until further notice they should not promise any delivery in less
than four weeks from receipt of the order. It will jeopardize their
new campaign, but that's life."
Right in front of our eyes the baton has been passed. It's
obvious who is the boss now. I feel proud and jealous at the same
time.
"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, op-
erating expense will be up and increasing the buffers means that
inventory will be up. Everything is moving in the opposite direc-
tion of what it should."
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"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 resem-
bles 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."
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40
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 ex-
posed. 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 re-
duce 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?"
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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, inven-
tory, 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 ev-
eryone 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 care-
fully 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 in-
ventory?"
"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 af-
fects their day-to-day decisions, that's a different story. With con-
centrated 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 divi-
sion 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?"
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sure 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 re-
call?"
"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 opportuni-
ties 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.
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"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 sec-
ond? 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 hesi-
tation."
"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 organi-
zation."
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"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 com-
ment. "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 paren-
thesis that we put at the end of the word 'constraint'. Fine, Alex,
what do we do about the measur
ements?"
"Measurements?," I say in surprise. "Where did they come
from?"
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"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 mea-
surements. "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 open-
ing a dam. "Wait Lou, I haven't finished. What about the mental-
ity 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 ef-
fects, it's identifying what causes them all."
"How are we going to do that? How are we going to identify
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