Supply Chain Trends and Issues: Our Weekly Feature Article on Important Trends and Developments in Supply Chain Strategy, Research, Best Practices, Technology and Other Supply Chain and Logistics Issues  
 
 
  - Feb. 9, 2012 -  

Supply Chain News: Dr. Eli Goldratt's "Unplugged" Interview with SCDigest Part 2

 

One of Our Most Popular Articles of All-Time

 
     
     
  by SCDigest Editorial Staff  
     
 

Two week, we noted the 2011 death of Dr. Eli Goldratt, originator of the "Theory of Constraints," author of "The Goal," which introduced TOC to the world, founder of the Goldratt Institute, and much more. (See Industry Lost Dr. Eli Goldratt in 2011).

As a remembrance, last week we republished Part 1 of an outstanding "Unplugged" interview SCDigest editor Dan Gilmore had with Goldratt all the way back in 2006. One of our most popular articles of all time, the discussion is still very much relevant today.

This week, we are republishing the conclusion of that interview below.

 

Goldratt Says:
Let me give you the truth. In order to minimize risk and best enable my people to execute this, I have eight generic solutions. If it fits one of these eight, we take the project. If it doesn't, we don't.

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Gilmore: You’ve said “inertia” is a big problem in many companies. What do you mean?

Goldratt: Inertia is related to the patterns of how a company does business or executes a function like supply chain. But when there is a paradigm shift, or the need for significant change, these patterns are what kill you.

So you have to go back and re-examine the basic assumptions. The tough question is: How do you know what assumptions you have to re-examine when you are facing an intolerable compromise?

But most companies just accept the compromise, rather than realizing they just got the gift that can point to us the wrong assumptions and the wrong patterns. Instead of working to find the correct pattern that will remove the conflict, and by that generating a win-win solution, we still compromise. That’s a huge mistake.

So, we have things that are good in the normal course of things, patterns and inertia, in the case of paradigm shift, is killing us.

Gilmore: It seems to me that the Theory of Constraints has some strong parallels to concepts like Lean and Six Sigma. Right or wrong?

Goldratt: Let’s put it this way. 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.

For example, the U.S. Navy has an RFP last year for all its logistics operations, a huge undertaking. In the RFP, they said the umbrella for the operator must be Theory of Constraints, and underneath that Lean. That’s exactly what I am saying.

Gilmore: When you are working with companies, what is typically the “Aha” moment, when the light bulb finally goes off?

Goldratt: If you really want an answer to that, I am going to have to market myself. Let’s look at “The Goal.’ In that book, the consultant, Jonah, leads Alex Rogo step by step down the path, almost by the nose. I am actually sick of that approach.

That book focused at the plant level. My assumption was that if I showed top management the whole thing up front, they’d say “It’s unrealistic,” We’re different,” all the usual things, and they will not move.

Even at a more local level, it can be hard. If Jonah would have told Alex in “The Goal” what the performance of the factory really should be a year or so down the road, Alex would have fainted.

And this is the problem. You go into a company, you use Theory of Constraints to make progress, move someone one step then another, they get fat and happy again, and then they just want to stop. But you’ve just started!

So – this is the marketing part – I’ve started with a new thing called “Viable Vision,” where I am showing company execs the whole thing for the first four years. And again, I tell most of them that in four years they can have net profit equal to their current total sales.

Of course, the first reaction is “This is totally unrealistic,” but then we say back, “Give us the data, and we’ll show you how to do it.” We show them how to do it, and then we take on the implementation plan.

 

(Supply Chain Trends and Issues Article - Continued Below)

 

 
 
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Gilmore: Net profit in four years equal to current sales?

Goldratt: That’s right. Not every company. Right now, I know how to do it with about 80% of them.

Gilmore: What’s the barrier at the other 20%?

Goldratt: I’m stupid – I don’t know enough yet. I am restricting myself now, for example, to physical products. Not hospitals, banks, etc., even though we know in general Theory of Constraints works beautifully there, but we have less data and don’t want to take on too big a risk because all of our contracts are based almost totally on realizing the results.

Gilmore: When you look at the issues and plans across companies after you do this analysis, what are common themes or opportunities?

Goldratt: Let me give you the truth. In order to minimize risk and best enable my people to execute this, I have eight generic solutions. If it fits one of these eight, we take the project. If it doesn’t, we don’t.

Those eight templates cover 80% of the physical products companies, including manufacturers, retailers, wholesalers, etc.

Gilmore: Can you describe a common template?

Goldratt: Well, to do this in half a page or whatever this will be will probably be mumbo-jumbo, but fine.

Suppose that we are producing manufactured products that are sold through distribution, wholesale and retail, ok?

Then the question the question I am really interested in is “How frequently those channels are ordering from you the same SKU?” 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.

Because what happens is that 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.

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?

A retailer or wholesaler’s key metric is inventory turns, and its main concern unavailability. If you solve both these problems, that’s it, the customer is yours.

Gilmore: Ok, I think the basic issue is well understood. We’ve been trying to solve that with many things, from collaborative planning to RFID and lots of other technologies and strategies.

Goldratt: These are all hard. This solution is so damn simple.

Do you know that I have put in the public domain computer courses? Because I found that in a manager wants to get buy-in from his people, a computer course is far more effective than a book. Exactly what I have told you about how to do that solution is in one of the computer courses.

Gilmore: Procter & Gamble is among the companies trying to solve this, and is doing so in part by trying to make their factories more flexible to shorten the length of production runs and enable more SKUs to be made each day….

Goldratt: First, so you know, the Procter & Gamble soap and detergents division implemented my distribution solution in 1989! But just that division, as far as I know.

 

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