Gilmore: Procter & Gamble is of course better than most, but they are committed to this further improvement, though whether the manufacturing economics will allow them to make tubes of Crest or whatever in much shorter runs, as even they have said, remains to be seen.
Goldratt: But at the same time I think you’d find the P&G or at least most consumer goods manufacturers give big discounts to retailers and wholesalers for ordering in large quantities. That’s part of what kills them all. If they would refrain from that, then they probably wouldn’t need to make their plants more flexible.
Let’s consider an example. You are a shop. And let’s say I say to you, you have to buy minimum of 100. And you are selling two per day, on average. So immediately I have elongated your cycle by 50 days. Because now you will wait to order until you have run down the first 100 and then order another 100. I have put into the replenishment time 50 days.
Goldratt Says: |
 Now you understand why in the Theory of Constraints that the number one thing we attack all the time is called "Local Optima." Someone tries to optimize a piece of the system, and you kill the system.
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Gilmore: The response, I would think, is that there are trade-offs between inventory and transportation, and my costs of shipping the two I sold that day are way too high.
Goldratt: Since when are we allowed to put only one type of product in a truck? So, where is this argument coming from?
Gilmore: Let’s take it back further then. It costs a lot more per unit to pick and ship say two items than a pallet of them.
Goldratt: Your right – 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?
Gilmore: Well, part of the issue of course is that most companies in the end are still siloed, and the distribution director is in fact primarily concerned with DC operational efficiency, and transportation managers their metrics, etc.
Goldratt: Now you understand why in the Theory of Constraints that the number one thing we attack all the time is called “Local Optima.” Someone tries to optimize a piece of the system, and you kill the system. That’s why again we now focus up front on viewing the whole picture.
Gilmore: People and companies have taken the Theory of Constraints and taken it in all kinds of different directions. Are they doing this well, or is it being misapplied?
Goldratt: I would say most of them are valid.
Gilmore: Some software vendors have adopted at least in part a Theory of Constraints orientation, especially in “optimization” products. What is the role of software in TOC?
Goldratt: It depends. There are in fact cases where I don’t know how to solve a company’s issues without the software. For example, if you are dealing with large distribution networks of course you have to have the software. You’ll get killed trying to do it on spreadsheets. You also need software for big project management activities.
Gilmore: Let’s talk about manufacturing in Europe and North America. There is a lot of general concern and political heat around “saving” manufacturing in the west, amidst low costs and pressure from China and other low cost countries. Can adoption of Theory of Constraints principles help revitalize those manufacturing companies?
Goldratt: I think that question doesn’t consider what is really going on. What is this “save western manufacturing?” Let me talk about China and India – these are the two you are afraid or, right?
I work a lot in China. You know the biggest problem in China is right now? Getting people – for the 2nd shift. Can you imagine not enough people in China? Salaries are now skyrocketing. Statistics say that in 2004 salaries rose by 24%. When they are finalized in 2005, it will be much higher.
Have you been in Shanghai, for example? You may have had images like I had of rickshaws and bicycles – No! This is a western town. With the best cars everywhere, and fewer bicycles than in Holland. I sent an assistant to go and look in some shops for bargains. She said, “Sorry Eli, the prices are the same as in Amsterdam.”
So, China is not only becoming a big producer, but a huge consumer. If what we see now continues another 5-6 years, China will be by then the largest consumer market in the world.
What’s happening in India is even more fascinating. I can say without blinking an eye that in India they have the best management of companies in the world. Better on average than I have seen in Europe of the United States. There problem was that they had put chains on themselves, in terms of regulations, tariffs, etc. This is gone.
Because of it, the biggest boom is happening. India is also growing at 8-10 percent per year, and salaries are also rising rapidly. So again, in just a few years you will see a huge consumption market.
Do you understand what together this means? In a few years, we will triple the world consumption in 5 to 6 years. You will see supply chain bottlenecks everywhere in the world. The best thing that ever happened to us is what is happening now in China and India. It is time to stop complaining about Chinese producers and focus on how to enter the Chinese market or export to China and India. What huge, beautiful markets.
Gilmore: Yes, if they continue to open their markets….
Goldratt: They are open right now. Fine, it still takes 3-4 months of bureaucracy – what’s the big deal? As if there is no bureaucracy to overcome in Europe or the U.S.
China and India shouldn’t be looked on as a threat but as a fantastic opportunity.
Gilmore: Our audience is a supply chain audience. How do they best understand and get started with these concepts? And from what you’ve said earlier, is this something that really only makes sense to start at the CXO level with?
Goldratt: When I start with a company, yes I start from the CEO down, because from a business perspective, “grass roots” is just usually too hard.
It’s also because if you start in one function, you improve that, but then immediately the constraint just moves to another function.
Gilmore: But in “The Goal,” Alex was a plant manager. There was something in the TOC constraints for him.
Goldratt: He was quite lucky. If you remember, if he hadn’t have had the VP of Marketing on his side because of the problems he was also facing, Alex would have crashed into the wall.
(Supply Chain Trends and Issues Article - Continued Below) |
Think about it. Does the VP of Supply Chain have influence on marketing strategies and policies? If that answer is No, then immediately you are working with one of your hands tied behind your back.
