behaviour”.  One case is when the organization launches a big surprising hit without being aware of the potential success. Diagnosing whether this surprising success would continue or not is critical.  If the organization wrongly assumes that the future success is guaranteed, meaning assuming it is a trend, and rushes to invest in doubling and tripling the capacity, the result could be catastrophic.  The other obvious mistake is sticking to the current capacity levels and letting other competitors take over the new market demand.  TOC has the tools to inquire the true causes behind the surprising surge of demand.

A basic TOC message when going into a surprising peak is to identify the emerging internal constraint and make quick changes to the procedures to match the new exploitation and subordination requirements. Of course, management needs good TOC knowledge to be able to adjust to the new situation in the best way.  The remaining big challenge is whether to elevate the constraint, probably also other resources, or wait and see and maybe lose part of the future market demand.

As already mentioned, dealing with long anticipated peak of demand, has been treated in the post entitled:  Facing Seasonality – the true problematic issue, see https://elischragenheim.com/2016/03/28/facing-seasonality-the-true-problematic-issue/

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/

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.