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accounting is completely false. As a matter of fact, financial managers
are the only type of managers that knew, much before TOC, the fal-
lacies of cost accounting. Moreover, in almost any company, the VP
of finance is one of the few managers who sees the overall picture and
is extremely frustrated to witness so many devastating local optima
decisions which do not view the organization as a whole. What we see
in reality is the exact opposite; the financial managers rarely oppose
TOC. On the contrary, in many (if not most) implementations, they
are the driving force.
DW: That's hard to believe. Can I interview such an enlightened
financial manager?
EG: As many as you want. As I said, such financial managers are the
norm rather than the exception.
Interview with Craig Mead, Book Manufacturing
Vice President Finance, Thomson-Shore, Dexter, Michigan.
DW: Tell me about Thomson-Shore.
CM: We're in Dexter, Michigan, just outside Ann Arbor. Approxi-
mately 40% of our customers are university presses. We would be
considered a short-run printer, meaning we print runs of between 200
and 10,000 copies. We're also an ESOP company-98% of the stock
is owned by the employees. We've had as many as 300 employees.
Right now we're at 280.
DW: I understand that everybody in your company has read
The Goal.
CM: We made it mandatory reading for all our employees.
DW: Top to bottom?
CM: Yes.
DW: So what was the problem you were trying to correct with
the help of The Goal
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CM: Our main problem was with on-time delivery. We also had
problems with a department-type mentality at the company. People
had a hard time looking beyond their departmental responsibilities.
Everybody was functional in thought.
DW: Were you able to turn things around?
CM: Yes. Before we started, we were at around a 70% on-time deliv-
ery. After implementing the TOC policies and practices, we got up
to around 95%.
DW: Your first step was to have everyone read The Goal?
CM: Yes, that was the first step. The next step was to bring in a TOC
consultant. We put 30 people through a three-day training course on
Theory of Constraints. From there the leadership group identified what
we thought was the constraint and began to follow the Five Steps.
DW: What was the constraint you identified?
CM: In our business we have two areas of major investment One is in
the press room and one is in the bindery. We basically settled on the
press room as the constraint and began to manage the business with
that in mind. As we focused on the constraint and began to subordi-
nate everything else to that, we began to break down departmental
barriers. It took a lot of education and training. We developed our
own internal course for employees. Basically we took the three-day
course, pared it down to about an hour, and had every employee go
through that. The course dealt with the major concepts of constraint
management, subordination, flowing work, and removing localized
thought processes.
DW: What changes did you make in the press room?
CM: We chartered some teams to look at the various products that we
made and began to challenge assumptions on how we use the presses.
We make two types of books, a perfect-bound paperback book and a
casebound hardcover book. We have sheet-fed and web presses. We
began to devise rules on what type of books went on what pieces of
equipment, to maximize the capacities of the equipment and to meet
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customers' needs. By creating new standards we eliminated an incred-
ible amount of waste. Before, we were constantly reworking jobs to
meet what we thought were customer needs. In reality it was forever
putting us farther and farther behind. Rethinking all our assumptions
forced us to discipline ourselves and to maximize each component in
the press room. That allowed us to flow the work more consistently.
DW: How did you involve the employees?
CM: Employees at Thomson-Shore have the ability to influence the
standards and the way work moves within their area of expertise. When
you're strictly localized in your thinking, every person wants the job
designed to benefit themselves. And that creates chaos. Before we did
our TOC implementation, we could never agree on anything without
a long, involved discussion. If we wanted to make a change we had
to get 12 people in a room and then try to reach a compromise on
everything. We could never please everybody. Having everyone read
The Goal helped everyone understand that the basis for everything we do wasn't localized thinking anymore. So, for example, if a job had to
spend a little more time in the bindery, that's okay, as long as that's
what's most effective for the press, which we had identified as the
major
constraint. In the end we got the throughput that we needed.
DW: As a finance guy, what was your specific contribution?
CM: The Theory of Constraints is built on the premise of breaking
the barriers of the cost model of accounting, and we were a heavily
cost-driven organization, as a lot of manufacturing companies are.
Everything in the company was designed as the cost-system would
dictate. That's where I began to add value—by helping to develop dif-
ferent measurement tools that we could use instead of the traditional
cost tools. And that's what I believe began to drive real change in
the organization. We are still struggling on the sales side but we've
made progress in breaking away from the cost method of sales and
estimating.
DW: How does that work?
CM: The cost method of accounting creates departments and it al-
locates indirect overhead expenses. TOC, however, says you're one
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big happy family, you have fixed expenses and you have variable
expenses. Your variables are your materials and your fixed is every-
thing else. And sitting around spending all your time trying to figure
out how much electricity and square footage of air conditioning and
cooling goes to the press room, how much to the bindery and the
prepress and how much to the office doesn't help you manage your
business.
DW: Because it distracts you from the goal.
CM: Yes! Of meeting the needs of the customer. And flowing the
work in a timely fashion. When we began to concentrate on making
the work flow, that is, maximizing the capacity of the press room, and
subordinating everything else to that, we began to improve our on-
time delivery. The critical issue is how you measure the performance
of the organization. W
e use two methods.
DW: And they are?
CM: Eli Goldratt talks about developing a constraint management
tool. Ours is called TCP, for throughput contribution per press hour.
When the market isn't a constraint, you choose which products and
which customers to bring in based on that number. That's how you
build profitability. Assuming, of course, that the constraint is not in
the market.
DW: And when the constraint is in the market?
CM: For that we came up with another internal measure. We call
it CRH, for contribution margin per resource hour. We try only to
capture hours that represent value that customers pay for. We take
the contribution—which is sales less materials—and we divide by the
hours consumed and come up with a relative measure that has validitv
across the whole organization. It has taught us an immense amount
about what we do here.
DW: By confirming what you already suspected or by
revealing what you hadn't known before?
CM: Both. It confirms that certain types of customers, certain types of
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work, are difficult and cost us more to manufacture-it clearly pointed
that out. And then it also began to show us how technology affects
our margins. I mean, we get most of our books on PDF files now,
and the cost difference between working with a PDF file and working
with what I'll call the old conventional way is incredible. What was
happening was that we were being forced by the market to reduce
our prices across the board, but then any job done the old way was
not very profitable. Hah! Not profitable at all! People were expecting
PDF pricing for conventional work, and that just doesn't work. Bot-
tom line: In a harsh business climate, in which the market is the new
constraint, and sales are declining, we've actually built profitability.
Significantly.
DW: Does it help that you're an ESOP company? Does that
make
it easier for employees to align their interests with the goal?
CM: It depends on the individual. Someone who is ten years from
retirement is more interested in the value of the stock. Someone who's
been here three or four years, they're looking at the individual-based
bonus. So we actually began to implement team bonuses instead of
individual-based bonuses. Today we're working on disconnecting the
link between compensation and performance feedback. Feedback is
going to be all team-based.
DW: You said you had 300 employees before and now you're
at 280. Is that the fault of a bad business climate or a benefit
of being more efficient?
CM: It's both. The business climate has not been healthy. But at
the same time, some of the changes we made freed up capacity, and
as people quit we didn't replace them, which built profitability. No
layoffs. We just didn't replace everyone who left. And we moved
individuals around.
DW: Is the constraint still in the presses?
CM: Well, it shifted to the bindery.
DW: What about market constraints?
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CM: Yeah, we have more capacity than the market's willing to give.
That's an issue. I think we're prepared to meet the market when and
if it comes back. And in order to do that we have to do three things.
We have to fulfill the requirements of speed and delivery. We have
to stay profitable to maintain our equipment and provide the quality
that customers expect from us. And then, three, we have to have em-
ployees who are participating fully, who want to come to work every
day, and who understand why they're here and why they're doing
what they're doing. TOC has allowed us to do all three.
Interview with Eli Goldratt continued...
DW: I'm back to my previous question. How come most readers
of The Goal do not rush to implement TOC?
EG: TOC is built on the realization that every complex environment/
system is based on inherent simplicity and the best way to manage,
control and improve the system is by capitalizing on this inherent sim-
plicity. That's why the constraints are the leverage points. That's why
the five focusing steps are so powerful. But, what we have to bear in
mind is that such an approach is a major paradigm shift. And people
will do almost anything before they will shift their paradigm.
From observation, I can tell you that readers of The Goal proceed to implement it mainly when three conditions are met. First, there is a real
pressure to improve. But that by itself is far from being enough. The
second condition is that it is obvious to them that there is no remedy
within their existing paradigm. In other words, they had already tried
everything else. And the third condition is that something helped them
to do the first step. This something might be a "how to" book, like Production The TOC Way, a course, a simulator, or a consultant.
DW: Can you guide me to a case where all the three condi-
tions exist?
EG: Frankly, once the three conditions had crystallized in my mind it became easy to detect them in every case. It is just a matter of asking
the right questions and the pattern is apparent. Actually, there is no
need even to ask guiding questions, you just have to listen.
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Interview with Stewart Witt, Ongoing Improvement
A consultant
DW: I understand that your introduction to The Goal came be-
fore you became a consultant
SW: Right. I was VP of operations at the time for a small manufactur-
ing company, Ohmart/Vega Company, in Cincinnati, Ohio. Someone
gave me the book with the recommendation to read it. And I read it,
and it was very entertaining and made a lot of sense, and I promptly
put it right back on the shelf.
DW: I've heard stories like that before.
SW: Right. I just wasn't ready yet. This company had hired me specifi-
cally to improve their operations and prepare them for growth and
make them more efficient, all that stuff. I had talked the president
into hiring a consulting firm, saying, "I can do these things but we
can get it done that much quicker with some help," and he was fine
with that. So we hired Grant Thornton, and they came in. We rear-
ranged everything, streamlined everything. They took a look at the
software we were using and made some other recommendations. We
paid them about $120,000 and in about 6-8 months we started to see
some results. Everyone was very happy because we took lead times
down from, like, two weeks to one week. It was, wow, that's pretty
good! The problem was that the same improvements were happening
in sales and marketing. So here comes 40% more orders in the same
time frame, and as it trickled out into the shop, so trickled away my
improvements. The capacity I had freed up was now being doubled
up by all these extra orders and I was back in the same boat that I
was in before.
DW: What were you manufacturing?
SW: Nuclear measuring devices for the oil industry. Essentially, it's a
non-contact measuring system, kind of like a Geiger counter.
DW: So, you were back in the same boat
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SW: Yeah, I spent all this money, all this time. All the things I knew
how to do I had done. I couldn't rearrange everything again. I couldn't
look at the software and come up with any new ideas. I had already
employed the best consultants that I knew.
DW: Right So what did you do?
SW: I signed up for Porsche mechanic school in California. It must
have been a weak moment in my life. I do amateur racing and there's
a saying that goes: you didn't make any mistake when you spun the
car and flew off the track; what you did was you went into the corner
and ran out of talent. That's how I looked at it-I must not be cut out
for this job, there must be something I'm missing. I couldn't figure
it out
DW: How old were you?
SW: That was ten years ago; so, early 30s. Mechanic school wasn't
a waste of time. I still use what I learned. I save 600 bucks doing my
own tune-ups. But right before I left to go out there, someone said:
"You know, in San Jose there's a software company that has been cre-
ated to support the rules that are stated in The Goal, and by the way, the Goldratt Institute has just issued a self-learning kit that you might
be interested in." So I went to my mechanic class, that was very fun.
Then afterwards I stopped in San Jose, took a look at the software,
and completed the workbook on the way home. I was so excited that
on Monday morning I got my staff together and I said: "This is what
we're going to do. We've got nothing to lose. It looks like it's possible.
It almost looks too simple. Let's give it a try." They weren't very convinced. In fact they were pretty skeptical. I'd put them through a lot
already. One more thing, huh?
DW: This was their first exposure to TOC?
SW: Yes. Short story is, it took us about a month to go through the
training materials, which came with a tutor guide and a workbook for
all the participants. I went through the tutor guide step by step, they
went through the workbook, and eventually they said: "I think you're
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