Three weeks ago, we summarized the first half of my interview with Dr. Eli Goldratt, father of the Theory of Constraints and author of the immensely influential book “The Goal” and many other works, and well as offering a full transcript of that Q&A. We’ve had several thousand downloads of that piece.
This week, I offer part 2. Summary of the Goldratt interview in this column, full transcript of the second half of the Q&A on Supply Chain Digest’s web site.
I’ll note also that we received some excellent letters on part 1, included in the Feedback section nearby. Several noted the sort of “true belief’ needed to really be successful or even to get started with Theory of Constraints initiatives.
Related, I asked Goldratt how TOC related to clearly similar concepts such as Lean and Six Sigma. His answer: “In almost every implementation of the Theory of Constraints, we also force in the concepts of Lean and Six Sigma. The techniques themselves are beautiful. What is lacking is the mechanism to use them. In other words, Lean and Six Sigma will never force you to examine the policies of top management.
“And that’s why they have a limited effect. Once you have used Theory of Constraints at a higher level to really understand what you need to do, at a lower level these techniques are fantastic. But you need to know where to use them and where not.”
He noted that the U.S. Navy in 2005 put out an RFP for some type of logistical services that stated the provider needed to use Theory of Constraints as the umbrella for the services, and underneath TOC should be Lean. I am not sure the details here, but I did find this January announcement on Goldratt’s company winning a contract as prime contractor with the Navy for parts and supply chain management systems, so how exactly the Navy came to structure the RFP this way is not clear. But interesting regardless.
Goldratt also talked in some detail about the problems he sees – and the proposed solution – in the manufacturing to retail/wholesale supply chain. “The question the question I am really interested in is: How frequently those channels are ordering from you the same SKU?” he said. “It doesn’t matter to me that in general they order from you once a week. What I want to know is for each specific product how frequently they order. And if the answer is they order once in two weeks or more than two weeks, that’s it - I have the solution.”
What is that solution? Well, it sounds a lot like Quick Response wrapped in with The Bullwhip effect, but with some Goldratt twists. Replenishment tied very closely to what is actually sold.
“if say they are ordering the same product once a month, that means the total order lead time – from when the sell a unit to when they order a unit – is one month. This is enough to kill them,” Goldratt told me. It will typically create big problems with excess inventory, along with frequent problems with unavailability. So now, the standard solution shows them how to do this with less than half the inventory, with almost no unavailability. Do you understand once you are doing that you are taking the market?”
I countered along several lines, among them that we’ve had a whole series of initiatives, from ECR/Quick Response to CPFR to now RFID all at one level of another trying to address the same issue. There’s also obviously transportation and distribution costs to consider. I also cited Procter & Gamble’s announced strategy of getting to more flexible plants that can produce products in much shorter runs.
Goldratt had rejoinders for all.
“Since when are we allowed to put only one type of product in a truck?” Goldratt shot back. As for costs in distribution for picking and shipping smaller quantities: “So save two cents there so you can pay 20 cents over here. Very smart. Let small warehouse concerns override smart business decisions. Think about what you’ve just said. Rather than pick a carton or two instead of a full pallet and have a few more pennies of warehouse cost, I need to invest in flexible plants?”
As an aside, Goldratt said P&G’s soap and detergent division worked with him to implement Theory of Constraint-based improvements in 1989.
There’s a lot more provocative talk in the full Goldratt interview. For example, he also said the number one issue he faces in supply chain work is “Local Optima.”
Goldratt also offered his believe that the tripling of world consumption in 5-6 years based on China and India’s growth a thing to be welcomed, rather than feared as threat to domestic jobs, and that this demand “will cause huge supply chain bottlenecks across the globe.”
That’s something to think about.
We’re out of space here. You’ll enjoy I know the full Goldratt interview with Supply Chain Digest. Agree or disagree, he stimulates your thinking.
Do you have experience with Theory of Constraints? What’s your take on our Goldratt interview part 2? Are we not looking at the inventory-logistics cost trade-offs correctly?