Part 3 of a series on using T, I and OE for key decision making
In the last post I showed the need to have inputs based on intuition for making sound decisions. Thus, for any structured decision making the involvement of people with the best relevant intuition is absolutely required.
This is not enough. There is still a need to check the wider ramifications of the decision at-hand considering the various intuitive inputs. This check has to be based on logic, serving both as an intuition-control mechanism and being able to look at the bigger picture.
There is a known managerial practice where the top manager calls his people to a meeting, lay down a decision to consider and asks every one of the participants to voice their view one at a time. In the end the top manager states HIS opinion and this is the decision to be acted upon.
While that practice ensures everyone has an opportunity to present his/her view and intuition exposing the top guy to the inputs, it lacks a critical element: logical analysis of the full ramifications of every alternative!
Some of the frequent, but very basic, decisions every company has to make are about its product-mix and capacity. Suppose the following decision is now considered:
Currently the company sells two different chocolate packages containing the same basic product. The idea is to sell a much larger package for a reduced price per one unit of product.
The intuition of the sales people is required for the following inputs:
- What might be the pessimistic and optimistic sales of the new package?
- By how much would the sales of the other two packages be impacted?
- We can be reasonably certain the sales of the other packages will be reduced – but by how much?
- Would other products, somehow similar to the above product, face reduced sales?
Given the above intuition and simple calculations the impact on the total T can be derived – both according to the pessimistic and optimistic estimations.
One more issue needs to be resolved:
Do we have enough capacity to sustain the possible increase in sales, especially according to the optimistic assessment?
It is enough that we’d lack capacity on just one resource to invalidate the above T and OE calculations. We need also to understand that by “lack of capacity” we also consider the case that on average we do have enough capacity, but lack capacity at specific points in time causing delays to the market. We call “protective capacity” the amount of excess-capacity that is absolutely necessary for keeping the delivery performance in “good-enough” state. When the protective-capacity is penetrated there is damage.
How much protective capacity is required?
Eventually we need the intuition of the key people in Operations to assess the answer. There is no TOC formula determining the right amount of protective capacity.
Calculations can easily depict the load on critical resources generated by the assessment of the demand.
If there is enough capacity then the calculated total T, with and without the new package, is all the support management truly needs.
If one or more of the resources lost their protective capacity then the management team has to consider quick ways to increase capacity, or find products where it is possible to reduce their sales (maybe by increasing the price). Again we need the intuition of sales and operations to make sure the solution is doable.
What might happen with the decision making is that while the optimistic assessment brings very nice addition to the profit, the pessimistic scenario shows a loss. We expect that if making much higher profit is more likely than the having a relatively small loss then accepting the new idea is the right decision. However, one more point needs to be checked. Small losses might accumulate to the point it endangers the organization. The current state of cash-flow plus the intuition of the finance guy should be part of the mutual decision process.
Mutual Decision Making Process is a managerial must. Such a process has to use the intuition of key people as legitimate and necessary inputs. Then data processing and logical analysis would lead the management team to make sound decisions.