The Goal: A Process of Ongoing Improvement, Third Revised Edition

by Eliyahu M. Goldratt

Why do you want to ruin a promising career? You've done an

  outstanding job, why go and mess it up? Besides, if we lower

  prices for one client, it's just a matter of time until the others find

  out and demand the same. What then?"

  He has a point. The last argument shows that the light at the

  end of the tunnel was just a train.

  Help comes from an unexpected side.

  "Djangler is not connected to our regular customers," Dick

  says hesitantly. "Besides, with the quantities he's asking for, we

  can always claim we gave him a volume discount."

  "Forget it," Johnny is practically shouting. "That bastard is asking us to give him the goods for basically nothing, not to mention that he wants us to ship to France at our expense."

  Turning to me he says, "This French guy has chutzpah, it's

  unbelievable. We negotiated for three months. We established

  each other's credibility, we agreed on terms and conditions. It all

  takes time. He asked for every technical detail that you can imag-

  ine, and we're not talking about one or two products, it's for

  almost the entire range. All this time not even a peep about

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  prices. At the end, just two days ago, when everything is agreed,

  he faxes me that our prices are not acceptable and sends his

  counter offer. I was expecting the usual thing, asking for price

  reductions of ten percent, maybe fifteen percent considering the

  large quantities that he is willing to buy, but no, these Europeans

  probably have a different perception. For example, Model

  Twelve, the one that you pulled such a miracle on. Our price is

  nine hundred and ninety-two dollars. We sell it to Burnside for

  eight hundred and twenty-seven dollars; they're a big client and

  they consume very large quantities of this particular product. The

  bastard had the nerve to offer seven hundred and one dollars.

  Did you hear that! Seven hundred and one dollars. Now you

  understand?"

  I turn to Ralph, "What's our material cost for Model

  Twelve?"

  "Three hundred thirty-four dollars and seven cents," Lou

  answers without any hesitation.

  "Johnny, are you sure that accepting this order will not have

  any impact on our domestic clients?"

  "Not unless we go out, and sing it from the rooftops. On this

  point Dick is right, no impact. But the whole idea is ridiculous.

  Why are we wasting our time?"

  I look at Lou, he nods.

  "We'll take it," I say.

  When Johnny doesn't respond, I repeat, "We'll take it."

  "Can you explain what is going on?" he finally says, between

  gritted teeth.

  "It's very simple," I answer. "I told you that I have spare capacity. If we take this order, the only out-of-pocket cost to produce these products will be the cost of the materials. We'll get

  seven hundred and one dollars, and we'll pay three hundred and

  thirty-four dollars. That's three hundred seventy-eight dollars to

  the bottom line per unit."

  "It's three hundred sixty-six ninety-three per unit, and you

  forgot the freight," Lou corrects me.

  "Thank you. How much is the air freight per unit?" I ask

  Johnny.

  "I don't remember, but it's not more than thirty bucks."

  "Can we see the details of that deal?" I ask him. "What I'm particularly interested in is the products, the quantities per

  month, and the prices."

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  Johnny gives me a long look and then turns to Dick, "Bring

  it." "

  Once Dick is on his way, Johnny says in a puzzled voice, "I

  don't get it. You want to sell in Europe for a price that is much

  less than what we get here, even less than the production cost,

  and you still claim that you'll make a lot of money? Lou, you're a

  controller, does it make sense to you?"

  "Yes," Lou says.

  Seeing the miserable expression on Johnny's face, I jump in

  before Lou has a chance to explain. Financial calculations, show-

  ing the fallacy of the 'product cost' concept won't help, it will just

  confuse Johnny even more than he's confused now. I decide to

  approach it from another angle.

  "Johnny, where do you prefer to buy a Japanese camera, in

  Tokyo or in Manhattan?"

  "In Manhattan, of course."

  "Why?"

  "Because in Manhattan it's cheaper, everybody knows that,"

  Johnny says confidently, here he's on solid ground. "I know a

  place on Forty-seventh Street where you can get a real bargain—

  half price compared to what they asked me to pay in Tokyo."

  "Why do you think it is cheaper in Manhattan?" I ask, and

  then answer my own question, "Ah, we know, transportation

  prices must be negative."

  We all laugh.

  "O.K. Alex. You've convinced me. I still don't understand

  but if it's good for the Japanese, it must be profitable."

  We work on the numbers for almost three hours. It's a good

  thing that I brought both Ralph and Lou.

  We calculate the load that this large deal will place on the

  bottlenecks—no problem. We check the impact on each of the

  seven problematic work centers—two might reach the dangerous

  zone, but we can manage. Then we calculate the financial impact

  —impressive. Very impressive. At last we're ready.

  "Johnny, I have one more question. What guarantees that

  the European manufacturers won't start a price war?"

  "What do you care," Johnny brushes the issue aside. "With

  such ridiculous prices I'm going to lock in Monsieur Djangler for

  at least one year."

  "Not good enough," I say.

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  "Now you're really getting difficult. I knew that this was too

  good to be true."

  "That's not the point, Johnny. I want to use this deal as a

  beachhead to penetrate Europe. We can't afford a price war. We

  must come up with something else besides price, something that

  will make it very difficult to compete with us. Tell me, what's the

  average supply time in Europe?"

  "About the same as here, eight to twelve weeks," he answers.

  "Good. Promise your Monsieur that if he commits to the

  quantities per year, we'll deliver any reasonable quantity within

  three weeks of receiving his fax."

  In astonishment he asks, "Are you serious?"

  "Dead serious. And by the way, I can start to deliver immedi-

  ately. I have whatever's needed for the first shipment in stock."

  "I guess it's your neck," he sighs. "What the heck, in any

  event you will have full responsibility very shortly. If I don't hear

  from you, I'll fax him tomorrow. Consider it a done deal."

  Only after we pull out of the parking lot do we let ourselves

  go; it takes us more than fifteen minutes to settle down. That is,

  Lou and Ralph dive into polishing the numbers. From time to

  time they come up with a slight corre
ction, usually not more than

  a few hundred dollars. Compared to the total deal it's not signifi-

  cant at all. But Lou finds it relaxing.

  I don't let it bother me. I sing at the top of my voice.

  It takes us more than half the way home until they are satis-

  fied. Lou announces the final number. The contribution to the

  net profit of the plant is an impressive seven digits, a fact that

  doesn't deter him from specifying it down to the last cent.

  "Quite a profitable deal," I say. "And to think that Johnny was about to drop it. ... What a strange world."

  "One thing for sure," Lou concludes. "You can't rely on

  marketing people to solve the marketing problems. They're cap-

  tured by old, devastating, common practices to an even larger

  extent than production.

  "Try to imagine," he continues, "the reaction of people when I start to explain to them they are the ones who believe too much

  in cost accounting."

  "Yes, I sigh. "Judging from today I shouldn't expect much

  help from these guys. Even though, you know, there might be

  something in Dick."

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  "Hard to tell," he comments. "Especially when Johnny is

  holding him so tightly under his thumb. Alex, how are you going

  to do it?"

  "Do what?"

  "Change the entire division?"

  That puts an end to my euphoria. Damn you Lou, why did

  you have to bring it up?

  "God have mercy on me," I say. "Yesterday we were talking about inertia. We were complaining about the inertia that we

  have. Compare it to the inertia that we are going to face in the

  division."

  Ralph laughs, Lou groans, and I feel pity for myself.

  This week, even though we made such impressive progress,

  one thing was definitely proven—I'm still managing by the seat of

  my pants.

  Take yesterday, for example. If it weren't for Ralph's instinct

  that something was missing, we wouldn't even have noticed the

  huge, open opportunities. Or today. How close was I to giving

  up? If it hadn't been for Lou putting us on the right track ....

  I must find out just what are the management techniques I

  should master. It's simply too risky not to. I must concentrate on

  it. I even know where to begin. . . .

  Maybe I was holding the key all along. What did I say to Julie

  in the restaurant? My own words echo in my head: "When did

  Jonah have the time to learn so much? As far as I know he never

  worked one day of his life in industry. He's a physicist. I can't

  believe that a scientist, sitting in his ivory tower, can know so

  much about the detailed realities of the shop floor."

  And then, the idea of 'scientist' came up again, when Lou

  and Ralph were arguing about the usefulness of classifying data.

  And I myself supplied the answer: How does one go about re-

  vealing the intrinsic order? Lou asked it as if it is a rhetorical

  question, as if the obvious answer is that it is impossible. But

  scientists do reveal the intrinsic order of things . . . and Jonah is

  a scientist.

  Somewhere in the scientific method lies the answer for the

  needed management techniques. It is obvious. But what can I

  do? I cannot read a book in physics, I don't know enough mathe-

  matics to get through even the first page.

  But maybe I don't need it. Jonah stressed that he wasn't

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  asking me to develop the methods, just to determine clearly what

  they should be. Maybe popular science books would be sufficient?

  At least I should give it a try.

  I should go to the library and start digging. The first modern

  physicist was Newton, that's probably the place to start.

  I'm sitting in my office, my feet up on the desk and staring

  blankly into the room.

  The entire morning, I got only two calls—both from Johnny

  Jons. First he called to inform me that the deal with the French is

  signed. He was very proud of the fact that he negotiated a better

  deal than expected; in return for the flexibility and immediacy of

  our response to their future requests, he succeeded in squeezing

  slightly higher prices.

  The second time he wanted to know if he could approach

  our domestic clients with the same concept. That is, to shoot for a

  long-term contract where only the overall yearly quantities are

  fixed, and we promise three weeks' delivery for any specific re-

  quest.

  I assured him that we don't have any problem responding,

  and encouraged him to go ahead.

  He's excited. I'm far from it.

  Everybody is busy. Launching this huge new deal has made

  them really busy. I'm the only one who has nothing to do. I feel

  redundant. Where are the days of the telephone ringing off the

  hook, when I had to run from one important issue to the other,

  when there were not enough hours in the day?

  All those calls and meetings were fire fighting. I remind my-

  self. No fires, no fighting. Now, everything is running smoothly—

  almost too smoothly.

  Actually, what bothers me is that I know what I should be

  doing. I need to guarantee that the current situation will con-

  tinue, that things are thought out in advance so fires will not

  break out. But this means finding the answer to Jonah's question.

  I stand up and leave. On my way out I say to Fran, "In the

  unlikely event that anyone needs me, I'll be at the public library."

  "Enough for today," I say and close the book. I stand up and

  stretch, "Julie, join me for a cup of tea?"

  "Good idea, I'll be with you in a minute."

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  Captured by Plamen T.

  323

  "You're really into it," I comment as she joins me at the

  kitchen table.

  "Yeah, it's fascinating."

  I hand her a steaming cup. "What can be so fascinating

  about ancient Greek philosophy?" I wonder aloud.

  "It's not what you think," she laughs. "These dialogues of

  Socrates are really interesting."

  "If you say so," I don't try to disguise my skepticism.

  "Alex, your perceptions are all wrong, it's not at all like what

  you think."

  "So what is it?" I ask.

  "Well, It's hard to explain," she hedges. "Why don't you try to read them yourself?"

  "Maybe one day I will," I say, "but for the moment I've

  enough reading to do."

  She takes a sip from her cup. "Did you find what you're

  looking for?"

  "Not exactly," I admit. "Reading popular science books

  doesn't lead you directly to management techniques. But I've

  started to see something interesting."

  "Yes?" she says encouragingly.

  "It's how physicists approach a subject; it's so vastly different

  from what we do in business. They don't start by collecting as

  much data as possible. On the contrary, they start with one phe-

&n
bsp; nomenon, some fact of life, almost randomly chosen, and then

  they raise a hypothesis: a speculation of a plausible cause for the

  existence of that fact. And here's the interesting part. It all seems

  to be based on one key relationship: IF ... THEN."

  Somehow this last sentence causes Julie to straighten up in

  her chair. "Keep going," she says intensely.

  "What they actually do is to derive the unavoidable results

  logically from their hypothesis. They say: IF the hypothesis is

  right THEN logically another fact must also exist. With these

  logical derivations they open up a whole spectrum of other ef-

  fects. Of course the major effort is to verify whether or not the

  predicted effects do exist. As more and more predictions are veri-

  fied, it becomes more obvious that the underlying hypothesis is

  correct. To read, for example, how Newton did it for the law of

  gravity is fascinating."

  "Why?" she asks, as if she knows the answer but is anxious to

  hear it from me.

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  "Things start to be connected to each other. Things that we

  never thought were related start to be strongly connected to each

  other. One single common cause is the reason for a very large

  spectrum of different effects. You know Julie, it's like order is

  built out of chaos. What can be more beautiful than that?"

  With glittering eyes she asks, "Do you know what you have

  just described? The Socratic dialogues. They're done in exactly

  the same way, through exactly the same relationship, IF ...

  THEN. Maybe the only difference is that the facts do not concern

  material but human behavior."

  "Interesting, very interesting. Come to think about it," I say,

  "my field, management, involves both material and people be-

  havior. If the same method can be used for each then it's proba-

  bly the basis for Jonah's techniques."

  She thinks about it for a while. "You're probably right. But if

  you are then I'm willing to bet that when Jonah starts to teach

  you those techniques you'll find that they are much more than

  techniques. They must be thinking processes."

  We each dive into our thoughts.

  "Where do we take it from here?"

  "I don't know," I answer. "Frankly, I don't think that all this reading really gets me closer to answering Jonah's question. Remember what he said? 'I'm not asking you to develop the man-

  agement techniques, only to determine what they should be.' I'm