The first five posts

A decision is required – a management story with a lesson

Imagine that by a strange incident the following notes have been found. They express the hidden thoughts of a CEO that he’d never dare to reveal in public.

I bet everyone believes I’m in deep thoughts about the Fedora Russia Contract. Dale is still talking about the potential threat if Fedora would use its relationships with us to copy our technology and design to sell imitated products throughout Asia. Dale speaks with a lot of self-conviction, which should cause Martha and Gideon to have second thoughts about the contract they are passionately promoting. Dale brings a real example where something similar has happened: collaboration between British and Chinese companies ended badly for the British and great for the Chinese – a typical win-lose.

I think about my little daughter. Well, she is not exactly “little”, we have celebrated her 22^nd birthday last week, together with her graduation with distinction from Stanford. She is my youngest child and she is determined to take an eye operation, using laser, to get rid of her glasses after failing to get used to contact lenses.

Martha is trying to argue that the probability of Fedora doing something outrageous against us is low. The main current markets of Fedora are all in Western Europe. She further claims that the Russian oligarch Ilia Mushkin, the owner of Fedora, recognizes the potential in collaborating with us exactly because he prefers doing business in Europe rather than in Asia. Dale says that this policy can easily evaporate in one day. Technically he is right. It is possible, but highly unlikely. Fedora certainly realizes that as long as they continue to export to Europe we have enough legal options that could hurt them. What Dale does stress is that if the worst scenario materializes then the damage would be huge. We have invested $15M in opening our export channel to India, Malaysia and Indonesia. However, even if all the investment would be lost, which in itself is unlikely, the corporation will still be able to sustain the loss. And the business potential of the collaboration is much higher – for us as well as for Fedora.

The situation with my daughter is different. The damage of a failed eye operation is very high and would reduce her overall quality of life. I try not to think about it – but refraining from thinking about potential consequences does not solve any problem. On the other hand, a successful operation would improve her quality of life and the probability of success is very high. Actually she tells me the eye surgeon has, so far, one hundred percent success rate. That does not reduce my fear of the “black swan”. I don’t know how to consider such a critical decision when I have no idea what is the probability of such a failure. Actually I have no real say in the matter. My daughter is an adult and she does not ask my advice – she simply tells me what she is going to do.

I notice that Dale and Martha are looking at me, expecting me to make the decision. Gideon seems to be in deep thoughts. He probably thinks about the personal impact on him if the Fedora Contract is cancelled. The last project he was deeply involved with had been cancelled as well.

Is the decision regarding Fedora truly straightforward? It has big potential along a certain not-too-large risk of real flop, and even then it is not a real disaster, unlike what might happen to my daughter. The only other consideration is that if the Russian Project, as the directors in the board call it, would fail then all the fingers would point to me. I think some more caution is required here.

“Let’s see what Claire could add to the contract that will protect us from hostile moves by Fedora.” I say. Claire is our legal adviser. I can see the light in the eyes of Martha fades out. Gideon continues to look down. I’m not sure what Dale real position is. Everybody is aware that I have just killed the Russian Project.

I would love to hear your opinion and have a discussion about the following 3 questions:

Should the corporation approve the Russian Project?

Yes
No
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Should the CEO’s daughter take the operation?

Yes
No
VoteView Results
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3.

Is there a generic inherent problem in making decisions on behalf of an organization that is expressed in the story? If so, what can we do about it?

How come managers take different decisions for their organization than for themselves?

This post continues the previous post on “A decision is required – a management story with a lesson.

Prof. Herbert Simon, the Noble prize winner, claimed that people are NOT OPTIMIZERS – they do not search for the ultimate optimal choice. Simon called the way people, like you and me, make decisions “satisficers” – looking for a satisfying choice by placing certain criteria and choosing the first one that satisfy all the criteria. This is quite similar to what we call in TOC “good-enough solution.”

My point is that while people are satisficers, once they make decisions on behalf of their organization they are forced to demonstrate that they actively look for the optimal decision. However, there is too much complexity and too much uncertainty on top of it to truly reach optimum decisions. This situation makes the search for optimal decisions, based on “books” written by other academics than Prof. Simon, looks pathetic. Too many of those decisions are wrong and leading to inferior results.

A common cause for this different behavior is:

Managers are afraid from after-the-fact criticism, which they consider unfair, because it does not consider the conditions when the decision has been made.

The key frightening aspect is the possible impact of uncertainty. After-the-fact the decision can be easily seen either as “right” or “wrong”. Admitting to have made a mistake causes two different undesired effects:

1. Being punished because of the “mistake”, like being fired or just not being promoted.
2. Losing the feeling of creating value and being appreciated. This is of very significant meaning to executives and highly professional people.

The fear of unjust criticism forces managers to look for two means of protections:

1. Being super conservative.
2. Following the “book” when there is a book.

As Mr. Preston Sumner, in his very interesting comment to the story has noted, some CEOs are influenced to do the exact opposite: take larger risks than what they would allow for themselves. This tendency is initiated by the way some large organizations compensate the c-level executives. When a CEO is pushed to show great results by hefty bonuses, while the opposite is not true, the derived greed pushes them to take high risks. Is this really what the stockholders want?

There is critical mistake in looking to “motivate” a person, a CEO or even just a regular salesperson, by linking the actual financial results to payments to the person. Money is always a necessary condition – but it is far from being sufficient to ensure good intentions to look for the interests of the organization.

Dr. Goldratt said that organization for certainty on uncertain situation. Ignoring uncertainty make people believe that they can judge any decision according to its actual result. If we recognize the need to live with significant uncertainty we need to learn how to judge decisions in a way that would reasonably assess what might happen – the potential damage as well as the potential gain.

This is just the beginning. I claim that failing to openly and visibly dealing with uncertainty is the core problem of most organizations! I’ll certainly come back to this topic highlighting more undesired effects resulting from the core problem.

The problems with “Common and Expected Uncertainty”

Not all the decisions managers have to make are about risk,meaning decisions that might cause a serious loss, but might also cause a considerable gain.  Actually those risky decisions are very infrequent.  While I’m still claiming that the vast majority of the organizations force the managers to be ultra-conservative, the losses from those decisions are small relative to the huge loss from wrong policies dealing with “common and expected uncertainty.”

Take CCPM (TOC Project Management Solution) and ask yourself how come that planning a clear project buffer is such a dramatic new insight?  How come people insist that there is clear time duration for a task?

Eli Goldratt said that organization force certainty on uncertain situations.

The paradox is that by forcing certainty management increases the negative impact of uncertainty. We see projects that take too long and shop floors that process too much inventory.  Many organizations suffer from hazards because of lack of manpower, relatively cheap resource.

The common cause is the concern of every human manager of being blamed of creating “waste”.

The prime example I like pointing to is the use, actually misuse, of sales forecasts.  We know from Probability Theory, or Statistics, that the minimum description of an uncertain variable contains two numbers, usually the average and the standard deviation.   However, the vast majority of the forecast reports, used for various decisions, include only ONE number.

What is the value of one central measure for a forecast when nothing describes the spread around that measure?  If next month sales of Product134 are forecasted to be 10,000 what is the likelihood that the actual sales would be 4,776, 8,244, 13,004 or even 18,559?

Suppose that the magic number of 10,000 comes from assessment of salespeople, is it clear that it represents an estimated average (expected value in the mathematical language)?  Isn’t it possible that salespeople, who do not have any magic power to see the future, state a number they are comfortable with?  If they are measured by meeting sales objectives, that are set according to the forecast, then they would reduce their estimation. But, if they need Operations to provide availability they would inflate the forecast.

I think that there is no way to manage an organization without forecasting!

I also think that Dynamic-Buffer-Management is actually a forecast looking at the combination of sales and inventory and predicts whether the stock buffer is about right.

However, treating a forecast as one number is a gross mistake.  The reliance on one number allows top management to judge their sales and operations people, however that judgment is flawed and the sales and operations managers have to protect themselves from the ignorance of top management.

The overall impact of mishandling the common and expected uncertainty is HUGE.  Management don’t recognize the need for protective capacity and thus look for high “efficiency”, causing people to pretend being very busy, which means they constantly look for “something to do”, regardless whether it creates valueor not.

However, protective capacity is truly required in order to maintain enough flexibility to deal with Murphy, as well as with temporary peaks of demand. TOC buffers help a lot to stabilize the flow and by that improve the overall performance, but they do not cover all the areas where people are using their own hidden buffers, causing huge damage:  The hiring process is basically flawed with ridiculous requirements of 100% technical fit instead of requiring learning capabilities; Budgeting processes are flawed carrying no appropriate reserves;  Even the need for maintaining presence in several different market segments is not fully recognized in many organizations.

Is it possible to learn how to deal with uncertainty, particularly the common and expected uncertainty?  The vast majority of the managers have been in a basic course on Statistics, but it does not lead them to handle uncertainty that: does not have clear probabilities, is definitely different than the Gaussian (Normal distribution function), and the samples of similar occurrences in the near past are very small.

The real obstacle for improving the policies, making them a better match to the inherent uncertainty, is getting rid of the utopia of “optimal decisions” replacing it by “good enough” and stop measuring people by numbers which are exposed to both uncertainty and dependencies.

Is that doable? For me that is what TOC is all about.

The current TOC achievements in handling uncertainty

TOC has always been focused on the common and expected uncertainty.  It just did not generalize in full the global ramifications of its tools to handle uncertainty.  In this post I like to highlight the wider impact that stem from DBR, CCPM and Replenishment.

The critical TOC terminologies that are a key in handling common and expected uncertainty are:

1. Buffers
2. Buffer Management
3. Protective capacity
4. Thin and focused planning

Buffers:  The concept of inserting visible buffers as anintegral part of the plan is, for me, a landmark in managing uncertainty and by “managing” I mean also the behavioral side.  People use buffers all the time to protect themselves, but they have to hide the buffers. The main problem in using hidden buffers is that they are wasted by being always fully consumed because the organization does not recognize the need for buffers.

The visible use of buffers in the planning raises several issues that planners have to consider:

1. What to buffer? Should we spread buffers everywhere or concentrate on specific locations?
2. How should we size buffers?
3. What is the cost of maintaining such buffers? What are the benefits?

Struggling with the above questions force people to recognize the impact of uncertainty and to employ certain key insights from Probability Theory.

Buffer Management:  It is a unique concept of TOC, I don’t know of any similar idea to inquire the actual usage of buffers to guide decisions.  Buffer Management is relevant only to buffers that are frequently partially consumed.  Buffers that are either fully consumed or not at all, like alarm systems or insurance, cannot be managed by buffer management.

The value of buffer management is for two different fronts:

1. Dictating a priority system in the execution phase, striving to achieve all the planning true objectives.
2. Generating valuable feedback on the planning, thus improving the future planning, including the more appropriate size of the buffers.

Protective Capacity:  This is the most revealing concept, as it is in direct clash with the utopia of being able to match capacity to demand and the efficiency syndrome.  The important message is that due to both external and internal uncertainty lack of enough excess capacity hurts the delivery performance to the market.  Note that there is no formula for how much protective capacity is necessary.  Buffer management let us know when one or more resources come close to the protective capacity, but is unable to tell us whether we have too much protective capacity.

Thin and focused planning:  Is a TOC concept even though it was never verbalized as such.  From the five focusing steps we realize that the key planning rule is exploitation of the constraint.  Subordination is about adding buffers to the planning and mainly about execution – making sure the exploitation plan progresses smoothly.  Both DBR and Replenishment use very thin planning, leaving many decisions for the last-minute where the actual impact of uncertainty is known.   CCPM does not fully follow the thin planning direction and it leads to recent ideas, by James Holt and Sanjeev Gupta, of simplifying the CCPM planning.

The above achievements should encourage us all to develop more tools that will allow management to recognize and manage the uncertainty.  I think most managers are aware of the need, but simply are caught within the fear of being unjustly criticized.

A superior level of performing well in spite of significant uncertainty will be achieved ONLY when a decision making process is established that verbalizes the uncertain potential results and lead the decision makers to contemplate decisions that would achieve high gains most of the time, but also take into account that in some cases limited damage will occur.  The emphasis is on ‘limited damage’, meaning the organization is able to tolerate, and thus the potential results considered can be used in the future to demonstrate the validity of the decision at the time.

The balance between Statistics and Intuition

Joel-Henry Grossard has made an important comment I like to share with you and express my view. He wrote:

“However you can have two distributions which have the same average and the same standard deviation, but which are profoundly different when you look at the numbers. The missing factor is time: to know how the numbers are spread over time is critical to decide. Using Statistical Process Control can help.”

Do we know how the variables we look at in our practical reality behave with time?

Let’s consider a process in the shop-floor where we are able to record a lot of data and how they spread over time.  What we get is a time series of results, but that graph represents only one possible spread of the results and it is not a replicate of the real distribution function. Usually we don’t really know the full characteristics of the distribution function.  For instance, if an operator gets tired after one hour and if this tiredness can be expressed in the quality of the output then we should see a certain deviation. But, unless we suspect this could happen there is no big chance that such cause for deviations would be detected.

When the process is fully under our control we are able to confirm that the basic parameters of the process haven’t gone through a significant change. Even in such a convenient case my understanding is that even Prof. Deming did not apply the full power of Statistics, and just went for standard heuristics to establish good-enough quality control.

Once we step out of what is fully under our influence we know even less about the behavior of the surrounding uncertainty. We don’t even know whether all the recorded results belong to the same distribution function.

Suppose a new Harry Potter book suddenly appears. The last book in the series appeared in 2007. What statistical model could predict the number of copies to be sold in the first week?  We do have past results, and they are relevant to a certain degree, but due to the long intermission between the former series and the surprising new book the original distribution function has changed and we don’t exactly know what the change is.  We don’t even know whether the demand will be up or down relative to the last book.

Does it mean we don’t know anything?  Can it really be any number?  We know some of the parameters that impact the demand for the next book.  The reputation of the original series is still high. But many of the past readers are now older and it is not clear whether their interest is still high. Thus, some intuitive estimation can be made regarding the reasonable minimum demand.  We can also estimate how much more demand is reasonable, taken into account the demand for the last book, but what meaning do the previous results carry?  The one conclusion from them is that the last book was not a single incident and the whole series was a big success.  However, the detailed results and how they spread over time do not add much value to the prediction.

I put a special emphasis on the word “reasonable”.  First, we know that sometimes unreasonable things do happen.  But, assuming we do have intuition based on care and experience, most of the time what is happening is reasonable to us.  Our intuition is shaped by many small events and whether they are considered reasonable or unreasonable by us.

This intuition is a source of valuable, but partial, information to guide our decisions concerning common and expected uncertainty.

Partial information is what we usually have that could help us.  Not enough to prevent us from some damaging decisions but good enough to guide us so that overall we’d get much more benefits than damage.

But, when we knowingly ignore the partial information, we cause definite damage.  This is what most organizational policies do: force certainty on uncertain situation, like using one-number forecasts and turn them into sales objectives as prime performance measurements.

I claim that forcing certainty on uncertainty is due to fear from being unjustly criticized.  I like to deal with the cause and effects of the fear from the performance measurements on people and highlight the nasty sides of the relationships between the organization and its employees.  This is, hopefully, going to be my next post, subject to the inherent uncertainty.