Gilmore: The results of many company initiatives and strategies illustrate that point.

Goldratt: Illustrate it beautifully.

Gilmore: It seems to me that originally the Theory of Constraints had a theme that for any system at a given point in time, there was a single constraint. Is that notion evolving?

Goldratt: It depends on how you define a system. For me, in most companies a system is a one-directional flow, and therefore in most companies you have only one constraint. In conglomerates, there can be more than one constraint but this is because there is more than one system.

Goldratt Says:

There is another definition of complexity, which is the degrees of freedom of the system. If the system has even five degrees of freedom, that is very complex to manage. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

But the fact that in a system there is one constraint that makes it simple.

Gilmore: I talk with lots of supply chain executives, and right now for many of them there is a strong focus in simplifying their supply chains…

Goldratt: Good grief! OK, there are two different definitions of complexity. The mere fact that both exist serve to confuse everything.

One definition is that the more data elements needed to define the system, the more complex it is. So, if you can describe the system in five pages, that’s a simple system. If you have to take a hundred pages, that’s complex. In this regard every company and process is amazingly complex. Even in a small company, how many pages would it take to describe how to make very part, how to work with suppliers, manage channels, etc.

So, if it is enormously complex and we try to simplify it, there’s not much point. It would be a million complexities minus two or three. We haven’t done a thing.

But there is another definition of complexity, which is the degrees of freedom of the system. If the system has even five degrees of freedom, that is very complex to manage. If we have only one degree of freedom, that is so easy.

The problem is that people look at simplifying the system not reducing its degrees of freedom, but by the first definition, which is a total waste of time.

Gilmore: Let’s get back to a supply chain example.

Goldratt: In the past decade, all we hear about is supply chain, supply chain, supply chain. Before that, there wasn’t a peep about it. So let’s analyze this for a second. Consider that product lifecycles are shrinking rapidly in almost every area, but especially electronics. As product lifecycles shrink, we hit the first huge barrier, because the lifecycle of products in the market is shorter than the time to develop the product.

(Supply Chain Trends and Issues Article - Continued Below)

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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