Gilmore: This is true often in the apparel industry as well, and I suspect an increasing number of others.
Goldratt: Correct! Suppose I have an excellent company and a winning product. If your development time is longer than the lifetime of the product, it means there will always be a window of time when the competition has a better product than you. So, you will lose.
As a result companies spend an awful lot of effort to reduce the development time. But it hasn’t worked very well. So they think there is only one way out - if we can’t shrink the development time, than you have to have more than one wave of development on-going. But that’s very difficult to do. First, it’s very expensive. Then companies have to learn how to build cement walls between the teams, because if they talk with each other, nothing will ever be finished. But there are a few companies that have managed it.
Many haven’t. The best example is probably Digital Computer. It was ultimately killed by this problem. But still today, most companies in this situation have more than one team developing the same types of products, because that is the only way to effectively shrink the lead time of new product introduction.
Gilmore: There are supply chain factors as well.
Goldratt: Yes, in the electronics and other markets, as the product lifecycles keep shrinking, they are often now also equal or shorter than the supply chain lead time.
If you make electronics and need a custom chip built, it will take 6, 7 or 8 months from the time you order to the time the first unit goes out the door with that chip in it. Longer than the product lifecycle. Now I order this component, and before I can even ship the product, there is a newer, better version of the component. So what do I have to do? I have to reduce the price or I can’t sell it at all.
So now if I am in the channel I will eventually demand higher margins, or maybe even consignment inventory to protect against this. As a result, you see top companies with great technology losing their pants! All because the supply chain time exceeds the market cycle time.
So everyone is also trying to shrink the time of the supply chain. But the joke is they are always trying to do it in production, when they don’t realize that 80% of supply chain time for many is in the wholesalers and the retailers. And they aren’t doing a thing about that. In PCs of course, Dell is an exception.
So, we aren’t looking at what the constraint of the system really is, which in this case may be how inventory flows thru the channel. We have to look at how we exploit and subordinate that. Instead, we get all this mumbo jumbo about “simplicity” here, “simplicity” there.
Gilmore: OK, we started out with one of the two pillars being “people are not stupid.” But this makes it sounds like maybe we don’t have especially bright people out there, when we know there are.
Goldratt: We all act according to patterns and inertia. And it’s very hard to get out from under that, because it seems we have to recalculate everything. When you show them how it can be done, the reaction is usually “That’s not realistic,” or “But we’re different.”
But I’ll tell you, most companies if they follow these principles in four years can have net profits equal to their current sales.
Part 2 of this Interview will be published next week.
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