Author: Eli Schragenheim

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.

By Eli Schragenheim and Henry Camp

E-Commerce offers real added value to many different market segments. The value of the new technology has been analyzed in a previous post: “Applying the six questions of technology to digital stores.” This added value changes the whole business of retail.  But, it is not just a disruptive technology; there is a risk of being self-destructive, because digital stores face a huge threat to their own survival.

The main question every single digital stores faces is:

What added value can we offer relative to other digital stores?

The question targets a huge and sinister obstacle, which becomes more and more dangerous with time. From the point of view of potential customers, what is the difference between buying from one digital store and another? As long as delivery logistics are in place, location has no relevance, unlike traditional brick and mortar stores.

Dr. Goldratt coined the term “decisive competitive edge” (DCE), as being superior to any significant competitor in a given market segment. He also defined the conditions for gaining such a DCE.

• Answering a need that no other competitor is able or willing to.
• Competitors refuse or are slow to follow, usually because delivering equal value contradicts a common business paradigm, such as operating efficiently or containing costs.
• In other parameters important to the segment, the company is on par with the competition.

The direct consequence of lacking a strong DCE is that customers are left with no clear means to differentiate, except based on price. The reality of the internet has encouraged services that compare prices between different digital stores.  Thus, it is quick and easy for customers identify the cheapest digital store for any desired product.

Many on-line shoppers make spontaneous purchases once they see a product they fancy and its price. This is where the vast majority digital stores compete, but without truly gaining any advantage over each other.  They commonly offer a broad variety of products at very low prices and send emails in volume to past customers with the hope of capturing or keeping mindshare.  On top of that, artificial intelligence is deployed to speculate what any potential customer desires.  Could this be a DCE?  Yes, if you are far better than your rivals.  The problem is, since competition is so hot, any gaps close very fast.

When the only reliable competitive differentiator is price, then the Throughput percentage (Margin/Sales) drops, forcing the digital store to look for some combination of two alternatives:

One approach is cutting expenses, seeking profitability at current volumes. Unfortunately, the main expenses of digital stores support marketing as well as being quick and reliable in delivery.

If cutting expenses seems like an obviously bad idea, you will understand why most digital stores choose the opposite approach, spending more and slashing prices in the hope of driving sales growth. Driving OE up while cutting Throughput % typically results in current losses but maybe, just maybe, with enough more sales … someday the digital store will gain enough economies of scale to become profitable.  The required relentless increases in the quantities of items sold, becomes more and more difficult to accomplish, because the cost of entry for new competitors flush with investors’ cash is very low.  Should one digital store fail, then the remainder feel like there is no alternative to spending lavishly on marketing to attract the customers who used to buy from their now defunct competitor.  Furthermore, the survivors try to draw in ever more new clients by dropping prices some more.  This is the vicious cycle of the digital marketplace.

How can a digital store gain a Decisive Competitive Edge that is not price?

First let’s state the obvious: currently the only true DCE for digital-stores is being very big!  So, Amazon and AliBaba have already gained that position but how can others become that big?  There are three separate types of added value that big successful stores deliver to their customers:

1. Confidence that nothing will go wrong
2. A broad variety of products
3. The ability to succeed while delivering at low prices

Is there anything that a smaller digital store can do to gain a customer base that loyally buys from them? This is the most critical question for any digital store facing the grim reality of global and open competition on price.

There are several directions where breaking the vicious cycle is possible:

Building a strong loyalty program for customers

It has been proven by the airlines that loyalty programs work! It demonstrates not only the impact of getting things for free, but also that giving special VIP treatment to people makes an impact.  Translating the concept of a loyalty program to digital stores is far from being trivial but it also brings a new opportunity.  The common paradigm is stuck with investing money to give away value to customers who bought something without being certain of future purchases from those customers.  This paradigm makes such a loyalty program tough to imitate, especially in the current environment of lack of profits among digital stores.

The real challenge of pursuing this direction is not only the free gifts and price reductions but providing special VIP treatment to loyal customers. It could be a certain top product mix sold only to the members of the club, giving high priority in the shipping, free delivery – like Amazon Prime, free returns – like Zappos or any other generic idea for a DCE.

Still, loyalty programs have been copied. What airline doesn’t have one?  The “D” in DCE stands for decisive.  This means others won’t copy the edge, at least for long enough for the developer to gain enough of an advantage, like accumulated profits, to make another leap ahead of the competition that they can’t or won’t afford – again, at least for many years.  For a digital store’s loyalty program to remain exclusive, it must either address a problem caused by digital stores by their very design or an issue that is unresolved by all stores.

One comment about a neglected market segment: the high socioeconomic sector is not actively sought by digital stores who speak the language of low price. While relatively rich people still hate to pay more just because they can afford to, those people are willing to pay more for higher value.  A loyalty program that treats the members specially is something they look for.  If digital stores are able to find its way into this sector – they’ll become antifragile, and that is worth a lot.

Choosing the right product mix

Regular stores carry and display physical items. Virtual stores can only display a picture of an item.  This allows the digital stores to display and sell very wide variety of similar items, without the need to choose the preferred product mix.  On the other hand, even if offering more is virtually free, studies have confirmed what shoppers already feel – having to sort through the haystack to find the desired needle makes what could be easy and fun a boring chore.

What does it mean that a store shows a picture of a certain product? Actually, it only means that the product is for sale.  There is no implied formal recommendation by the store.  “Some people buy it.  So, we have it.”

What if the store took a stand on what it considers good and worthy products? Consumers are rightfully suspicious that stores recommend those items that bring the store the most margin.  If that expectation for self-serving behavior can be overcome, then truly assisting individual buyers choose well for themselves specifically is a significant added value.  Big retail already relinquished all the responsibility of choice to the customer.  The need for help making the right choice is still real for many buyers of many products.  So, being able to identify the right product mix and then directing the consumer to what truly fits his or her needs while clearly projecting pure intentions is a Decisive Competitive Edge.

Assisting customers can be partially by virtual means, displaying relevant information that helps them realize which needs the product meets or by means of real-time texting or even speaking with a shopper live. Such services add complexity and costs to operations, which is seen as problematic, but could also establish a unique value that makes the specific digital store unique and it attracts high level customers.

Making the delivery a special experience

It is true that customers of digital stores have a somewhat elastic tolerance to the time of the delivery. If they didn’t, they would be forced to buy from a local store that holds stock of those products for which they prefer not to wait.  This does not mean they don’t care how the item finds its way to their home or workplace.  Most digital stores partner with delivery companies to handle shipments.  This means the delivery company treats the item(s) that are delivered just like all other items.  It is enough that they get there reliably.

What if, for the upscale segment, the carrier truly represents the digital store? When this is feasible, the delivery could easily answer a need: allowing the customer to physically check the product and only then decide whether to keep or return it.  It could solve the problem of fitting clothing, by including in the delivery two or three sizes out of which the customer would choose the best fit.  The buyer could decide by actual inspection which of two competing brands is preferred.

Is this too expensive to do?

This is the wrong question, even though this is the most common one managers of digital stores probably ask themselves. The real question is whether some customers are ready to pay for such a service?  If there are customers for whom this service is what they desire, then the price is not the only issue.  What a relief!

The internet created a sea change, the ramifications of which we are still struggling to understand. There are some destructive aspects to the internet economy.  The belief that the number of customers and detailed information about them are enough for making a successful exit are probably over but the damage from making customers expect to getting value for free still exists.  It is time for deep cause-and-effect analysis to outline a way to draw true value, value that answers our needs from the internet.  E-commerce in general and individual digital stores in particular are ripe areas in which to start such an analysis.  Those who do it well and soon will deploy their DCE to earn not just sales but disproportionate profits.

By Ravi Gilani and Eli Schragenheim

Money is a critical resource as demonstrated by every company that has gone through bankruptcy or has been on the verge of bankruptcy.

Generally speaking cash is also the ultimate constraint of the public sector, as the budget dictates the maximum value that the public-sector organization, a non-profit organization by definition, is able to draw. Limiting the working capital of an organization to the extent that lack of cash limits the throughput happens also to some profit organizations.

This article focuses on companies for which the cash limitation is a direct threat on their survival. This kind of cash constraint is unique because it is imperative to find the immediate way to go out of the situation.

People who are knowledgeable in TOC are aware that any specific constraint of the organization should dictate policies and norms of behavior that could be different than with another constraint. This dependency on the constraint is even more noted when the constraint lies with cash, which prevents purchasing the required materials and the use of capacity and by that disrupts the life line of the organization. The immediate result is that revenues are blocked.  These revenues could have been used to generate more revenues and reduce the pressure on cash.  In such a case money is both the goal and the absolutely required capacity to continue the business. This is a unique situation with very critical ramifications, which should lead the management to behave differently than in any other state. When lack of cash threatens the existence of the organization all the attention of the top management is consumed in fighting one payment crisis after another.

The seemingly complicating factor of money being the goal, the constraint and the direct threat to the organization makes the TOC insights regarding exploiting the constraint and subordinating everything else to it, especially strong. The good news are that the right behavior accelerates the regaining of cash in a non-linear way. The objective of this article is to point to ways to elevate the cash constraint. It is not a constraint a company can live with for too long.  We believe that it is possible, many times, to get out of the cash constraint situation in 15-20 weeks.

The important generic insight for a survival cash-constraint situation is to understand the meaning of cash-to-cash cycle time and cash-velocity. This leads to being able to accelerate the cash-velocity and go out of the current state, even on the expense of the amount of revenues.

Cash to cash cycle time is the total time it takes from cash going out to cash coming in. In other words the time from the actual payment to a supplier until the client pays. We can measure the time by days or weeks as reasonable periods of time.

Cash Velocity (CV) is defined as the contribution-ratio of one unit of cash in one period of time.  For any business every dollar invested in materials, or for providing the capacity required for a sale, is expected to yield, on average, more than one dollar. In other words, the ratio of the cash in to cash going-out should be higher than 1. The idea here is to get the ratio for one period of time, like a day or a week.

Suppose one dollar is the cost to buy materials and the finished item is sold for $2 dollars three weeks later. So, the going out cash is doubled in three weeks and should yield 4$ in another three weeks.

How much did the invested dollar yielded after just one week? The answer is NOT 33%, because if after one week we get $1.33, then we immediately invest the $1.33 to generate more sales and then after the second week we have 1.33*1.33 = $1.7689, and after the third week we should have: 1.33*1.33*1.33 = 2.35, not 2.  In order to get the cash velocity (CV) of the situation where $1 would yield revenue after three weeks of $2 the CV = the 3^rd root of 2 = 1.259, or 25.9% contribution rate in one week.

A company that is in the state of struggling with a cash constraint has operational lines working, but it needs to invest its limited cash to buy materials and then turn them into sales. These are the main body of the truly-variable-costs (TVC), the cost saved when one unit of output is not produced and sold.  The quicker these dollars, used for TVC, are turned into Sales the amount of cash would grow until the state where the constraint moves to something else.  The ratio of S/TVC, S stands for sales, representing the contribution of $1 invested in materials to cash coming from sales.  This ratio is called: contribution-ratio.

The overhanging threat on the company is its ability to cover all the other operating expenses (OE). These are all the expenses the company has to carry to sustain the operational line alive.  Without the OE there is no basic ability to survive.  So, it is absolutely critical to have the amount of necessary OE in order to stay alive.  The rest of the limited cash is to make more cash as fast as possible, until the company reaches the state where there is enough cash to support the full market demand.  At that state the constraint might move to the market or to another resource.

The formal mathematical formula for cash velocity is: CV = ((S/TVC)^(1/n) -1).

The cash-to-cash cycle time is represented as n in the above definition.

Table 1 details the calculations for two different products P & Q.

Table 1

It seems that given a choice, due to the lack of cash, between selling P and selling Q, that selling Q would generate cash faster, bringing the company to go out of the cash constraint situation earlier than focusing on selling P. This is not the intuitive answer, just to hint how far are most managers from the right answer when cash appears as a constraint.

The cash the company holds at every point in time when it is in a cash constraint situation is used for two critical objectives:

1. Covering the critical operating expenses: the must-have expenses to keep going – OE.
2. Purchasing the absolutely required materials to enables sales. This is the TVC.

The minimal cash required for survival is n*OE, because whatever is purchased now will turn to revenues only in n periods. However, this amount does not leave any room for investing cash in order to get more cash. This means that once the company is left only with that amount of cash it is doomed.  Question is what is the amount of cash that still provides a valid option to survive? We like to find out what cash leaves an option that after n periods the company would still have the same amount of cash. Let’s call it adequate survival cash. So, we look for X cash that after n periods would yield exactly X cash. In the beginning we need first to put aside n*OE from the cash in order to cover the OE payments for all the periods, including the current one, until the new cash appears.  The remaining cash of X-(n*OE) is used to purchase materials to sell end items after n periods getting X in revenues, allowing us to repeat the process. The invested cash in materials would yield c*(X-(n*OE)), where c is the contribution rate, S/TVC, and we like it to be equal to X.

X = c*(X – (n*OE)) = c*X – c*n*OE

X*(c-1) = c*n*OE

X=n*OE*{c/(c-1)}

Sufficient cash means the cash at hand is enough to cover the n*OE plus having enough to purchase whatever is needed to exploit the capacity and/or the maximum market demand. If the cost of materials that fully answer all the demand or the full capacity of the most loaded resource, then it is enough cash to be considered beyond the urgent need pull the company from its cash constraint situation.

Table 2 provides sample calculations for above parameters.

Table 2

What the table shows is that having on hand cash between $4,001 and $4,500 and focusing on the Q product provides a much better way to bring the organization out of the cash constraint than by concentrating on the P product. If the market for the Q product is limited, and this is what constraining the company from investing more than $1,000 per period in purchasing materials, the organization has more cash than 4,500, and the internal constraint provides enough capacity also for the P product, then the organization can improve even more.

The above example is a simplified reality.  Usually, while having on-hand only $2,000 there are already orders and materials in the pipeline.  That means the cash-flow situation needs to be clearly specified week-by-week.  But the principles are the same.

The process of going out of the cash constraint situation

In cash constraint situation, the focus on generating as much cash and as fast as is possible through effective utilization of existing cash. A small increase or reduction in cash can make or break the organization. This unique property of cash impacting throughput non-linearly could help organizations to overcome cash constraint in a very short period of time.  In most cases it may be possible to come out of cash constraint in less than three months by reducing cash to cash time, and by that accelerating the cash velocity.

Cash to cash cycle time (n) reduction has huge non-linear impact on throughput, cash availability, survival time, adequate cash requirement etc. Often just shrinking cash to cash cycle time is good enough to come out of the cash constraint situation provided the right measurements are in place.

The common TOC techniques of accelerating the flow of value to customers, through chocking the release of orders and the use of buffer management, are already good means to shorten the cash-to-cash cycle and increase cash-velocity.

Additional ways to reduce the cash-to-cash cycle time are:

Reducing the customer paying time. Giving the customer price reduction in exchange of significant faster payment is of paramount importance for achieving faster CV. It can be shown that even after providing 20% price discount to shrink customer payment time from 4 weeks to one week could exploit better the cash constraint. Of course, this might not be the right move when cash is not an active constraint.

Reducing the manufacturing lead-time is also of critical impact. While it is always good to reduce manufacturing lead-time, its impact on exploiting the cash constraint is even more critical.  Even here, when possible, on top of all the known TOC techniques, to use overtime, for extra cash, to vastly reduce the lead-time and by that accelerate the revenues, then it has to be carefully checked.

This thinking on the special devastating impact of a cash constraint, and its practical meaning for exploiting the cash constraint, is a major contribution of the five focusing steps of TOC.  Just remember the purpose here is to get rid of the cash constraint situation.  Cash is not a resource to keep as a system constraint!

Amazon made a huge change in Retail and all the large retail chains feel it. The ability to buy online is a disrupting technology, even if it won’t totally shut down the retail chains  The question is how the way current retail stores are going to change in order stay economically viable.  Regular stores will have to emphasis their added-value to the products and customers for which digital stores have difficulty to satisfy.  It is similar to the small shops that succeed to exist along the big stores, because they offer personal service and specific taste that appeal to certain segments.

The focus here is on the general concept of a digital store, which offers wide variety of products through the Internet and ships the purchased items to the client. It does not deal with the need of a specific store to differentiate itself from the other stores.

Question 1: What is the power of the new technology/product/service?

Digital stores have the technology and the logistical capabilities to show variety of items for sale through the Internet, accept orders, accept secure payments and ship the purchased items to the client address.

Question 2: What current limitation or barrier does the new technology eliminate or vastly reduce?

The limitation, removed by the digital stores, is the need to go to a store to choose and pay for the items. Within the limitation there are three different sub-limitations:

1. Reaching the physical store. It takes time, efforts and money.
2. Facing limited choice, depending on the space of the store and how it is utilized, thus having lower chance to find the item of choice.
3. Limited capability to compare prices. In the store the buyer is faced with the price of that store. Even when the buyer is aware of another store with reduced price it still requires going to that store adding more time and efforts.

Amazon started by offering, to the whole world, a wide-range choice of books and CDs that no physical store is able to keep, this is on top of the ability to buy without going out of home.

The limitation eliminated or reduced by the new technology let us analyze the target market for which the new added-value is very high.

Reaching a physical store can be viewed as a burden, but it can be desirable in itself.  The term ‘shopping’ suggests that there is substantial value, for many people, in having good time by going to a store and browsing through the displayed choice.  For these potential customers the limitation is much smaller: only when there is no time, or capability, to go to a store, then there is added-value to the digital store.  For customers who “hate shopping” or customers who are ultra busy at work, the option of buying from home, maybe during the night, is a blessing.

For customers who live far from the worthy stores the value of buying online is most valuable. So, customers in rural areas are a good target.  Customers in big cities, but without a car and far away from the big shopping centers, are a reasonable target as well.

Customers who love to find the cheapest priced items, digital stores offer an advantage, because it is so easy to compare prices and find the cheapest store for a specific product.

It seems to me that second question, as verbalized by Goldratt, lacks a critical part:

What new limitation(s) are imposed by the new technology?

In other words, what are the key current negative branches (NBR) created by the new technology? Some of the new limitations might be eliminated in the foreseen future.  Others do not currently seem to be solvable, so they reduce the value.  It is of special importance to check the new limitations regarding the segment that draws the key value from the removing the old limitation.

The new possible limitations:

• The display on computer screens is not equivalent to the feeling of looking closely at the product and touching it. What might look esthetically nice in the picture might be much less attractive in reality.
• Returning the goods is always a hassle. When frequent bad quality or a mismatch between the buyer expectations and the product happen the hassle is combined with disappointment.
• It takes time, sometimes long time, until the product is received. It is always possible that the purchased item would not arrive at all.
• While there is an expectation that the price at the digital store is lower than in a store, the additional cost of shipping might increase the overall price beyond the price at the store.
• The huge available choice in various digital stores could be a curse rather than blessing. Searching for the best product might take very long time. Too much choice is often paralyzing, causing the buyer not to buy, and add the distress of wasting time.
• Lack of any human interaction reduces the confidence and pleasure of purchasing.

The key limitation that is eliminated or vastly reduced by the digital stores defines the customers, and the appropriate products and other conditions that would yield high value to those customers. The limitations of the solution add more conditions that reduce the original market segment, unless those limitations would be successfully eliminated.

However, in order to fully materialize the potential value of overcoming the need to reach a store we need to evaluate more questions.

Question 3: What are the current usage rules, patterns and behaviors that bypass the limitation?

This is a key question because it is not commonly asked. Identifying a limitation contains important knowledge about the potential value of eliminating it, but the true reference of the added-value is to compare the new situation with the situation prior to the new technology, considering the fact that people find ways to deal with the limitation by reducing its negative impact.

The way customers handle the need to reach a store is to batch many of their needs into the same trip to the shopping center, a mall, or a very large store.  The emergence of large stores, containing diverse variety of departments, greatly supports the idea of batching.  Having a group of stores, each one offering special sales and reduced prices, helps buyers feel that their time and efforts are well spend.  The malls provide ample parking and also restaurants and coffee houses to make the shopping time and efforts pleasant and even rewarding.

The digital stores need to look at the malls as the reference for the current buying norms. The batching of buying many different things at the same time creates habits that impact the buyer facing the digital stores.

Question 4: What rules, patterns and behaviors need to be changed to get the benefits of the new technology?

What does it mean to draw the full benefits of digital stores?

Certainly a basic expertise of operating the computer is required, along with good internet connection.  All safety issues have to be properly handled by the digital store and spread the recognition that buying online is safe.  The change in the behavior means the customer has to be knowledgeable enough in searching the Internet and especially the new safety rules, like when it is safe to reveal the credit card details.

The habit of batching should be grossly reduced for buying online, with the exception of buying items from the same category, like groceries.  The only slight advantage is the option of batching the shipment, but that is available only when the digital store carries all the items at its own warehouse.

Another example where buying several items at the same time online makes sense:  when browsing through the special sales offered by a specific digital store. This is especially important for people who love bargains and “real finds.”

The practical meaning is that in the majority of the cases there is no added value to batch the purchases from a digital store.

Considering that most customers have free time and they like to go out of home or work clarifies that for the majority of the customers digital stores do not fully replace the retail chains, but they add superior ability to buy specific items easily without going out of home.  So, the change in behavior is to make the differentiation what to buy online and what to buy by physically going to a store.  So, awareness to when there is an advantage in searching the internet and how this should change our buying habits is truly required. It is the interest of both the digital stores and the physical stores to lead the potential customers to recognize their unique added-value and guide them to accomplish it.

The way people choose the store itself is also a habit to be re-considered. Going through many digital stores is time consuming and saving time is supposed to be the key value.  One important factor is the brand name and the past experience in that store, physical or digital.  The esthetics of the physical store has an additional and significant impact, but the factors that create impression from a digital store are quite different.  Digital stores have to find the key factor that influences the right customers to go frequently into the store.

Attracting first-timers and then keeping them as frequent customers is a challenge for every digital store. It requires leading the customers into a unique and focused experience of looking at what they truly like; skipping most items the customer is not interested at.

Here are some characteristics for reasonable items to buy at digital stores:

• Items that are clearly defined by the picture and written description. In other words, the customer knows what he is buying.
• Items that are not commonly available in regular local stores.
• Items that are relatively expensive and digital stores are able to offer a very good price, including shipping.
• Heavy items that need to be shipped to the customer anyway.

Question 5: What is the application of the new technology that will enable the above change without causing resistance?

There are four critical factors that generate resistance to digital stores:

1. Safety/security issues.
   1. Getting the products according to the expectations of the buyer.
   2. Being certain that the credit-card details would not be used for other purposes, not by the digital store and not by hackers fishing for such information.
   3. The private data of the buyer would not be sold to someone else and would not breach the privacy of the buyer.
2. Efficient and friendly navigation, closing the deal and payment.
   • The application has to give the feeling of saving time and hassle.
     • The choice of items to be shown first is critical.
3. Proper description of the product. The use has to be certain the chosen product is what he/she likes.
4. On time and quality of the shipping process.

The current digital stores are still struggling with the above factors. While the confidence in the use of credit-cards in the Internet is getting reasonable answers, all the other issues are still open.  The difficulty to describe the features and look of the items and what are the differences between seemingly similar items is especially troubling.  Shipping is another open issue; with some new means of using drones to bring the item to its destination in the fastest and most friendly way.

Question 6: How to build, capitalize and sustain the business?

Every store, digital or physical, needs to re-think their strategy. The important starting point is identifying unique value to well-defined customers who need that value and do not get it anywhere else.  The questions so far have outlined the overall contribution of the new technology, thus pointing to various market segments and what are the key challenges.  What is required now are focused efforts to define the more specific value offered by the store to well-defined target market. This is what TOC calls a ‘decisive-competitive-edge’.

Once a decisive-competitive-edge idea is raised an analysis based on the six questions, but narrowed down to the specifics of the need and the proposed way to handle it would reveal the business opportunity.

Eventually developing the Strategy should lead to answers to the following critical questions:

1. What should the store sell? What related services need to accompany the sale? At what price? To whom?
2. How to operate the delivery in a way that would maximize the value to the target group of customers?
3. How to market the unique value? How to prevent too many competitors to copy the unique value?
4. How to answer all the concerns and reservations of the customers?

Digital stores are an example to a global change that all the players should analyze carefully in order to adjust to it in a faster and better way.  The six questions are a good tool to guide such a necessary process.

What should WE, possible future fliers, learn?

And what should the other airlines learn?

The extra brutality is not the real issue. United, or XYZ Airlines, can always claim “it is not us; it is they, police or local authority security forces”. The real message to any passenger is:

“XYZ Airlines would, most probably, fly you to your destination, provided you have a valid ticket AND provided the airline does not have something more important to do. If XYZ would fail to fly you on time, they might compensate you, or maybe not.”

Should United and the other Airlines stick to the above message? Of course they should! Because, what can we, the passengers, do?  Do we know another airline with significantly better commitment to its passengers?

Why should United and the other airlines contemplate to change their basic paradigm of trying to exploit the seats of all their flights? This is absolutely in-line with TOC, isn’t it?  Some flights have the limited number of seats as a micro-constraint.  Overbooking is an exploitation scheme, because many times passengers don’t show up and then it is a waste not to sell the seat to a paying passenger.   Now, if there is a real need to fly several crew members, because otherwise another flight might be delayed or cancelled causing very high cost, then it makes perfect sense to nicely ask some passengers to give up their seat for some compensation the airlines think is fair.

The only question is whether WE, potential future passengers, agree to this widespread win-lose scheme of the airlines.

The scope of question is much wider than this specific case.  There are many other cases where we are, very politely, asked to change our plans because it is too expensive for the airline to fulfil their commitment. The Israeli airline, El-Al, has lately cancelled, at the very last minute, many flights because of lack of pilots.  Let me stress the point: cancelled at the last minute!  El-Al management blamed the pilots, and the pilots blamed the management.  It is nice to have somebody else to blame.  Do I care who is right?  Blaming does not solve anything.

I hope some airlines would see the opportunity to develop a decisive-competitive-edge policy of behavior and make it work. I do not claim it is easy – just that it is possible!

Remember: the real constraint of any business is the market demand! If you fail to subordinate to the demand then the future demand would go down, and then you won’t have an internal constraint as well.

It is still possible to have an internal constraint, but the constraint has to be exploited only to the level that still provides good overall subordination to the market.

Let me point out that having to add crew members to a full flight is a good example of interactive constraints! Another operational wisdom the airlines have to learn.

Goldratt introduced into the TOC vocabulary the word “choopchik”, originally Russian but also used in Hebrew slang to describe a very small unimportant issue. Dealing with a choopchik could bring value, which one needs a microscope to be able to see, according to Goldratt’s illustrative description.

The obvious insight is:

We are constantly flooded with choopchiks. We won’t achieve anything substantial if we spend time of those choopchiks.  Thus, dealing with a choopchik is a major waste, because you have something much more valuable to do.

The emphasis is on our ultimate constraint of attention. The relevancy is both personal and organizational:  focus on what brings value.  When you inquire a little more into the cause-and-effect behind the above insight you realize that there is no way to achieve all the potential value you, or the whole organization, are theoretically able to achieve.  So, you need to give up minor potential opportunities for added-value, and concentrate on achieving the more meaningful ones.

Insight means a new realization is happening. If it is obvious then it is just good effective verbalization of an already existing paradigm.  However, is ignoring choopchiks truly common?

Just the other day someone told me a story about a good rational manager who spends a lot of time validating that every one of his subordinates works full weekly and monthly hours according to their contract. Isn’t it a choopchik?  Still, isn’t it a pretty common practice?

When something obvious is not common then there has to be reason.

Here is a related insight:

Dealing with choopchiks is easy and certain, while striving to achieve substantial value is risky.

In itself the feeling of risk is frightening and fear causes paralysis, which impacts the person to be active on something else. Is the risk of striving to generate significant value all that high?  Not necessarily, but one needs to evaluate the risky situation and find ways to reduce, or even eliminate the risk.  The common mean to run away from thinking about risky moves with high potential value, is to focus on a choopchik and feel good of achieving an infinitesimal value.

So, shouldn’t you challenge the risk and strive to achieve true substantial value that is part of your dream? This is what the insight of not dealing with choopchiks is all about.  The point of having a strange word to color an unimportant issue is to make it visible so we can pull ourselves and go back to what truly matters.

The more generic insight of ignoring choopchiks is to ask ourselves the following question:

Is the resulting value of what I’m busy with right now truly significant?

Personally I don’t want to write about topics that are choopchiks. I’m not always certain the topic I’m writing on is not a choopchik, but, the question certainly bothers me. So I assume I succeed to avoid many choopchiks, probably not all.

Let me remind you again of the coming TOCICO conference in Berlin. This is where the opportunities of gaining new insights are.  I hope to see many of you there, talking to each other and sharing insights.  Learning a significant insight from somebody else is a blessing.  It depends on us to be open enough to notice the insight, and then to think further how to use it for generating value.

We all look to overcome the main problems that trouble us to the extent that most of our time is wasted just by thinking about them. Generally speaking there are two possible solutions that miraculously eliminate such a problem:

1. A detail procedure that handles the specific problem. I call it a ‘recipe’, because it is similar to the medical treatment we follow without truly understand how it helps us. Many times these recipes, sometimes even called “best practices”, are not based on clear cause-and-effect reasoning, but on past experience that shows that the recipe usually works.
2. An insight that is the core of a new potential solution. A new understanding that leads to the detailed development of a full solution using logical tools.

Insights have to be based on cause-and-effect logic otherwise there is no new understanding. Here are several definitions of the term ‘insight’ taken from Google:

• An understanding of the true nature of something – merriam-webster.com
• An understanding of relationships that sheds light on or helps solve a problem – dictionary.com
• The ability to have a clear, deep and sometimes sudden understanding of a complicated problem or situation – Cambridge

The term ‘understanding’ appears in all the above definitions. It seems that to ‘understand’ anything the underlining cause and effects have to be part of it. Thus I suggest the following definition:

Insight: A generic cause-and-effect branch that becomes clear and can be applied to many different situations

Filling in a missing cause that explains an effect creates a sudden understanding about reality and also causes an emotional sensation of overcoming a vague situation. In my years of close interaction with Dr. Eli Goldratt I have had many moments of ‘aha’ of gaining a new insight.  Those insights had huge influence on my life and they constitute very precious memories of a truly great person.

The key value of an insight is being generic and thus its real impact is very wide. So, new opportunities are opened with every new insight we learn.  It is our duty to fully comprehend the new opportunities, which pose us the challenge of using our limited time in the most effective way to achieve our dream.  This characteristic of an insight is in contrast with a recipe that is effective only within certain boundaries.

Every practical problem is actually being torn between two different actions, where each action is target to satisfy a need and there is no way to take both actions. In itself this understanding is not all that useful as it only says that one has to choose the more important need and sacrifice the other, or decide to compromise.  The key TOC insight is that it is enough to challenge ONE assumption that lies behind one of three different causal statements to solve the problem by satisfying both needs.  One statement is that the two actions cannot be done together and the other two statements are that without the specific action the related need would not be satisfied.

This key insight is the core of the TOC conflict resolution tool, but in itself it has wider ramifications of constantly challenging key assumptions, like “When the costs go up the selling price goes up.”

When an insight triggers an effective solution to a long troubling problem there is a risk that the insight would be wasted by the recipe that is built upon the insight.  It is amazing how many valuable insights that have been implemented in one business sector are unknown in other business sectors.  For instance, consider the following insight:  It is highly beneficial to keep our current customers and it is not self-evident to our customers that they should remain loyal. Thus, we have to give our customers special and well appreciated incentive for continuing to be our customers.  This insight has been translated by the airlines to a recipe called ‘frequent flier program’.  The insight is generic, while the recipe is specific, and one has to go back to the insight to realize how to draw value in very different business sectors.

Benchmarking is a popular recipe to adopt recipes from similar organizations. This leads to major moves that imitate practices that bring limited value and close the mind to identify insights that could lead to so much more value.

TOC has developed several important recipes that work well within the boundaries determined by several basic assumptions. We should never forget the original insights.  Their scope of value is far wider.

I intend to talk about the key TOC insights in the next TOCICO annual conference in Berlin (July 2017).

Any change, even one that promises big benefits, includes concerns that something might go wrong. Too many times there is no practical way to prove that the concerns are either easily solvable, or they are too small relative to the benefits. There are also concerns from the unknown, what we cannot even imagine.  Even the value of the benefits is often hard to translate to actual impact on the goal.

Proof-of-concept is a general expression for providing a logical proof that the concept works. Theoretically a good Future-Reality-Tree (FRT) can provide such a proof, but it might not be good enough to eliminate all concerns, especially not the concerns from the unknown.

A more robust way to prove a concept is through simulation. However, it requires utmost care that the underlining assumptions are valid in the reality where the concept is considered.  It is not trivial to check the assumptions behind computerized simulation that has been developed by other people.  One category of assumptions that need to be carefully checked is the behavior of uncertainty. Another important aspect is identifying real effects that have not been included in the simulation.  For instance, most simulations do not consider human behavioral aspects like Parkinson Law.

The most robust way to prove a concept is running a pilot. The pilot should give a better idea of the value and reveal the negative branches and their impact, providing the opportunity to trim or reduce the negative impact.

A pilot generates considerable hassle.   Management attention is given beyond what is usually required in such a project.  All pilots are aimed at proving a concept.  This actually points to the very first task of planning a pilot:  defining the concept to be proven and its resulting benefits, including assessing the reduced uncertainty due to the pilot.

For instance, consider the case of choosing a project as a pilot for proving the concept of CCPM. The concept is aimed at completing the project on time, preferably earlier than the realistically expectations.  The CCPM concept includes planning the critical chain, cutting the task times and inserting buffers, mainly the project buffer.  In the execution phase the use of buffer management as the only priority mechanism is a key insight.  The choice of the particular project should handle the concerns that meeting the due-date for that project might be due to either special attention given to that project or that the good result is merely arbitrary.

It is important to realize that pilots should be done only when there is strong conviction that the concept offers considerable value, but might also cause damage.

The main factors in designing the right pilot are:

• Being able to significantly reduce the potential damage from full implementing of the concept.
• Providing good information on the value from full implementation.
• Limited consumption of special management attention.
• Limited investment in the pilot.
• Limited hassle throughout the organization. The impact of the pilot on the daily management and performance of the organization as a whole should be relatively low.

A suggestion for planning the pilot:

Define a-priori the performance measurements and the decision rules to determine whether to implement the concept after the pilot’s completion.

The concern is that if the measurements and rules for such a decision are not defined before the pilot is implemented, then there is high probability that no decision would be made, and the situation that led to the pilot, the conflict between believing in the value and being concerned by negatives, will continue indefinitely.

A key case for considering a pilot for a TOC implementation is for a distribution chain. The size of the full implementation, which could cover wide geographical area, many regional warehouses and huge number of retailers, makes the decision to abandon the current rules and move to the dynamic TOC solution very tough.  Let’s just state some of the reasonable concerns of senior managers:

• The improved availability would not lead to significantly improved sales.
  • For instance, because clients have always reasonable alternatives.
  • Or, because the short items are not high runners.
• The resulting inventory levels, and their impact on cash-flow, might be still high, maybe even higher than now.
• Transport costs would go up.
• New difficulties would emerge in loading trucks with very small batches of many SKUs.
• Getting used to new software modules and implementing them in many sites would take long time, causing problems in daily management and by that harming the performance.

These concerns, while still relying on the big promise of achieving a decisive-competitive-edge of vastly improved availability and lower inventory levels, lead to going for a limited pilot as a proof-of-concept.

How should such a pilot be defined?

There are several options to consider:

1. Start by implementing the solution at the central warehouse, but waiting with the regional warehouses.
2. Focus on 3-4 regional warehouses.
3. Choosing one family of products, including both fast and slow runners, and covering the way from the central warehouse to several, or even all, regions.

The issue of defining the characteristics of a good pilot is one of the most important open issues of TOC implementations. I highly recommend that TOCICO would arrange for several known TOC experts to publically discuss the issues during the next TOCICO annual conference.

I like to express my own view on the above options for a pilot on distribution.

The effectiveness of the replenishment solution depends on maintaining stable and flexible flow, according to a clear set of priorities, throughout the distribution chain. The relationships with suppliers have to be carefully re-thought in order to maintain as fast and frequent replenishment as possible.  The number of different suppliers poses a difficulty that is not lower than the difficulty to deal with huge number of small retailers.  It is part of the overall implementation plan to grow gradually through suppliers and though retailers.

What a pilot cannot afford is to cause disappointment from the results. Implementing a pilot only at the central warehouse exposes the chain to negatives that are not part of the final process. The regions would still order relatively large quantities, based on their local view of the supply chain, forcing the central warehouse to hold high inventory levels.  This could easily cause disappointment from the results and shutting down the whole implementation.

Focusing on several regions causes two different negative branches. One is that as long as the central warehouse cannot ensure fast and reliable response to the regions, the availability at the regions becomes questionable, leading again to disappointment.  The other negative branch is that the regions in the pilot might demand, and get, special treatment.  This could lead to good results in the pilot, but causing huge resistance in all other parts of the organization because they have to deal with tougher conditions.

So, my preference is to run a pilot on one family of products, including the central warehouse and all the regions for that family of products. I don’t see an urgent need to go to the retailers as part of the pilot, especially when they are managed by another organization. The outcome of the pilot is gaining somewhat reduced overall inventory in the central warehouse plus the regions while ensuring excellent availability.  The retailers might still order in batches, but the number of retails would reduce the negative impact of the  batching. The experience would lead to better understanding the actual impact on transportation cost and on loading the trucks, even when most trucks would carry also items that not part of the pilot.

I hope that this post would raise the issues behind planning the executing TOC pilots in variety of TOC applications.

I think that none of the  TOC applications are in the stage of just following a recipe for implementation.  There are certainly recipes for SDBR, Make-to-availability, Replenishment and CCPM, but in too many occasions in reality there is a need to deviate from the recipe.

There are two different categories of basic, sometimes hidden, TOC assumptions behind the TOC recipe for a successful implementation.

1.  Invalid necessary assumptions about the reality of the organization.
2. Invalid assumptions about the clients of that organization.

All TOC applications have several necessary assumptions that define the boundaries where the TOC application is effective.  Here are some examples where failing to notice that one necessary assumption is not valid causes problems in the implementation.

Basic SDBR assumption: The total touch-time is less than 10% of the total production lead-time. When that assumption is not valid the problem lies mainly with buffer management that might not show penetration into the Red at the appropriate time when the user can still expedite.  In such a case certain changes to buffer management are required, taking into account the touch-time that still lies ahead of the order. When the touch time is 50% or more of the lead-time then the problem is wider than just buffer management.  Such environments either have very high amount of idle capacity or have to be planned according to CCPM.

Comment:  Touch time also include necessary wait time, like drying, even when no resource capacity is required.

Basic SDBR assumption: From material release until completion the order is under full control of the organization.  This is not valid when one or more of the processes are done by outsourcing. The contractor usually does not commit to follow buffer management priorities. The whole batch is going to and from the contractor. In a way this is similar to long touch-time process, but not being in control during that time adds to the problem.  The situation calls for protecting the intermediate due-date when the order should go to the contractor.  This means having two back-to-back time buffers, one until going to the contractor and the other covering the route from that time until completion. 

TOC common assumption for manufacturing organizations:  The common practice is to release orders as early as possible. In one striking case this almost automatic assumption about the organization was proven wrong!  The plant was very careful, actually too careful, in releasing orders, causing very low WIP throughout the plant.  Can you imagine what happened when the production lead-time was cut by half and orders were not allowed to be released earlier?

Basic CCPM assumption: The project could earn a lot from quick completion and loses a lot from slow completion.  When this assumption is not valid then the whole concept of the ‘critical chain’ (or the ‘critical path’) loses its impact.  While it is always true that completing the project fast is valuable and being slow causes some damage, the important question is whether the value from being fast or the loss of being late are such that the organization is ready to invest efforts and money to complete the project fast!  The reason that in manufacturing the concept of critical chain is not known is that the value of fast delivery is lower than keeping high efficiency of the expensive resources.  When some resources are highly loaded then tasks have to wait for the resource to become available.  TOC, which challenges the value of efficiency for non-constraints, does not challenge the manufacturing concept of orders waiting for loaded resources, certainly for the constraint.  Thus, in manufacturing the lead-time is much longer than touch-time, while in projects special efforts are put to prevent the project from standing idle.  Recognizing when fast completion is critical should be part of the definition of a ‘project’ that should be planned using CCPM.

A common assumption in CCPM:  Professionals intentionally inflate the time to complete a job in order to be always on-time.  This assumption might be invalid in software and in sophisticated technology organizations where the professionals are not bothered by being on-time, and are more interested in getting the green light to develop something new and exciting.  For that end they might intentionally reduce the time it takes to do the job!  Cutting to half this kind of time assessment is a major mistake!

TOC assumption in Distribution:  The TOC solution would dramatically cut the inventory levels.  This is a common expectation and sometimes the success of the implementation is based on the amount of reduced inventory.  The real aim of the TOC solution is to provide excellent availability.  In most cases trying to do so without the TOC insights ends up holding too much inventory.  So, in most cases the expectations are met.  But, when many slow movers are maintained for perfect availability the required inventory, according to the TOC model, might be higher than the current practice.  Should the organization commit to keep those slow movers in perfect availability?  This questions leads us to the second category of invalid assumptions.

Here are some common examples for failing to understand the clients of the organization.

A common assumption in make-to-availability and distribution: the market suffers from frequent unavailability of every item.  There are two devastating results stemming from this assumption:

1. All the items are held for availability, including slow movers that require large stock buffers to maintain availability, even when the clients are ready to wait some time for delivery. Another related problem is offering availability for items with unstable supply. 
2. All clients like to be offered perfect availability. Well, perfect availability is always nice, but:

Do the clients truly suffer from unavailability?

Many times the suffering is real and it is beneficial to offer perfect reliability that the clients can rely on.  But, sometimes the missing items have obvious replacements, so the damage is minimal.  In other cases the client carries enough stock and is not bothered by short-time unavailability.  When the value to the client is low then providing perfect availability is merely “nice”.  For instance, offering perfect availability to wholesalers, which base their competitive advantage on low prices and do not offer availability of specific items, is bound to fail.

A hidden assumption in CCPM:  The original due-date, which is important to the client, does not change.  An important planning principle in CCPM is keeping the planning intact. However, the critical due-date might often slide later because of other needs of the client.  When this happens it does not add value to complete the project on the original time.  Showing the project in Red when the client can easily wait adds unnecessary pressure and tension.  It could also make project managers suspect buffer management when the project is Red and they know it is not. When the change of the due-date is small, then the project buffer can get extra time until the new due-date, relieving the pressure on delayed chains.  When the change is considerable re-planning is recommended.  The main point is: check frequently with the client whether the original due-date is still on.

We all make mistakes.  We need to learn from our mistakes, and even better, learn from the mistakes of others.  The key learning from mistakes is the ability to generalize the case, so it becomes a new insight.  It bothers me that most TOCICO case presentations take the usual approach of showing successful results, without revealing the mistakes and hurdles on the way, as if someone needs to be ashamed of the mistakes and by that also hide the achievement of identifying the mistake and fixing it.  There was one great presentation I remember from the Canadian CMS group that came up with lessons learned from mistakes in an implementation.  The implementation apparently ended well after the new understanding.  I think we all should learn the lessons from mistakes, made by us and by others.

The most common procedure for maintaining stock of items is relying on a forecast, translate it to average daily sales/consumption and aim at holding fix number of sale-days in stock or defining min and max number of sale-days. That number of sale-days (or sale-weeks) is determined by a policy for a whole category of items, defined broadly by the supply lead time.

This common procedure leads to significant deviations from the determined levels in both directions causing shortages and huge surpluses at the same time.

The main flaws in the rationale of the common procedure:

1. The common procedure monitors the demand fluctuations and based on it forecasts the future. But it ignores the uncertainty in the supply time.  The stock-level should consider both the demand and supply fluctuations.
2. The current forecasting method is based on predicting the average demand, but ignores assessing the level of uncertainty (forecasting error). Thus, information regarding the stock that is required to satisfy the constantly fluctuating demand is missing.
3. Frequent forecasting increases the noise in the system.
4. The min-max definition encourages batching and slows down the replenishment frequency, which increases the impact of uncertainty.

The TOC key insights for holding stock are:

1. Considering not just the on-hand stock, but also the items ‘on the way’, meaning all the open purchasing orders should be part of the mechanism to provide good availability. The Target-Level defines the buffer of stock, including both on-hand and open orders.
2. The Target-Level is kept constant until clear signal is received that it is not appropriate.
3. Fast and frequent replenishments to the target-level.
4. Buffer Management is used for establishing one priority system for moving stock from one location to another.
5. Tracking the behavior of the buffers to decide whether the Target Level is too small or too large. This is the objective of the DBM algorithm.
   1. The idea is to check the combination of two different sources of uncertainty:
      1. The market demand – its ups and downs!
      2. The replenishment time – its own ups and downs, including the impact of the frequency of replenishments.
   2. There is no point in introducing small changes.
   3. The signal for increasing the buffer is too long stay and too deep penetration into the Red Zone of the on-hand stock.
   4. The signal for decreasing the buffer is too long stay at the Green Zone.

The breakthrough idea of DBM is monitoring the effectiveness of the protection mechanism rather than re-calculating the buffer-size. Both the demand and the replenishment time behave in an erratic way, which is difficult to describe.  The main difficulty is frequent changes in the environment, which upset the key parameters of the demand and supply time.  Events like the emergence of a new competitor, a controversial article in the media, changes in the economy or regulations all could cause a quantum change in the market demand.

The replenishment time is highly influenced by the operational management of the supplier and the state of load versus capacity. Changes in both factors could lead to significant changes in the replenishment time.

Re-calculation of the buffers when such a drastic change happens is problematic because the calculations rely on past performance. Sensing the actual state of the protection mechanism leads to taking quick actions based on the most recent past.  The quick response does not try to speculate the exact size of the change – just its direction: up or down.  Goldratt recommended increasing or decreasing the buffer, once DBM signals the need, by 33%.

The impact of DBM on the performance of the organization is quite strong and faulty DBM signals might be very costly. Constant learning should be used to tune its algorithm to the specific reality, especially identifying situations that require different reaction.

When the reason for the deep and lengthy penetration into the Red is (temporarily) inability to replenish, like when the source lacks inventory or capacity then DBM should not increase the buffer.

A conceptual issue is the fixed-ratio change of buffers. It even does not matter whether it is an increase or decrease. It is always possible that a change has been invoked, but after some time reality shows there has been no real need for the change.  In other words, short time after the increase there is a signal to decrease.  However, if we use 33% for any change then we end up with about 90% of the buffer before the increase.  The problem is that it is hard to explain that inconsistency.

An idea, raised by Dmitry Egorov, was to check carefully the behavior immediately after such a buffer increase in order to validate that it is truly needed. The result of an increase in the buffer is that the buffer status is deeper into the Red relative to the new buffer size. If after very short time the buffer goes up into the Yellow, then it should signal returning to the former size.

Similar behavior should be taken after decreasing the buffer. This move would temporarily make the on-hand stock to be above the new Green line.  If the buffer status goes down into the Yellow very soon – DBM should recommend increasing the buffer back to its previous size.

A related issue is the asymmetry of the DBM algorithm between increasing and decreasing the buffer. For buffer increase the algorithm considers the depth of the penetration into the Red-Zone. For decreasing the buffer the amount of penetration into the Green is not considered at all.  Actually there is a good reason to be much more conservative about reducing buffers than for increasing them.

The use of the replenishment time as part of the DBM algorithm is of concern to me, because the TOC algorithm does not monitor that time and its relevancy for the decision is dubious. The whole point of DBM is monitoring the combination of demand and replenishment time.  The only important need for the replenishment time in the DBM algorithm is for stopping further increases until the effect of the new size can be evaluated.  However, this can be done by monitoring the arrival of the specific order generated by the buffer increase.  The algorithm for buffer increase could be based on continuous stay in the Red-Zone taking the depth into account.  For decreasing the buffer there is no reason to refer to the replenishment time.  All that is required is a time parameter for too long stay in the Green.

DBM works in a similar way to forecasts, meaning it looks back to the past to deduce the near future. However, DBM looks only to the very recent past and considers only the actual state of the on-hand stock.

Should we use forecasts as additional information?

The idea is NOT to change the buffer unless there is a clear signal that the buffer is inappropriate. The additional information based on a forecast that considers additional parameters than DBM would be a rough estimation whether the current buffer is definitely too large or too small. Considering seasonality, knowledge of a change in the economy or the emergence of new products could add valid information to the decision whether to change buffers, and also give a rough idea by how much.  When the forecast points to a minor change in the buffer. less than 20%, the buffer size should be kept as is.

The above issues are, to my mind, central for coming up with an overall more effective way to control stock buffers. I always prefer to leave the final decision to humans, but give them the most relevant information to do that.  When millions of stock buffers are maintained throughout the supply chain at various locations, and 1-2% of the buffers seem to be inappropriate at any given day, it is practically difficult for humans to consider the changes for so many buffers.  At that case there is a need to let DBM, coupled or not with forecasts, to change buffers automatically.  This means the effectiveness of DBM directly impacts the financial and strategic performance of the organization.

DBM is important enough to encourage TOC experts to collaborate in order to come up with effective DBM specifications for software companies to follow. The full detailed solution should have a wide acceptance.  TOC is clearly against any “black box” algorithms.