The Goal: A Process of Ongoing Improvement (38 page)

"Bob has taken over very nicely,’’ Lou says as we enter my office. At least this front is covered.’’
"Yes,’’ I agree. "But I hate to put him in a position where his first independent actions are so negative.’’
"Negative?’’ Lou asks. "What do you mean by negative?’’
"All the actions he is forced to take are leading in the wrong direction.’’ I answer. "Of course, he doesn’t have any choice, the alternative is much worse, but still. . . .’’
"Alex, I’m probably thicker than usual today, but I really don’t understand. What do you mean by ‘leading in the wrong direction?’’’
"Don’t you see?’’ I’m irritated by the whole situation. "What is the unavoidable result of telling sales that they should quote four weeks’ delivery? Remember, just two weeks ago we went out of our way to persuade them to quote two weeks. They didn’t have much confidence then. Now, it will cause them to drop the entire sales campaign.’’
"What else can we do?’’
"Probably nothing. But this doesn’t change the end result; future throughput is down.’’
"I see,’’ says Lou. "On top of it, overtime is up significantly; putting the plant to work on the weekend will consume the entire overtime budget for the quarter.’’
"Forget the budget,’’ I say. "When Bob has to report it, I’ll be the divisional president. The increased overtime is increasing operating expense. The point is that throughput will be down, operating expense will be up and increasing the buffers means that inventory will be up. Everything is moving in the opposite direction of what it should.’’
"Yup,’’ he agrees.
"Somewhere, I’ve made a mistake,’’ I say. "A mistake that now is causing us to pull back. You know Lou, we still don’t know what we’re doing. Our ability to see what’s in front of us resembles that of moles. We’re reacting rather than planning.’’
"But you’ve got to agree that we are reacting much better than before.’’
"That’s not a real comfort Lou, we’re also moving much faster than before. I feel as if I’m driving looking only in the rear view mirror, and then, when it’s almost too late, we make last minute course corrections. It’s not good enough. It is definitely not good enough.’’

I’m driving back from headquarters with Lou. We’ve been doing this every day for the last two weeks. We are not in what one might call a cheerful mood. Now we know every little detail of what’s going on in the division, and the picture doesn’t look good at all. The only bright spot is my plant. No, I should get used to the fact that it’s Donovan’s plant. And it’s not a bright spot, that’s a gross understatement. It’s the real savior.

Donovan succeeded getting everything under control before the clients had any reason to complain. It will take him some time to regain the confidence of our sales people, but with me pressing from the other side it will not take long before it will be okay.

This plant is so good that Lou and I were led astray for some time. The reports on the division gave us the impression that the situation is quite good. Only when we went through the elaborate work of separating out Donovan’s plant was the real picture exposed. And it’s not pretty. It’s actually quite disastrous.

"Lou, I think we did the exact thing that we knew we shouldn’t do.’’
"What are you talking about?’’ he says. "We haven’t done anything yet.’’
"We have gathered data, tons of data.’’
"Yes, and there’s a problem with the data,’’ he says. "Frankly, I’ve never seen such a sloppy place. Every report is missing at least back-up details. You know what I found today? They don’t even have a report on late receivables. The information is there but—can you believe—it’s scattered in at least three different places. How can they operate this way?’’
"Lou, you’re missing the point.’’
"Am I? Do you know that with proper attention we can reduce the open receivables by at least four days?’’
"And that will save the division,’’ I say sarcastically.
"No,’’ he grins. "But it will help.’’
"Will it?’’
When Lou doesn’t answer I continue, "Do you really believe it will help? Look Lou, what have we learned? What did you yourself say when you asked for the job? Do you still remember?’’
Irritated he says, "I don’t know what you’re talking about. Don’t you want me to correct things which are obviously wrong?’’
How am I going to explain it to him? I try again.
"Lou, suppose that you do succeed in collecting four days out of the open receivables. By how much will throughput, inventory, and operating expense be improved?’’
"They’ll all be slightly improved,’’ he says. "But the major impact will be on cash. You shouldn’t sneeze at four days’ cash. Besides, improving the division requires many small steps. If everyone does his share, together we can lift it.’’
I drive silently. What Lou said makes sense, but somehow I know that he is wrong. Deadly wrong.
"Lou, help me here. I know that improving the division will require many small improvements, but . . .’’
"But what?’’ he says. "Alex, you are too impatient. You know what they say, Rome was not built in a day.’’
"We don’t have hundreds of years.’’
Lou is right, I am impatient. But shouldn’t I be? Did we save our plant by being patient? And then I see it. Yes, many small actions are needed, but that doesn’t mean that we can afford to be satisfied with actions that improve the situation. We must carefully choose which ones to concentrate on, otherwise. . . .
"Lou, let me ask you. How much time will it take you to change, for internal purposes only, the way that we evaluate inventory?’’
"The mechanical work is not a real problem, that won’t take more than a few days. But if you’re referring to the work it’ll take to explain the ramifications, to explain to managers how this affects their day-to-day decisions, that’s a different story. With concentrated effort, I’d say it’ll take weeks.’’
Now I’m on solid ground.
"What, do you think, is the impact of the way we currently evaluate inventory on the levels of finished stocks that the division currently holds.’’
"Significant,’’ he says.
"How significant,’’ I press. "Can you give me a number?’’
"I’m afraid not. Not even a meaningful evaluation.’’
"Let’s try to do it together,’’ I say. "Have you noticed the increase in finished goods that the division is holding?’’
"Yes, I have,’’ he answers. "But why are you surprised? It’s exactly what should be expected. Sales are down and the pressure to show profits is up, so they build finished goods inventory to generate fictitious inventory profits. I see what you mean. We can take the increase in finished goods as an indicator of the impact of the way we value inventory. Wow, it’s about seventy days!’’
"Lovely,’’ I say. "Compare it to your four days of receivables. On what should you work? Moreover,’’ I keep on hammering, "what is the impact on throughput?’’
"I don’t see any,’’ he answers. "I see very clearly the impact on cash, on inventory, and on operating expense, but not on throughput.’’
"Don’t you?’’ I say mercilessly. "What was the reason that they gave us for not introducing the new models? Can you recall?’’
"Yes,’’ he says slowly. "They are convinced that introducing the new models will force them to declare all the old ones they’re holding in stock as obsolete. That would cause a major blow to the bottom line.’’
"So, we continue to offer the old stuff rather than the new. We continue to lose market share, but it’s better than to bite the bullet of write-offs. Do you understand now the impact it has on throughput?’’
"Yes, I do. You are right. But Alex, you know what? With some extra effort I think that I can handle them both. I can work on the problem of the way we value inventory and at the same time arrange for more attention to the receivables.’’ He still doesn’t get it but now I think I know how to handle it.
"What about the plant indicators?’’ I ask him.
"That’s a real Pandora’s box,’’ he sighs.
"What is the damage there? Slightly bigger than four days? And what about the fact that sales continue to judge opportunities according to the formal ‘product cost’ and desirable margins. Or even worse, that they will look for anything they can sell above variable cost. What’s the damage there? And what about the transfer prices between us and the other divisions; that’s a real killer. Do you want more?’’
"Stop, stop,’’ he raised his hands. "You made your point. I guess I was inclined to deal with the open receivables issue just because there I know what to do, while in all the others . . .’’ "Afraid?’’ I ask.
"Frankly, yes.’’
"So am I, so am I.’’ I mutter. "Where do we start? Where do we continue? On what should we concentrate first, on what second? It’s overwhelming.’’
"We need a process,’’ he says. "That’s obvious. It’s too bad that the five-step process that we developed turned out to be false. No ...Wait a minute Alex, that’s not the case. At the end, the problem was not wandering bottlenecks. It was insufficient protection for the existing bottlenecks. Maybe we can use that five-step process?’’
"I don’t see how, but it’s worthwhile to check it. Should we head to the plant and give it a try?’’
"Certainly. I’ll have to make some phone calls, but it’s no problem.’’
"No,’’ I say. "I have some commitments for tonight.’’
"You’re right,’’ he says. "It’s very important but not urgent. It can wait for tomorrow.’’

"Identify the system’s constraint(s),’’ Lou reads from the board. "Do we accept it as the first step?’’
"I don’t know,’’ I say. "Let’s examine the logic that brought us to write it. Do you remember what it was?’’
"Roughly,’’ he says. "It was something about the fact that we adopted throughput as the number-one measurement.’’
"I’m afraid that roughly is not good enough,’’ I say. "At least not at such an early stage in our analysis. Let’s try again, from first principles.’’
"I’m all for it,’’ he groans, "But what do you call first principles?’’
"I don’t know. Something basic that we accept without hesitation.’’
"Fine. I have one for you. Every organization was built for a purpose. We haven’t built any organization just for the sake of its mere existence.’’
"Correct,’’ I laugh. "Even though I know some people in some organizations who seem to forget it.’’
"Washington, you mean?’’
"That too. I thought about our corporation, but who cares. Let’s keep going. Another basic fact is that any organization is comprised of more than one person, otherwise it’s not an organization.’’
"Correct,’’ says Lou. "But I don’t see the point in all this. I can give you many more correct statements about organizations in general.’’
"Yes, you probably can, but look at the conclusion that we can derive already. If any organization was built for a purpose and any organization is composed of more than one person, then we must conclude that the purpose of the organization requires the synchronized efforts of more than one person.’’
"That makes sense,’’ he says. "Otherwise we wouldn’t need to create an organization; the efforts of individuals would suffice. So?’’
"If we need synchronized efforts,’’ I continue, "Then the contribution of any single person to the organization’s purpose is strongly dependent upon the performance of others.’’
"Yes, that’s obvious.’’ With a bitter smile he adds, "Obvious to everybody except for our measurement system.’’
Even though I wholeheartedly agree, I ignore his last comment. "If synchronized efforts are required and the contribution of one link is strongly dependent on the performance of the other links, we cannot ignore the fact that organizations are not just a pile of different links, they should be regarded as chains.’’
"Or at least a grid,’’ he corrects me.
"Yes, but you see, every grid can be viewed as composed of several independent chains. The more complex the organization —the more interdependencies between the various links—the smaller number of independent chains it’s composed of.’’
Lou doesn’t want to spend too much time on that point. "If you say so. But that’s not so important. The important thing is you’ve just proven that any organization should be viewed as a chain. I can take it from here. Since the strength of the chain is determined by the weakest link, then the first step to improve an organization must be to identify the weakest link.’’
"Or links,’’ I correct. "Remember, an organization may be comprised of several independent chains.’’
"Yes,’’ he agrees impatiently. "But as you said, the complexity of our organizations almost guarantees that there are not many of them. In any event, it is taken care of by the S in parenthesis that we put at the end of the word ‘constraint’. Fine, Alex, what do we do about the measurements?’’
"Measurements?,’’ I say in surprise. "Where did they come from?’’
"Didn’t we agree yesterday that the distorted measurements are the biggest constraint of the division?’’
Bob Donovan is right. Lou certainly has a fixation on measurements. "They are definitely a big problem,’’ I say carefully. "But I’m not convinced that they are the constraint.’’
"You’re not?’’ Lou is astonished.
"No I’m not,’’ I say firmly. "Do you think that the fact that most of our products are already outdated in comparison to what the competition is offering is not a major problem? Don’t you realize that the attitude in engineering, claiming that the basic rule of nature is that a project never finishes on time, is an even bigger problem. And what about marketing, have you seen any marketing plan that has any chance of turning the situation around?’’
"No,’’ he grins. "As a matter of fact everything that I’ve seen of long term planning should be more appropriately categorized under ‘long term bullshitting.’’’
I’m on a roll. Today asking me about problems is like opening a dam. "Wait Lou, I haven’t finished. What about the mentality that is so prevalent in headquarters, the mentality of
covering
your ass. Haven’t you noticed that whenever we asked about something that doesn’t go so well, everyone almost automatically started to blame everybody else?’’
"How could I not notice. Okay, Alex, I get your point. There are major problems all over. It seems that in our division there is a whole herd of constraints, not just a few.’’
"I still claim that there are only few constraints. Our division is too complex to have more than a very few independent chains. Lou, don’t you realize that everything we mentioned so far is closely connected? The lack of sensible long-term strategy, the measurement issues, the lag in product design, the long lead times in production, the general attitude of passing the ball, of apathy, are all connected. We must put our finger on the core problem, on the root that causes them all. That is what actually is meant by identify the constraint. It’s not prioritizing the bad effects, it’s identifying what causes them all.’’
"How are we going to do that? How are we going to identify the divisional constraints?’’
"I don’t know,’’ I say. "But if we succeeded in doing it here, in our plant, it must be possible to do in the division.’’
He thinks about it for a minute and then says, "I don’t think so. Here we were lucky. We were dealing with physical constraints, with bottlenecks, that’s easy. But at the divisional level we’ll have to deal with measurements, with policies, with procedures. Many of them are cast already into behavioral patterns.’’
"I don’t see the difference,’’ I disagree. "Here we had to deal with all of the above. Come to think about it, even here the constraints were never the machines. Yes, we called and still call the oven and the NCX10 bottlenecks, but if they were true bottlenecks how come we succeeded to squeeze almost twice as much out of them as before? How come we increased throughput so much without buying more capacity?’’
"But we changed almost every aspect of how we operate them, and how we operate everything around them.’’
"That is exactly my point,’’ I say. "What aspect of operation did we change?’’ Mimicking his voice I answer, "The measurements, the policies, the procedures. Many of them were cast into behavioral patterns. Lou, don’t you see? The real constraints, even in our plant, were not the machines, they were the policies.’’
"Yes, I do see. But still there are differences,’’ he says stubbornly.
"What differences? Name one.’’
"Alex, what’s the use of pushing me to the corner? Don’t you see that there must be major differences? If there weren’t, how come we don’t even have a clue of what the nature of the divisional constraint is?’’
That stops me dead.
"Sorry. You’re right. You know, Lou, maybe we were lucky here. We had physical constraints that helped us to focus our attention, to zoom in on the real policy constraint. That isn’t the case in the division. Over there we have excess capacity going through our ears. We have excess engineering resources that we succeed so brilliantly in wasting. I’m sure that there is no lack of markets. We simply don’t know how to put our act together to capitalize on what we have.’’
Pacified he says, "That brings us to the real question, how does one go about identifying the system’s constraint? How can we zoom in on the most devastating erroneous policies. Or, to use your term, how does one go about identifying the core problem, the one that is responsible for the existence of so many undesirable effects?’’
"Yes,’’ I agree, "That’s the question, no doubt.’’
Looking at the board I add, "What’s written here is still valid. Identifying the system’s constraint is the first step. What we now understand is that it also translates into a mandatory demand for a technique by which to do it. Lou, that’s it. We found it.’’
The excitement causes me to stand up. "Here it is,’’ I announce, "here is the answer to Jonah’s question. I’m going to call him right now. You can imagine my first sentence: Jonah, I want you to teach me how to identify the core problem.’’
As I turn to leave I hear Lou, "Alex, I think that it might be a little premature.’’
"Why?’’ I ask, my hand on the doorknob. "Do you have any doubt that that is what I must learn first?’’
"No,’’ he says. "On that I’m quite convinced. I just think that maybe you should ask for more. Knowing the core problem exactly might be far from sufficient.’’
"You are right again,’’ I calm down. "It’s just that I was looking for the answer for so long.’’
"I understand, believe me, I understand,’’ he smiles.
"Okay Lou.’’ I sit down. "What else do you think I should ask Jonah to teach me?’’
"I don’t know,’’ he answers. "But if the five steps are valid, maybe what you should ask for are the techniques required to enable us to carry those steps out. We already found the need for one technique, why don’t we continue to examine the other four steps?’’
"Good idea,’’ I say enthusiastically. "Let’s proceed. The second step is,’’ I read from the board, "decide how to exploit the system’s constraints. That doesn’t make any sense to me. What is the point in trying to exploit an erroneous policy?’’
"It makes sense only if the constraint is physical, but since we do deal with policy constraints, I guess we’d better move to the next one,’’ Lou agrees with me.
"Subordinate everything else to the above decision,’’ I read. "Same reservation. If the constraint is not physical this step is meaningless. The fourth step is, ‘Elevate the system’s constraint(s).’ Hmm, what are we going to do with this one?’’
"What’s the problem?’’ Lou asks. "If we identify an erroneous policy we should elevate it, we should change the policy.’’
"How lovely. You make it sound so simple,’’ I say sarcastically. "Change the policy! To what? Is it so simple to find a suitable replacement? Maybe for you, Lou, not for me.’’ "For me neither,’’ he grins. "I know that cost accounting is erroneous, but that doesn’t mean I’ve completely figured out what to replace it with. Alex, how does one go about correcting an erroneous measurement or any other policy?’’
"First, I think that you need the light-bulb idea, the breakthrough. The management techniques that Jonah talks about must include the ability to trigger such ideas, otherwise those techniques can’t be used by mere mortals. You know, Lou, Julie predicted that as I come to it I’ll recognize that we are not dealing just with techniques but actually with thinking processes.’’ "It started to look like it,’’ Lou agrees. "But triggering breakthrough ideas by itself is not enough. An even bigger obstacle is to verify that this idea really solves all the resulting bad effects.’’ "Without creating new ones,’’ I add.
"Is it possible at all?’’ Lou sounds very skeptical. "It must be, if we want to plan rather than just react.’’ As I talk I find a much better answer. "Yes, Lou, it must be possible. Look what happened to us with our solution of getting more sales. As a direct result of the French order we threw the plant into a very unpleasant two weeks and we killed or at least delayed a good marketing campaign. If we just thought systematically before we implemented it, rather than after the fact, we could have prevented many problems. Don’t tell me that it was impossible. All the facts were known to us, we simply didn’t have a thinking process that would force and guide us to examine it early in the game.’’
"What do we change to?’’ Lou says.
That throws me off balance. "Pardon me?’’
"If the first thinking process should lead us to answer the question ‘what to change?’ the second thinking process should lead us to answer the question ‘what to change to?’ I can already see the need for a third thinking process.’’
"Yes, so can I. ‘How to cause the change.’’’ Pointing to the fifth step I add, "with the amount of inertia that we can expect in the division, the last one is probably the most important.’’ "So it seems,’’ Lou says.
I stand up and start to pace. "Do you understand what we are asking for?’’ I cannot contain my feelings. "We are asking for the most fundamental things and at the same time we are asking for the world.’’
"I’ve lost you,’’ Lou says quietly.
I stop and look at him. "What are we asking for? For the ability to answer three simple questions: ‘what to change?’, ‘what to change to?’, and ‘how to cause the change?’ Basically what we are asking for is the most fundamental abilities one would expect from a manager. Think about it. If a manager doesn’t know how to answer those three questions, is he or she entitled to be called manager?’’
Throughout Lou signals that he is following me.
"At the same time,’’ I continue, "can you imagine what the meaning is to being able to hone in on the core problem even in a very complex environment? To be able to construct and check solutions that really solve all negative effects without creating new ones? And above all to cause such a major change smoothly, without creating resistance but the opposite, enthusiasm? Can you imagine having such abilities?’’
"Alex, that is what you have done. That’s exactly what you have done in our plant.’’
"Yes and no,’’ I answer. "Yes, that’s what we have done. No Lou, without Jonah’s guidance all of us would be looking for new jobs today. Now I understand why he refused to continue advising us. Jonah said it to me in the clearest way. We should learn to be able to do it without any external help. I must learn these thinking processes, only then will I know that I’m doing my job.’’
"We should and can be our own Jonahs,’’ Lou says and stands up. Then this reserved person surprises me. He puts his arm around my shoulder and says, "I’m proud to work for you.’’