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  March 10 , 2006 - Supply Chain Digest Newsletter
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First Thoughts by Dan Gilmore, Editor

Eli Goldratt – Unplugged Part 2

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?

Let us know your thoughts.

Dan Gilmore


The largest trade show of software and systems for the Supply Chain Logistics Industry

Quote of the Week

"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."

Dr. Eli Goldratt, author of "The Goal," from part 2 o his interview with Supply Chain Digest.

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March 17 , 2006
Full Transcript of Eli Goldratt Interview Part 2

Agree or disagree, he is a provocative thinker.


March 16 , 2006
Supply Chain Digest Logistics Costs Survey - Full Details and Charts

Supply Chain Digest survey and report finds companies measure costs in many different ways, strong upward cost preSsure in 2005


March 7 , 2006

Supply Chain Organization: The Gap Splits Its Supply Chain Function, as Chief Supply Chain Officer Leaves the Company

The Gap forces its Chief Supply Chain Officer (CSCO) to step down, and re-splits the sourcing and logistics functions within the company.


March 2 , 2006

More Users, Less Vapor, at This Year's RFID World 2006

Up attendance, Non-EPC applications, "We're Gen2 now," and three cool new products


March 2 , 2006

SCDigest Technology Editor Mark Fralick's Audio Review of RFID World 2006

What new products caught his eye? Listen now.



Q.  How much have North American rail industry stocks as a group risen in the last 12 months?

A. Click to find the answer below


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Feedback is coming in at a rate greater than we can publish it - thanks for your response.

We just publishing a few of the letters we received on part 1 of our interview with Eli Goldratt, with the commentators mostly offering thoughts on use of the Thoery of Constraints.

That includes our Feedback of the Week from Thomas Dadmun of AdTran, who mostly agrees with the potential of TOC and Goldratt's thoughts on overcoming employee resistance. It's a great letter, as our both of the other two we are running on this topic.


Keep the dialog going! Give us your thoughts on this week's Supply Chain topics. As always, we’ll keep your name anonymous if required.

Feedback of the week - on the Theory of Constraints:

Overcoming behavioral resistance is a key to any project's success whether it be TOC theory of Constraints or implementing an ERP system. You must have the employees on your side, winning, or you will face resistance no matter what. The "what's in it for me" syndrome coupled with "you're telling me I have been doing it wrong all this time" are two barriers that must be overcome. I have found two solutions to this over the years, 1) you will learn new concepts, use leading edge processes or tools and be able to increase your current skill set making you more valuable for future positions; 2) you have been able to achieve significant progress and success to this point, now let's continue to move it further up the road to world class excellence. In this way you have developed a win win frame work and acknowledged their past contribution.

Once you have passed through those hurdles, easier said than done, the TOC concepts are simple to understand and milestones are achieved easily. I have been a disciple of Goldratt since I first read his book. I keep a case of his books in my office to hand out to new hires and share with visiting colleagues. Exponential gains can be had by discovering the true bottlenecks no matter how complex the process. But you cannot start or get any momentum going if you do not have the folks on your side to begin with. Let's face it, they want to win. They do not care that much if you are successful, they want to be. Therefore you have to get the team understanding that this is their win, their claim to fame, their project, not a top down driven "Corporate project". Once this is achieved they will put the shoulder to the grindstone to make themselves and the team successful. Only with team success and folks understanding it is a WIN ( employee ), WIN (company), WIN ( customer) will you be successful. I am looking forward to reading part 2.

Thomas L. Dadmun
VP, Supply Chain Operations

More on TOC:

In every Management Discussion on  cracking complex issues, we stress on Systems approach, i.e., think of the whole system while solving a problem or attempting optimisation. Even the (new) stress on Supply Chain Mangement--as compared to Materials Management or Logistics Mangement or the like--- can be related to the application of this approch  to the entire chain of activities invoving the supply chain ie deal with the end to end system for optimal solutions rather than focus on individual components.


However in actual practice there are solution themes invovilng systems approach, co-existent with solutions addressing individual domains : TOC belongs to the former group.


In the mid-1980s , the rocking concept of systems approch was Total Qualiy Management (TQM). Largely supported by the Japanese management practices (Toyota experiences thanks to Taichi Ohno and similar experiences from the Japanese Industry) and structured by the Western thinkers ( e.g., Edward Deming), the TQM  approach dealt on  simple tools for problem solving with  employee involvement. One among the predominent tools being the Ichikawa Mehod or root cause analysis. The root cause analysis was based on a presumption that every process result is resultant of many causes and the root cause(s) identified and addressed  largely eliminates the iproblem.


In the TOC approach , "constraint " is addressed.  To my understanding, this is synchronous with the the root cause approch followed in TQM, though the root cause did not specify selecting the cause to be addressed based on a constraint  or critical operation.What TOC emphasises is addressing the root constraint with single minded devotion. Where it  perhaps joins the TQM stream is in the emphasis on the win-win strategy, ,by invoving the stake holders in the process of change. By making the objective function simple enough , the approch is sure to get the attention  on the problem to begin with. By taking the stakeholder along the problem solving route this approch ensures that adequate internal force for change is geneated within —--than forced from the external factors.


In my opinion, to an extent TOC has arrived as the contemporary and forceful wind for Organizational change re-infusing the systems thinking


T A Krishnan

General Manger-Corporate Suply Chain

Larsen &Toubro Limited-India

TOC has long been introduced even in schools as a must read. The issue, therefore, is no longer its awareness or whether it has merit. The real issue is about adoption – why so few? Why isn’t there another Toyota touting TOC instead? We can all blame resistance to change as the big reason but that is the case with every new theory and idea. Still, many get widely adopted.

TOC suffers from ‘you need to learn advanced math before you can use a calculator’ syndrome. Yes, imparting basic knowledge is important but it is too much to expect mere mortals to learn how to solve a calculus problem by hand! Yet, mostly I see education, education and more education. There is big chasm between the expectation of the industry and the expectation of a TOC consultant. A senior director of a billion dollar company once told me at the end of an intense 4-day education session “Are any of these guys (planners & project managers) going to remember any of this a week from now?” Another CEO of a private company said “We still don’t know what to do differently now”, and this is almost after a year of education and consulting. Despite its simplicity it creates the perception of being too difficult.

Unless there is a technology tool part of the implementation that people can use for years to come, TOC adoption rate will continue to languish.

Pratik Jain

Founder & CEO



Q.  How much have North American rail industry stocks as a group risen in the last 12 months?

A. 43% as of March 17, 2006

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