Not even 24, just four-hour delivery times, which is completely crazy
for office supplies. I mean, we're not saving lives here.
So this is what we offered our customers: That we would take over all
this hassle of supplying everybody in the office with the right equip-
ment, the right articles, at the right time. We offered them cabinets
with office supplies in them. We owned both the cabinets and the
contents. The supplies were for a specific working group. Whatever they took out was considered sold, whatever was left was still ours. We
replenished these cabinets every week. We made it very easy for them
to check on us. And more importantly, we could give specific data
about each department, explaining that certain items were consumed
fast. For instance you might need a new pair of scissors once in three
months, but not every week.
DW: So you could discover theft?
PH: Well, we didn't call it theft, we called it overconsumption. But
of course it was theft, yes. So suddenly this guy who was responsible
for office supplies had much better tools to go after his dishonest
personnel. He's not interested in how many pencils someone uses.
Everybody knows that people take pencils home; you do that by ac-
cident and it doesn't cost anything. Toner cartridges, that's a bigger
problem. So when the theft of these ink-jet cartridges went up very
much, we advised them to buy bigger printer machines, which we
could also supply, to make them different than the machines people
had at home. Things like that. But those cabinets were a big, big
invention. While our customers might have paid 20%-25% more for
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the actual articles, the total cost of providing office supplies for their workers dropped by 50% because they didn't have the internal hassle
of misplacements, overstocking, and things like that. So they didn't
care that much anymore about the original price we charged. When
I sold my company a couple of years ago, the due diligence took a
long time because they couldn't believe our added value.
DW: What were the numbers?
PH: Normal gross margins in the industry were very much below
20%. Above 20% was suspicious. We were above 30%, which makes
a lot of difference. And we were not ripping people off. They were
extremely satisfied with our service.
DW: How did you go about selling the concept to your
customers?
PH: We had a department which was making appointments with
financial directors, not the guy normally responsible for purchasing
office supplies. That other guy was scared for his job when you came
with this solution. And we made a short movie to show the current
situation in their office and how people were screaming for office
supplies and things like that, and how great it would be if we could
take over their stock and their responsibility and solve this problem.
And this worked really great. Something like 30% of the sales visits
were successful sales. Again, the prices we were charging for supplies
was no longer an issue
DW: For anyone?
PH: Not exactly. We still had some customers who were focused on
price. We didn't chase them away. We just gave them completely
different conditions. We told them that if price is what matters most,
you have to buy big quantities and you shouldn't care about delivery
times: "You can get the lowest price possible but you have to stand in line." Now a good thing for us about the cabinet system was that we
had one-week advance notice on our purchasing needs. I mean, what
the customer used last week I didn't bring the day I was checking. I
would bring it the week later. So I hardly needed any stock anymore.
My suppliers could deliver in a day but I had a week. So now I could
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start buying on price. And I could combine my orders with those of
the bigger customers who still wanted to do business just on price.
DW: Those must have been a very satisfying couple of years for
you as you explored this new way of doing business.
PH: Well, yes, for a couple of years it's really fun. Because you're
winning a race. Of course at the beginning I was relatively small; I
was number four or five in the country. I was really afraid the bigger
companies would copy my cabinet system.
DW: Did they?
PH: Yes, a little bit. But they didn't get the message. It was actually
really funny. They were prepared to deliver cabinets but the customer
had to buy the cabinet and the content as well. They were never willing
to do it on consignment terms, which is what made it work. So that
was a big difference to start with. Secondly, they didn't understand
my replenishing system of stuffing the cabinets full enough that you
could survive a couple of weeks. What they offered was so different
that we could immediately show the customer that with our competi-
tors, you'll still have to do it yourself, you'll have to take responsibility.
Whereas in my case, when you change a printer, for example, and
you don't tell me, I will find out you don't use this cartridge any more
and I'll adjust. These cartridges are very expensive, do you want the
responsibility? That's the main difference of consignment.
DW: Later were you able to discover new constraints that
opened the way to new growth?
PH: Ultimately the constraint moved back inside the company. The
new constraint became; how quickly can we measure or install a new
cabinet? At first we could only do something like two or three cabi-
nets a day. People were standing in line for cabinets. We had waiting
lists for three months. So we put a second person on the job. Not a
big deal. But we were fully in charge. We could grow at the pace we
wanted to grow. That's kind of funny in a race where everybody was
yelling about price! There are other businesses in that situation. For
example, if you go to a really good restaurant, they don't care about
prices. They are booked for the next three or four months; they be-
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come arrogant. And we had the same situation! It was great! And to
think that we had started with all those competitors, all the problems,
and 20 sales guys who were really discouraged, they didn't know what
to do. And here we came with this really simple solution. I'm amazed
that to this day nobody's really copying it.
DW: Would you have discovered this breakthrough had you
not been exposed to Goldratt's theories?
PH: First of all, I wouldn't have known how to attack the problem
Since I was working at the printing company and my nephew was
working at the office supplies company, I never expected that we
would
change roles. Nevertheless, I knew how much loss they made. And by
then I was so convinced that just b
y applying Theory of Constraints,
I would figure out a way to solve the problem. It took me something
like three or four weeks to see the light and understand what was go-
ing on and how to solve it. I survived that month by sitting back and
saying, "Okay, no panic, no panic, let's not be hasty. As long as we
don't have a breakthrough idea I'm not going to make any changes "
I was just sitting back and thinking and discussing with people how
we could solve the problem, until we solved it. And that's one of the
good things about theory of constraints. You know in these cases that
eventually you will come up with a breakthrough idea.
DW: You have only to find it
PH: Yes, and I became better and better at it. It takes Eli about five
minutes to find the constraint and how to brake it. In most cases, I can
find the same within a week. Compare it to just doing more of
the'same.
I very often use this funny story about two guys on a safari. And after
a couple of days they hear the first tiger and they think, well, great! So they go for their guns and discover they forgot their bullets. So one of
them puts his pack down and grabs his running shoes, and the other
guy starts laughing: "Do you think you can outrun the tiger?" He says,
'I don't need to outrun the tiger, I only have to outrun you!"
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Interview with Eli Goldratt continued...
DW: Can you give me another example? Of a service company
that does not deal with physical products?
EG: To demonstrate how different one type of service company is
from another, I suggest you interview both a bank and a financial
advisors company. Then interview another, obviously different, type
of service industry, a hospital
Interview with Richard Putz, A Midwest Bank
Former CEO of Security Federal Bank.
DW: How did you conceive of applying the principles outlined
in The Goal to the banking industry?
RP: I was flying back from Los Angeles one night. And I was re-
membering my days as a consultant at Coopers & Lybrand, working
with the folks who were handling the manufacturing engagements.
That's where I was first exposed to The Goal. And I began to think that when you look at how a bank operates—for example, how it moves
through the process of putting loans together—it's really no different
than manufacturing. Why couldn't I use something that worked in
manufacturing and apply it to a bank? The process is the same, we
just give it different labels. So I started testing that out.
DW: How did that go over with the staff?
RP: In the beginning they were skeptical. I got all of the people who
report directly to me into the board room, we sat down, I passed out
copies of The Goal, and I said: "Guys, we're going to come together every week on Friday. We'll have fun, we'll have food, the whole bit, but
we're going to discuss how to translate The Goal into banking terms."
I'm looking over there at my CFO, he has this constipated look on his
face. I said, "Jim, is there something wrong?" He says, "Yeah." I said
"What?" He says, "There's no index in the back of the book. How do we find anything?" I said, "You read it, it's a novel." He eventually became our biggest advocate. But he was totally skeptical.
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DW: So how did you approach the problem?
RP: Traditionally the tough issue within banking is how you manage
all the regulatory constraints that you're faced with. Banks are just
immersed in regulations. And if you actually tried to manage accord-
ing to the regulatory measurements, your bank would fail. You bring
that up to the regulators and they laugh. There's just this whole slew
of things, some of which contradict themselves. Some of them were
created when lawmakers added them onto banking legislation because
they looked good, or else to fit a particular situation at the time.
DW: You're talking about regulations that keep banks out of
certain businesses?
RP: Right, as well as those that mandate certain loan mixes, how you
approach a market, that type of thing.
DW: Preservation of asset ratios and so forth?
RP: You got it. We took a slightly different approach. We decided we
had to figure out what our real market constraint was. Using TOC,
we found it had to do with service levels and how we were solving
problems for our customers, not with the specific products we were
offering. So we ended up gearing the whole bank toward solving prob-
lems for our customers. Part of the solution—the injection that broke
the conflict—was the creation of personal banking for everybody, not
just for wealthy people. Banks normally assume it's not worth spend-
ing time with you if you have only $100,000 when they can spend
that time with a guy who's got $10 million. We discovered that a guy
who only has $ 100,000 isn't really going to spend a lot of time with
you anyway; he's just not there very often. So we stopped worrying
about that and began focusing on how to better manage our customer
relationships across the board. People ended up coming to our bank-
ers anytime they had a financial problem. If we couldn't solve it for
them, then at least we could refer them to someone else, and we could
give them good advice because we didn't have an ax to grind. All we
asked is that they let us manage their cash flow. Most people gave us
everything in that regard, plus all their loans.
DW: You had a large mortgage business, too?
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RP: Right. We had more than 300 correspondent banks, all over the
country. National City and Bank of America would sell us mortgages.
What we discovered-also using TOC, and this is how we expanded
this business—is that most people with a loan viewed the bank that
serviced the loan as their bank. So, whether Freddie Mac or Fannie
Mae or PNC or any other investor actually owned the loan, we wanted
to own the servicing asset. It was more valuable in terms of building
customer relationships than the loan itself.
Also, these days it's a lot easier, but it used to take forever to get a
mortgage approved. That's because there are all these things you
have to have in place—again, to satisfy the regulators. We looked at
that and said, "Okay, what's the conflict here?" We built our conflict clouds, and we built a current reality tree, and we discovered there
are only three things that end up deciding whether a loan is a go or
a no-go. If we just focus on doing those three items, and worry about
plugging everything else into the file later, we can speed things up. In
fact we were able to cut the approval time almost in half. That made
us really popular with realtors and mortgage brokers, which brought
us more business.
DW: What effect did TOC have on customers' ordinary day-to-
day
interactions with tellers?
RP: Most of the tellers said they wanted to do this TOC thing, too.
Well, what do they really need to do? They really don't need to know
how to do future reality trees because their everyday life is not involved in future reality trees. But a teller is often dealing with conflict resolution. Tellers represent the frontline defense, especially at savings and
loans. People come up to them and say: "This doesn't work, this is
out of balance, they screwed this up," and it's the tellers who have to solve the problem. So we taught them how to do conflict clouds. We
created conflict-cloud worksheets for them, pads of 50 sheets, eight
and a half by eleven. On the back side were the instructions, just in
case they forgot how to do it. And the teller could actually fill in the
cloud as he or she was talking to the customer, work out the prob-
lem, then rip off the sheet and do the next one. We had that going
throughout the bank.
DW: It sounds like one of the main conclusions you reached
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was that the perceived constraint-the regulatory climate-was
not the actual constraint
RP: Correct. I would walk into the office of my compliance officer
and I'd say, 'Jeff, I got this idea." And he would just automatically point to this poster on his wall that basically said: If you can dream
it, there's a regulation for it.
DW: And yet even in that environment, you found ways to
grow.
RP: We did things in the banking industry that were totally unheard
of. We actually had regulators visit us more often than other banks
because those other banks kept calling them and saying: "They've got
to be doing something illegal, you need to check them out."
Interview with David Harrison, Administrative Ser-
vices, Founder, Positive Solutions, Newcastle, U.K.
DW: Tell me about Positive Solutions.
DH: We provide management and administrative services to inde-
pendent financial advisors. At present we have 755 of those people
who rely upon us to help them with such things as compliance with
financial services regulations, collection of commissions, and so forth.
That's the company we built, 60% of which we sold recently to the
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