Eli Schragenheim

There is a basic contempt in management circles towards theories. The common thought is that management is all about practice and when you are faced with a demanding situation the theory would not rescue you.  The art in management is being able to see what others are not capable to.  A theory, which is open for everyone to learn, cannot help in leading one to gain the extra capability required to see further than others.

REALLY?

Science is about theories that have proven validity. It means that while there is no certainty we know enough, so the probability of a major mistake is very low.

However, we need very good logical arguments for establishing “validity”, which is a vague substitute to certainty. In social sciences the validity has to be backed up by a statistical model with at least 95% confidence. Nowadays it is customary to demand confidence of 99%.  Social sciences do not consider logical arguments even as merely “interesting”.  Logic is important for hard sciences, even though it is not sufficient.  A logical claim constitutes a theoretical hypothesis, but science requires a validity check through predicting a new effect based on that logic and then proving the existence of that prediction by either a carefully designed test or identifying that effect in reality.

Goldratt called this logical structure ‘effect – cause – effect’ to describe the process of identifying a meaningful effect, coming up with a logical explanation (the ‘cause’) and then deducing that if the cause truly leads to the observed effect then another effect has to be caused by the same cause and if we find the second effect in reality it gives the extra validity to the logical claim.

In Physics, unproven theories that are based on good logical reasoning gain wide recognition until it can be proven valid or being invalidated.

There is an inherent behavioral conflict between Science and Management. Managers do not have the option to wait for a proof of validity.  Some decisions have to be takes NOW.  Management cannot be a Science because it is so action-oriented.

But, this does not mean that managers cannot benefit from the use of scientific tools and theories. What is required, though, is that the application has to take into account the time pressure.  In order to make decisions under time pressure one has to be able to simplify the situation and to be assisted by basic cause-and-effect logic.  This is what a ‘theory’ could yield to managers.  Demanding validity of 99% or even just 95% is unpractical in organizational life.  The critical question is whether the assumptions behind a decision/action have better validity than the other assumptions that push towards a different decision.  Another question is the size of the damage when the manager choice of action is wrong.  This latter question is not part of science, as the biggest damage for science is accepting a flawed theory.  In managerial reality the damage is much more concrete.

The introduction of the Principle of Uncertainty into Physics caused a lot of resistance and wonder how caused-and-effect strict logic can handle fuzzy knowledge about nature.  Today this is fully accepted and understood in hard sciences.  I think that in TOC we have neglected the inherent fuzziness of the cause-and-effect logic.  It does not mean that cause-and-effect should not be used, on the contrary, it brings immense value, but we have to understand the limitations.

When managers claim that practice is vastly different than any theory they indirectly point to the impact of uncertainty on their work. Partial information, no matter whether it is due to variability or lack of knowledge, forces a certain way of life. It makes it necessary to focus on the cause-and-effects that have an impact that is far beyond the “noise.” The term ‘noise’ means the range of outcomes that we are unable to predict which one would occur. We are able to logically deduce impacts that are beyond the noise with a certain confidence.  Focusing on the critical causes (like lack of capacity of a capacity-constraint-resource (CCR)) is a major TOC insight, which is inspired from Physics, but is more relevant to management.  The idea is that when you concentrate on the key impact and consistently ignore much smaller side impacts you are on the right track, with small downsides and very high upside.

Using known statistical models in management, where time-series are often irrelevant and good statistical samples do not exist, is a major mistake.  However, understanding the basic logic of Probability Theory is very useful to direct the managerial efforts to the way where there is much more to gain and little to lose.

To my mind TOC does not make Management a Science.  But, using the hard science approach is of major importance in improving the capabilities of any manager to adapt well to reality and be better in facing uncertainty and in learning from experience, especially from failures.

When does a business truly gain from promotions?

First let’s clarify the definition for this post:

A promotion is a stated period of time in which a certain product mix is sold for reduced prices.

Thus, reducing prices to get rid of unsold inventory is not a promotion. A promotion requires a clear date where the prices are going back to their original level.

The end-date of a promotion puts a pressure on the customer to buy now and buy more.  However, that pressure also pushes the customer to wait for promotions and refrain from buying after the promotion.  This is what makes promotions different from price wars.

There are four reasons for using promotions:

1. Introduction of new products, where the intent is gaining as many first customers as possible hoping that they will become regular customers. Sometimes this kind of promotions makes sense.
2. Fixing a state of lower than expected sales or against a marketing campaign of a competitor. The objective is selling high volume. This is a key cause for going into the vicious cycle where the vast majority of the sales are in reduced prices.
3. Retailers and distribution channels use promotions to bring customers into the store, where they buy additional items. The problem here is that all the direct competitors use this scheme and by this vastly reduces the added-value.
4. Being forced by a distribution channel to participate in their ongoing promotions. The distribution channels are the Gorilla dictating the business rules. Their poor suppliers need to find good-enough ways to live under that tyranny or rebel against it.

There are four different negative branches to promotions, without considering the relationships within the supply chain.

• The total T might go down because the increase in volume does not cover the reduced T per product-unit.
• The capacity of at least one resource is exhausted because of the sudden increased volume, causing loss of sales, usually of other products sold at premium price. Promotions cause a peak of load that often turns the weakest-link into a temporary constraint, cost goes up because of overtime and quality problems, and everybody in the organization feels the waves of that peak.
• The lower prices steal sales of other products that are sold at premium price!
• A critical effect is the reduction of sales after the promotion.

The result of the above is high probability that the promotion causes a loss rather than  profit, most of the potential damage is currently unknown. In TOC terms the loss is expressed by:

Delta(T) – Delta(OE) < 0.

So, the first mission when a proposal for a promotion is on the table is to assess the true impact of the negative effects relative to the positive of selling higher volume of items. The biggest mistake is to consider Revenues instead of Throughput.  Reducing prices reduces T-per-unit much more than revenue-per-unit.  Then, extra costs have to be included in the analysis.

The main difficulty to calculate the net impact of a promotion on the bottom line is to assess the demand during the promotion and also after the promotion!

Building two what-if scenarios, the reasonable pessimistic and the reasonable optimistic, is a tool to check the full impact of the negatives and guide the required actions.

Promotions are typical moves that impact both sales and operations. The end-date of a promotion impacts the behavior of customers.  Operations are hit by a huge peak, creating waves of shifting priorities that would take long time to calm down.  The crazy run after volumes of sales, expressed by either revenues or quantities sold, blocks the sight of the true economic impact.

However, being aware to the damage of most promotions would not automatically solve the basic two conflicts that involve promotions.

One conflict is generated when a competitor launches a promotion, which would reduce sales. Should we respond with our own promotion? Preserving the market-share is a flawed argument because the worthy objectives are high and stable profits and it is not obvious that preserving market-share is the mean to achieve them.  But, does it mean that ignoring the reduced prices of a competitor is the right action? When you don’t have truly superior products directed at specific market segments then you pay the price of being depended on the rational of your competitors.

The other conflict is whether to accept the demand of your distributors to carry a promotion or insist on your own interests, which might cause them to give up your products. Again, this could happen only when your products, viewed by the end customers, are practically the same as your competitors.

When you have to have a promotion how should your operations behave during the promotion?

The high demand starts at the first day of the promotion. The resulting demand is highly uncertain, meaning the range of the potential demand is pretty wide.  Only after the first day or two it is possible to assess a narrower range.  The length of the promotion is critical to the ability to respond by fast replenishments.  The shorter is the promotion more stock is required at the beginning of the promotion, both at the central warehouse and in the stores.

A short promotion poses a dilemma regarding the stock buffers. The optimistic forecast leads to very high buffers, but the actual demand might be according to the pessimistic forecast.  Sizing the buffers according to the pessimistic forecast might cause shortages.  Starting with low buffers and increasing them within the promotion requires considerable amount of excess capacity.

My recommendation is to prepare enough stock in the central location to cover the pessimistic forecast for the whole promotion period!!!

Every store has to hold enough stock for at least two days based on the optimistic forecast for that store. After the first day or two of the promotion re-adjusting all the buffers in the stores could be done more sensibly.  The central warehouse, starting with overstock, should also calculate the target-levels after the first two days, and replenish only when the inventory goes below the target.

Like in handling seasonality, it is imperative to reduce all the buffers to their original size sometime before the end of the promotion.

The damage of promotions is high and its most critical element is fixation of an end-date. This is a kind of dynamic pricing, a topic I mentioned in a post about yield-management, which pushes customers to change their natural behavior.

The true remedy is to be able to deliver unique value to many loyal customers, creating a decisive competitive edge (DCE). Is it always possible?  Unless you truly think hard about the possibilities you cannot claim it is impossible.

The term ‘Reasonable Doubt’ is a key concept in the legal system. Judging people is a typical decision making process under uncertainty, with drastic consequences to the individual and also to the whole society.  The essence of the idea is to minimize the cases where innocent people are punished, while also limiting the cases where guilty people get away.

For me this is one example where the best solution to a conflict is a compromise! I don’t have another solution to the inherent conflict in the quest to reduce crime while doing justice to every human being.

The basic assumption we would like to challenge, but unable to, is “never say I know”. Goldratt coined it (was he the first???) and it certainly applies to judges and juries who have to pass a judgment.

In management of organizations the drama is usually on a lower level. Very few decisions could cause a comparable damage of jailing an innocent person, or even setting a murderer free.

Yet, every day every CEO has to decide upon matters that might cause considerable damage, but might also cause considerable benefits. Like in the justice system one might claim that the solution is a compromise, but for managing an organization we are able, to my mind, to resolve of the conflict of take a risky action versus do not take the risky action.  Because the organization can tolerate decisions leading to certain damages as long as the accumulation of all decisions is highly positive.  This is not the case with the justice system.

In previous posts I have already mentioned the concept of “the reasonable range”, meaning considering the result of a “reasonable pessimistic forecast” versus “reasonable optimistic forecast”, uncovering the damage/benefit of each and making the final decision knowing that the real impact would fall, in most cases, somewhere between the two.

There is one insight coming from the legal system that is especially important:

The damage of a certain potential result is so big that we have to prevent it at any cost!

The concept of “above any reasonable doubt” means that no matter what horrible deed the defendant might have done – we cannot allow the damage of punishing an innocent person.

The generic insight is that any decision that might, even only in relatively infrequent cases, cause big damage then that decision should be rejected. If there is a chance, say of 5%, that the defendant is not guilty, meaning 95% that he/she is, then the right decision is to acquit.  The injustice done to an individual is perceived much more than 10 times the damage to society. Even 1% of doubt is usually considered reasonable.

Translating the insight to management environments:

Managers have to draw a red-line of potential damage resulting from their decisions and reject any decision that might penetrate the red-line, no matter what are the benefits.

People tend to make a distinction between losing a dollar and making a dollar, preferring not to lose. With small numbers this connotation is flawed and pushes us to wrong decisions.  However, I’d give up making $100M if the decision might cause me $10M loss, because the damage to my life from losing $10M is far greater than the benefits of gaining $100M.  For a billionaire this is the wrong decision, because for the billionaire the damage of losing $10M is much lower than for me.

So, unlike the justice system that does not consider the balance of how many free guilty people are out of jail, in management the financial status of the organization is an important parameter in assessing the potential damage of a decision.

There is another interesting insight coming from the legal concept of a reasonable doubt:

The judgment whether there is a reasonable doubt is based on intuition!

In other words, there is no strict method to deduce whether the evidence still leaves a reasonable doubt. Even though the justice system is very strict with the process of justice, the word ‘reasonable’ leaves the whole burden of the decision to convict or acquit on the shoulders of a human being using his intuition.

In management there is tendency to adore the mathematics of optimization, even though not to the same level of the academy, for which optimization is the key.  I think we should learn from the legal system that eventually you need your intuition to cover for lack of good information.

But, my observation is that both the legal and the managerial systems lack the ability to support the basic intuition about doubt and risk. There are enough biases that we, human beings, have when we intuitively assess uncertainty/risk/doubts.  Prof. Kahneman points to several of those biases in his book Thinking Fast and Slow.  Understanding better the key concepts and principles of Probability Theory could help us analyze (rather them deciding by an instinct) the conflict, still using our intuition, but also controlling it by using the principles.

I recently read an article by a lawyer who is also a professor for law in Israel that argued that every single piece of evidence has to be judged on its own terms and when there is a reasonable doubt about that particular piece it should be ignored. In other words, according to that professor there is no additional weight to the overall evidence in judging whether there is a reasonable doubt.  I sharply disagree with such an assertion that clashes with the basic logic of Mathematics.  I try to find the bridge between logic and reality where we lack the full information required by the Mathematical and Statistical models.

That said, the Mathematical logic defines the concept of “dependence” and “independence” between variables, like between different pieces of evidence or the demand in different locations. My observation of reality is that in too many cases there are “partial dependencies” between the variables, which means the effect of reduced risk due to aggregation is still there, but smaller than what we sometimes are led to believe. Once we understand the basic logic we can improve the impact of our intuition and this would yield very high value.

Software is both a blessing and a curse. The current huge push to Big Data, Industry 4.0, and perfect forecasting algorithms expresses the hope that software would tell us things we don’t know.  In other words, reduce the threat of uncertainty and bring back the hope for truly optimal organizational performance.

The late Eli Goldratt dedicated two of his books to the impact of software. Back in 1990 he wrote The Haystack Syndrome – showing the potential damage of overwhelming us with ocean of data.  He defined ‘information’ as an answer to a question asked, and by this put his finger on the potential value of finding answers. According to Goldratt the core damage of software is being unable to see the forest for the trees.

The other book by Goldratt Necessary but Not Sufficient (with Eli Schragenheim and Carol Ptak), written in 2000, looks into the ERP world and the necessity to clearly define how the user is going to get real value.

Software for organizations yields two obvious benefits; maintaining the database and quick calculations.  One might add managing communications as a third element. Simplicity, a basic TOC insight, implies that the logic behind the calculations is clear and agreed-upon by the users.  Goldratt called the software he developed in the late 80s “Disaster” to emphasize what would happen to the user who runs the software without understanding the logic.

Simplicity versus Sophistication is a key dilemma for software.  Simplicity brings value through better decisions and more effective actions.  Sophistication is mainly a proof of the capability of the software developers (“we can do that”) and it serves well the dream for optimal performance in complex and uncertain environments.  TOC challenges the assumption that the only way to improve an organization is through optimum performance of all resources. TOC claims that by focusing on what is truly meaningful (like a potential need of customers that is not answered today) it is possible to achieve a breakthrough that the optimization process is not aware of.

Software has another important benefit, though indirect, to offer:

Software forces the users to certain processes that follow key policies!

This capability of software is the source for many specific dilemmas around the pros and cons of every policy. The policy and its ramifications would determine whether the software, forcing that policy, is a blessing or a curse.

Software companies usually resolve the dilemma by letting the user have a wide choice of policies along their key parameters. Goldratt, on the other hand, strived to minimize the common big mistakes people do. In his juicy verbalization: “We should not give the rope to the user to hang himself.”  This fear led Goldratt to narrow the user choices of policies.  The TOC philosophy is to stick to good-enough effective policies that deal well with uncertainty.  This is the source of all the TOC policies and detailed solutions.

However, the TOC solutions do not cover all the possible situations and there are cases where a temporary deviation is necessary. This means a certain choice has to be given to the user, either by allowing the basic policies to consider certain deviations, or by letting the user bypass the software directives.  Such an action has to be infrequent and the user has to take the full responsibility for all the ramifications.

Just to illustrate the last point here is an example. Suppose a certain SKU has a target level of 1,000 units and right now there are only 999 units in the system.  Would you issue a replenishment order for one unit?  If your answer is “it depends” then you realize that a certain deviation might be required.  Goldratt himself outlined a more elaborate rule to release orders based on the planned-load, sometimes releasing the order earlier in order to keep the weakest-link constantly loaded, which deviates from the rule of chocking the release.

Generally speaking we have to judge any software based on two very different criteria:

1. The net added value the software generates in comparison to what already exists. The six questions on assessing the value of new technology is a powerful tool for that.
2.  The potential damage the software generates!

There are three different ways for the software to cause damage:

The way the software works.

• Bugs that mislead the user or causing a crash.
• Supporting the wrong procedures or the wrong algorithms.
• Letting the user make wrong decisions due to too much choice.
• Note, every single feature that does not bring value actually causes damage of confusion and potential mistakes.

The way the software has been modeled and installed.

• This is relevant for ERP, CRM and all large software packages where many critical choices and parameters have to be properly introduced into the software upon installation. TOC packages of DBR, SDBR and CCPM also require modeling and fixing certain parameters, like buffer sizes, into the software. When big mistakes are done at that stage – the amount of the damage can be HUGE!!!

Wrong use of the software by the user.

• This is the most frightening way of causing damage by software. The software and its specific installation could be excellent, but users who don’t think they need to understand the logic might generate huge damage.

TOC software packages used to be added-on modules that are linked to an existing ERP or MRP. The interface makes the installation critical.  CCPM software also used to be linked to Microsoft Project, but several newer CCPM packages are stand-alone packages.  However managing projects sometimes requires an interface to the ERP, like for the purchasing orders or for managing the budget.   When the synchronization between different packages is important then the burden on the interface, a critical part of the installation, is particularly high.

Eventually my main point is the responsibility to bring the user to fully understand the logic and the capabilities of any software. Limiting the choice of options that might be useful could create big damage.  Bypassing the software when the user does not fully understand the logic is even more dangerous.

This means that the TOC champions and consultants have to take the responsibility for the right level of knowledge at the client, including how this knowledge is preserved when new employees take over. Somehow the current S&T templates do not include the necessary educational activities to ensure ongoing training.

Sometime in the future I’d love to see a full ERP and business-intelligence software based on the TOC approach.  A key insight has to be that there is a need to combine data based on the user intuition with a rigorous numerical analysis.  I have put this kind of effort in my initiative of Decision-Support in TOC Way (DSTOC) and I think this insight should be spread all over the software industry.

A common paradigm is that the only line of action required to face seasonality is updating the size of many buffers according to a forecast of the demand growth. Suppose the target level of SKU1 is 100, and during the season the demand is expected to go up by 100%, then the simple action is to increase the buffer to 200.

REALLY?

Does this buffer increase ensure excellent availability of SKU1 during the season?

The main flaw in the above paradigm is the assumption that the replenishment time remains the same within the season.  In too many cases this is simply wrong.

What impacts replenishment time? We know many flawed policies that stretch the replenishment time, but when we push all those policies aside, we still have one variable with very considerable impact: the amount of excess capacity on the weakest link.  We know that when the actual load approaches 100% of the available capacity of just one link then replenishment time goes up to the sky.  Try simple simulations to demo that effect.

Can the distribution channel put all the responsibility to quickly replenish the supply during the season on the shoulders of the suppliers? Of course they can, the distribution channel is usually the big gorilla that dictates the business rules.  However, what happens when that does not truly work?

Before we proceed let’s check what are the characteristics of a “season” that could impact the solution. I like to differentiate between two very different “seasons”.

One is a significant peak of demand for very short time, due to a holiday or a public event.  Short time means it is shorter than the replenishment time.  Without the ability to replenish the TOC basic approach is not usable.

The second type is a long peak allowing enough replenishment orders, thus providing excellent availability without maintaining too much stock.

This is the meaning of a “season” for this post.

How should we know the replenishment time during the season?

My argument is that we cannot know a-priori, given that the load on the weakest link, also on the next most loaded resources, is assumed to go up significantly.  In reality we cannot get a reliable mathematical function that predicts well enough the lead-time, given the realistic dependencies between loaded resources, and the internal politics within the organization that make an impact on the behavior.

What can be done is taking actions to provide enough protective capacity in the shop-floor, even within the season, to keep the replenishment time close to the time before the season. There are two ways to reduce the load during the season:

1. Reduce the product-mix during the season. This move reduces the number of setups, and it also requires less total inventory during the season.
2. Preparing high stock of several fast movers to potentially cover all the demand throughout the season.

My observation is that the majority of the organizations offer too wide product-mix. The topic of too high variety has been dealt with in a previous post.  The point here is that the distribution channels should strive to reduce the offered variety at least during the season, where the damage of overall too high inventories, while suffering from serious shortages, is pretty clear.

The second way is much more drastic than just increasing the buffer. The objective is to free capacity in order to be able to quickly replenish all the rest of the product mix.  The choice of SKUs for the stock required to free capacity has to consider parameters like relatively low level fluctuations and also good enough demand after the season, so remaining stock could still be sold.  Usually fast movers apply better to these criteria.

As already mentioned the distribution channel should consider the problem of lack of capacity at the suppliers as relevant to its own Strategy. Certainly any change in the product-mix requires direct dialogue between the supplier and the channel. When the supplier might still lack capacity to ensure good availability throughout the season the channel should support the supplier to face the risk in producing very high stock of several items, for instance, by a commitment to a certain quantity to be sold within the season.

Producing stock to be used during the season does NOT mean the target level should be that high! When the extra stock is for freeing capacity then the inventory is intentionally much above the target level.  Only when the total inventory in the system goes below the target level replenishment is required.

Thus, in preparation for the season two different decisions have to be taken:

1. The new target level required to support the higher level of sales at about the same replenishment time.
2. Choosing few items and the quantities to be produced before the season. The quantity should be based, at the very least, on the pessimistic forecast of sales within the season. Overall the capacity to be freed should allow enough protective capacity to keep the replenishment time intact.

Another insight to remember: reducing the target levels to their original size one replenishment time before the expected end of the season!

You certainly don’t like to replenish just before the demand goes down. Note, DBM is far too slow to note the start and end of a season.  The prediction of a change in the sales trend should be handled by intuitive forecasting.  Mathematical forecasting of seasonality requires data from several years back, which is possible only when the key parameters of the market have not changed during those years.

Promotions are self-inflicted seasonality. Their durations are usually shorter than a season and longer than a peak based on an event.  A dedicated post on promotion is due in the near future.

Recognizing the negative impact of multi-tasking on the management of multi-projects is an important insight. But, we better go deeper into the issue of when multi-tasking starts to be damaging.

Multi-tasking means jumping between tasks before they are completed. There are several possible causes for multi-tasking:

1. A task with higher priority appears – forcing to switch to that task until it is completed.
2. Being stuck with a task without much progress, leading to putting it aside and do something else.
3. Being expected to do several tasks at the same time with a clear need to show progress on every one of them.

The potential damage of multi-tasking comes from the third type. The problem is that when an individual faces several tasks one option is to start with one and on completion go to the other.  Let’s call that the “queue-process”.  The other way is doing a little of this and a little of that, which is the essence of multi-tasking.  Individuals vary with how they cope with several tasks at the same time.  Managers have to be good in multi-tasking as a necessary skill.  The true damage from multi-tasking is caused to the organization. The individual is less negatively impacted by long delays of projects and initiatives.  The delays are caused by the long time it takes to complete a task and only then the next tasks, performed by other resources, are able to start.

In Manufacturing multi-tasking is virtually unknown! The “queue process” is the common approach, because in manufacturing saving setups and ensuring good utilization of expensive equipment are important values.  Multi-tasking generates many more setups, because every time one goes back to a task he needs to come-to-speed with the task.

Multi-tasking is found in multi-project environments.  The value of a typical project is usually considered to be very high, so the project is expected to finish as early as possible. Thus, the project should progress continuously along its critical chain.  Stopping the project because a human resource, not a particularly expensive resource, is busy in another task, is intolerable.  Maintaining clear priorities for key human resources makes it even more problematic.  It is tricky to tell a project manager that his project has lower priority than others and still maintain acceptable harmony within the organization.

The damage of multi-tasking to projects is causing two different undesired effects:

1. Wasted capacity due to many “setups”.
2. Very long delays in many projects due to resources moving between different tasks for different projects putting many projects on hold. The assumption is that only when a task is complete can the next task starts, usually with another resource(s). By forcing delays in the start of the next tasks the completion time of the whole project is likely to be significantly delayed.

The second undesired-effect, the domino-effect of stretching the time of one task is by far the more damaging effect for the lead-time of projects.

Are multi-tasking so damaging also to regular initiatives?

There is a subtle difference between a project and an initiative. Projects are planned to be executed as soon as possible.  Initiatives also contain a group of tasks to achieve an objective, but they are not planned to be executed continuously.  The due-dates of regular initiatives are not pre-determined and they are not expected to finish as soon as possible.  Initiatives do not have the urgency of projects!

However, when too many initiatives are open it could be that some managers run out of their capacity!!!

When this happen the damage of the wasted capacity is huge.  Remember the two causes for capacity to be wasted:

• Capacity wasted on low value initiatives.

• Frequent switching back and force between required initiatives (multi-tasking) causing waste of time on becoming updated on the current state of the initiative.

 

In such a case management attention, the capacity of managers to do their job properly, turns to be a wild bottleneck, and the organization becomes stagnated, in spite of the efforts to design a better future.  When the management constraint hurts also the current flow of value then the company might even fall apart.

Identifying the state when management attention is a bottleneck is far from being trivial.

The capacity of human resources is very tricky to measure. People like to be busy, or at the very least, be viewed as busy.  It is the impact of the efficiency syndrome, but it is also caused by a personal need of many people to be active all the time.

It is easy for a manager to keep himself active as he can always find something to do, for instance, check the performance of subordinate, call a meeting that is not truly required or come up with an idea to improve something that does not need improvement.

How can we know whether the manager is overloaded or just being active the way he likes it?

When a human being is truly overloaded the people around him get certain signals.  Sometimes the quality of work goes dramatically down. Other overloaded managers become impatient with their subordinates, even aggressive, without achieving any added value. Other managers try to focus on few initiatives based on personal priority that could be different than the focus of their colleagues.

Instituting the right focus all over the organization should become the decisive competitive edge of the TOC approach!

The organizational focus has two different time frames to consider:

1. In the short-term the focus is defined by the constraint, the exploitation plan and the subordination processes.
2. In the medium and longer term the focus has to be carefully defined by the Strategy (the plan to achieve more in the future). All the important initiatives have to be included in the Strategy.

On top of that the organization has to actively look for signals that point to potential threats, one of which could be running out of managerial capacity, the ultimate constraint for the medium and long term. What TOC teaches us to do is to exploit the management attention capacity properly without turning it into a bottleneck.  This is why the detailed planning of Strategy, clearly outlining the truly required initiatives (tactics) to achieve specific objectives (strategies), which lead to accomplish more of the goal, is so important. The format of the S&T is a good match for this formidable mission.

 

Buffer Management is a critical insight, which has ramifications far beyond what we in TOC do right now. The point is that we deal with fluctuations that are NOT described by the well known mathematical distribution functions, like Normal, Beta and Gamma.  Buffer management offers a true control mechanism that is not assuming any specific known shape of the fluctuations and even does not rely on the information behind the planning that dictate the size of the buffer.

In order to offer excellent availability, or ensure on-time of an order or a project we include buffers as an integral part of the planning. However, it is impossible to truly determine the “optimal” buffer.  Actually I feel inconvenient to use the term “optimal” for managing commitments to the market.  We simply have no idea of the true spread of the demand, the supply and the execution.  Looking into the past is not good enough because not only we need the combination of the variability of  three variables (demand, supply and execution) the three variables are exposed to very considerable possible changes, which change the basic parameters of the variability.  For instance, any emergence of a new competitor, a new product or even a marketing campaign has a very significant immediate impact on the demand.  The supply depends a lot of the amount of excess capacity and running out of capacity has a huge effect.  The level of execution goes through a change every time a new employee starts to work, certainly when a new manager is appointed.

The idea of Buffer Management is twofold:

1. Identifying when an order is “almost late“, meaning becoming too vulnerable to additional fluctuations. Based on the red warning we can increase the priority of that order and sometime expedite it by special measures.
2. Check the general quality of the buffer by looking on the COMBINED EFFECT of all the three distribution functions! This means using the concepts of “too much red” and “too much green” as warnings to a possible need to change the buffer.

Please note, the main protector of the commitments to the market is still the buffer! The optional warning and expediting are used to add flexibility as an additional mean to protect the commitment to the market.

So, what is the “right” size of the red-zone? Any attempt to calculate the red-zone based on forecasts, capacity and lead-times are damaging without any additional benefit.  The sanity check should answer the following questions:

Suppose the red-zone is somewhat too large what is the damage?

Suppose the red-zone is somewhat too small what is the damage?

My assumption is that I’ll never be at the imaginary optimal point. Would you agree that a somewhat larger red-zone, meaning issuing some early warnings a little too early, still representing true priorities, is not all that damaging?

So, the idea of one-third of the buffer is an excellent recommendation, because it is simple and effective and because it has a certain tendency to be somewhat larger than required. The simplicity of the idea, based on our inability to be precise and recognizing the fact that we should separate buffer management from the data used in the planning, looking just into the actual effects, makes it the right way.

The one possible damage of too large red-zone is when too-much-red is frequently observed, but the commitments to the market seem to be under very good control. In my book, Supply Chain Management at Warp Speed (Written together with Bill Dettmer and Wayne Patterson) I give an example for a relatively infrequent situation where one-third is too big.  Thus, for that example I recommended 1/6 of the buffer.  Calculating the red-zone to be 27% in one case, 23.9% in another and 31.2% in yet another SKU looks to me damaging, not just because of maybe somewhat late warnings, but because the effective logic has been lost!

Something else to think about. Simplified-DBR includes an absolutely required tool of the Planned-Load of one, or more, critical resources.  The Planned-Load is a complementary control mechanism to check whether the short-term capacity is enough to support the stock-buffers or the due-dates of the existing open-orders.  When the data is good-enough it gives early warning from a situation that might shake the whole system.  In other words, the “too-much-red” warning would definitely appear, but then the time to fix the problem might be too short!  The Planned-Load is also very effective in determining the “safe-dates” for make-to-order, so it is both an execution and planning device.  To my mind, the Planned-Load is an integral and vital element of ensuring stable fulfillment of the company commitments.

James Powell and Kevin Kohls conducted an interesting discussion about marketing TOC and the way for success. I like to follow up and make some generic observations and conclusions from my perspective.

Every TOC consultant has the goal of making more money now and in the future. In order to achieve as much of the goal the use of at least some of the TOC techniques could be beneficial.  If TOC as a brand name for a superior effective managerial approach is very strong then the consultant would include TOC in his own marketing and sales efforts.  Thus, the reputation of TOC could be a major marketing vehicle, but not every time and not for all consultants.  This is because when the competitors also use TOC as a brand name then maybe some other aspects of the offering become more dominant.

What we all miss here?

I think that we miss the big promise for HUGE value. In my original post I wrote a common belief (no hard proof yet) that all TOC practitioners have:

TOC has the potential to bring HUGE value to the vast majority of the organizations

If this is true then TOC can do much more than fix the current core problem and achieve many desired-effects. TOC is able to guide the managerial thinking to ongoing growing success, while keeping the organization from trouble.  If this is true, and if we find a reliable way to achieve and prove it, the personal goal of the TOC consultants would go up, no matter how good it already is.  In such a case, the TOC consultant would gain a real decisive competitive edge.  When an organization, or an individual (a consultant or a lawyer), has a decisive competitive edge it does not mean that there is no competition. It means that the competition does not truly diminish the results!

What many successful consultants do is to establish themselves within a niche. There are two meanings to that niche. One is the group of organizations the consultant feels he knows well the cause-and-effect and has already a certain reputation with them.  The other is that within this group of potential clients the consultant offers a certain mix of services that give good value for that group.

For instance, several key TOC consulting firms focus on medium and large retail chains, and within the retail chain they considerably improve the availability and also keeping excellent control on the assortments to ensure effectiveness.  This is certainly yielding excellent value.

But, within Retail there are other areas that could be vastly improved. Many times the availability and assortment control are, at the time, the core problem.  Sometimes (not every time) improving those aspects create a certain decisive-competitive-edge for the retail chain, even though without advertising the superior availability I suspect the value to the customer would take very long time, and most TOC consultants do not go into the advertising campaigns of the retailers.  Advertising, the definition of the specific market segments, the choice of products to display, the placing of the assortments within the store and the human relationships with the agents are just sporadic examples of areas that need to be part of the overall Strategy – if we truly mean to give HUGE value.

No person can be expert in everything. I watched Eli Goldratt very closely how he reacted to a new environment.  As Goldratt was unbelievingly brilliant he could see signals and drew the cause and effects very fast.  Many times he was right on.  Many times he was mistaken, but I’ve realized it only later because of his extraordinary charisma people tended to agree with him, even when they did not.

How can we compensate ourselves for being not as brilliant and not experts in ALL areas?

By being confident enough to ask questions and judge the quality and relevancy of the answers, and by being able to collaborate with others that have somewhat different experience and knowledge and again be able to judge the quality of the answers by the use of cause-and-effect logic.

My suggestion aims at the ambitious target of establishing TOC, all over the world, as an international, holistic and powerful managerial approach that brings HUGE value to any organization.  The key idea is collaboration between experienced people, from various geographical locations, who have wide and varied experience and share the passion to make it happen.

Should the consortium be not-for-profit? How should (or not) the consortium recommend consultants? How should the communications between local consultants and more than one experienced-international-TOC-consultant be effective from a distance?  These are part of the issues to be analyzed and agreed upon.  Certainly a group of experienced TOC experts can come to an agreement how to start working and be flexible enough to introduce changes when reality shows it is necessary.

My last post has stirred a lot of responses, which makes me optimistic as many people care and wish to improve what we have already achieved.

I’m going to layout a certain idea as an initial direction. I also include a similar, yet different, solution by Kevil Kohls, with whom I have exchanged mails on top of the exchange of comments in the blog.

Leo Lauramaa challenged the hidden assumption that “TOC is for everyone”. Let me simply state that I believe (when I cannot logically prove I use the term ‘believe’) that the assumption is valid.  TOC uses rational tools, based on logic and common sense observations, but TOC still recognizes emotions and intuition.  I see TOC as a general managerial approach that should stretch out to other methods, like Lean and Agile, which bring good value, and analyze them to decide when they are effective and what should be challenged.  I assume managers in medium and large companies are capable to deal with rational arguments.

Some basic assumptions of mine are important for the direction I propose:

• Competition between TOC consultants is good!
  • The Client gets a choice with whom to work on, and TOC becomes legitimate and widely recognized.
  • The main competition is with the current common approach of dissecting the organization into smaller parts pretending they are independent.

 

• The real value of TOC is leading the organizations to become ever-flourishing. This holistic approach means planning the appropriate Strategy ensuring every part of the organization is aware what to do and when to do.
  • Value can be generated also by partial implementation. I understand the opinion that starting with partial implementation could, sometimes, lead to the holistic one. I think that starting with the global vision has much better chance, but this is part of the individual strategy of every consultant and practitioner.
• The core difficulty to market TOC is that “it looks too good to be true”, as mentioned by Kevin Fox, and this causes a considerable fear. We need to learn how to overcome personal fears of people we have to convince. People overcome fear when they realize many others have successfully tried it.

Many of the responses, for instance by Kevin Fox and Henry Camp, claim that more big successes becoming known would open the way for TOC.  We also need the successes to be sustainable for long time. We better remember that the big competitors of TOC also declare successes and that it is not trivial to prove a sustainable success.  Eventually we need to convince through successes and also through the logic of the insights that applying them have to bring huge value.

The first obstacle for success is gaining access to top management of organizations to make them listen. This could be the result of effective marketing based on the chance of hearing something promising for just small amount of attention.

The next obstacle is convincing management of the huge value in applying TOC holistically. There are two obstacles to achieve that: showing them that TOC can, specifically, help them succeed in a big way, and vastly reduce their fears. This mission is definitely sales, but it has to be properly backed-up by marketing messages and preparation, taking into account the characteristics of the organization and what could be the decisive-competitive-edge (DCE) for such an organization.

The third obstacle is making sure the implementation is successful.  This is where the TOC knowledge and experience are required plus the personal capabilities of the TOC expert leading the implementation.  In order to sustain the success beyond the intervention of the TOC expert the management needs to be educated in TOC.  Succeeding to achieve that enhances the chance of getting more organization listening.

How can we overcome the above obstacles?

My direction of solution is to gather a group of top TOC experts, call it The TOC Consortium, to support high variety of TOC implementations, by giving the projects the power of international reputation, giving high level advice on critical issues, possibly facilitating the S&T and carry audits to identify obstacles and negative branches and guiding to overcome them.

The consortium would not push certain consultants over others and it could be part of competing offers to the same organization.

Goldratt initiated a series of seminars leading to two-hour meetings with the management of the interested companies. I think the idea can be still implemented. For the two-hour meeting a highly experienced TOC person is required.  I also recommend that the level of promise would be high, but not close to the unbelievable target set by Goldratt – getting net profit equals to the current turnover in four years.

Most of the support should be delivered from a distance given mainly to the local TOC experts. From time-to-time it is possible to send one of the top consultants to the specific location to help with the S&T, auditing or solving a critical issue. The point is to provide support not to take over the implementation.

This direction involves close relationships between the people in the implementation and the consultants of the consortium. These are business relationships, based on win-win-win, the client, the local TOC people and the international consultants.  The value is to create the right image of knowledge and experience, and also to actually use both in the implementation to guaranty success.

The missing element is how the TOC education is handled.  I hope that either TOCICO would be able to step in, or another international consortium is built to educate from a distance at an affordable price.

Kevin Kohls has a similar idea of a consortium with different scope.  Here are the main ingredients of his solution:

The Goldratt Consortium – Brainstorm

• A virtual group that would meet by teleconference on a regular schedule and perhaps before or after TOC-ICO.
• Their Goal is to make TOC the main way, and a Necessary Condition is to make money.
• It’s its members will be anyone who wants to pursue this purpose, but should include consultants, academics and TOC customers.
• They have a holistic framework based on the S&T trees, with appointed champions in key TOC areas: Throughput Accounting, Thinking Process, CCPM, etc.
• Part of their objective is to give better definition to what TOC is and isn’t, and talk through other perspectives and tools that are not within TOC, such as Lean methods, Motivation, Routines & Habits, Resistance to Change, etc., and see how they should or should not fit into TOC solutions.
• Non-profit training is one of the highest priorities, especially for it internal members.
• They are always trying to reduce implementation lead time for their tools.
• Recommendation of one or two tools that are the “best” tools for speed and quality. This could generate a few negative branches.
• They should do some work on a non-profit basis, with the objective to pass the work on from one expert to another as the veiled holistic approach is rolled out.

Kevin added the following FRT:

If TOC is a supreme management approach how come we have such difficulty to market it?

I believe this is the most common question of all the TOC enthusiasts. It is the one fact of life that points to a potential hole in the generic approach.  I have heard many explanations, including from Goldratt himself, as well as from people outside of the TOC circle. The key undesired effects (UDEs) of the current state of TOC are:

1. The late Dr. Goldratt has been and still is the ONLY leader, guru, truly known and influential figure in TOC.
2. TOC challenges too many paradigms.
3. There is no agreed-upon definition what is TOC.
4. The rating of TOC is still low relative to the time since its appearance.
5. Only few people seem to be content with the wide scope of TOC.
6. TOC includes many thought-provoking concepts, developed by Goldratt, which lack overall clear unity and lack effective ways to implement the whole scope.

I have heard from many people the first five UDEs. The sixth one is my own observation and it differs from what Goldratt believed just before his death.  Goldratt view was that TOC has reached the level of robust knowledge that can be put in a template and be repeated. I don’t think this is the current state, but I believe it is possible to achieve it.

I have outlined the CRT of the current state of TOC based on my views and rationale. Of course you all are invited to challenge every link in the tree.  There are TWO resulting big damages:

Many potential clients and academics refuse to learn TOC

and

The actual overall value generated by TOC today is limited

The latter one is the ultimate measure of the current state. The problem is that it is in contrast with the belief of thousands of Goldratt people, students and followers that:

TOC has the potential to bring HUGE value to the vast majority of the organizations

We currently lack a single person that has the charisma, intellect and character to take over the leadership of the TOC community to eventually achieve the goal of having TOC as the recognized way to manage, and by that generate huge value.

Do we really need ONE leader to carry TOC ahead?

The resulting personal core conflict is between every person operating individually according to his/her power and depth of knowledge, or collaborating in a synchronized way with many others to overcome the UDEs and especially unifying the knowledge to be effective for marketing, sales and implementation that would deliver huge value.

TOCICO supplies some of the necessary conditions to lead the TOC community to new achievements. It allows new people access to knowledge in various ways and it provides the infrastructure to meet other people from all over the world in an annual conference, which gives the chance for TOC experts to demonstrate their own abilities.  But, TOCICO does not initiate business, does not educate and does not support any implementation.  TOCICO has initiated the white-paper process to progress the body of knowledge, but so far it has not yield much response and new knowledge.

Here are some options for the basic Strategy for a TOC consultant:

1. Operate on your own.
   1. Rely on the name of TOC, Goldratt and ‘The Goal’ to get better chance to get projects, which are entitled according to the methodology used: S&T, TP, Supply Chain in the TOC Way or CCPM.
   2. Stop using the name of TOC and present yourself as a versatile problem-solver, tackling any major problem or major opportunity of the client. You may, or may not, use the techniques of TOC to deliver the value.
   3. Combine TOC with other methodologies, like Lean or DDMRP and offer the combination as your own special advantage.
2. Create or join a larger real or virtual organization, and by that be able to offer higher chance of generating real value to the client as more highly skilled people are involved.
   • A large organization can be more effective in developing the missing parts in the knowledge and offer auditing as a mechanism to keep the right track.

Let me just state that the big consulting companies are not attached to a specific methodology, but they gain a competitive edge, some of them a truly decisive competitive edge, by being big with wide experience.

TOC has very strong international spread, and the accumulative experience is pretty wide if we succeed to bring it together.

Any other idea that might lead you, a TOC consultant, to achieve a decisive competitive edge?

A practitioner within an organization who strives to make a real change that would yield a leap in performance has to be careful in dealing with several threats:

• Being viewed as a Goldratt zealot.
• Failing to understand the different perspectives of other functions.
• Ignoring the personal power game within the organization depending where the practitioner is located within the organization chart.
• Failing to identify the risks and thus not looking to reduce them.
  • A risk is a probability for a considerable damage.

I claim that involving an external TOC consultant in internal implementations offers higher chance of success even when the internal TOC champion is very knowledgeable. The seemingly objectivity of an outsider causes less internal tension.  The other reason is that an outsider has a bigger chance of coming with a truly new paradigm that is not common within the specific business sector.  New paradigms have the potential of generating huge value, because the competition is slow to digest the paradigm.

Let’s have a public open discussion about the problem that is common to all of us. Please respond by commenting what direction of solution you see.