Critical Chain: A Business Novel (17 page)

Puffing, I stop in front of the arrivals monitor and check for Judith's flight. I'm trying to catch my breath. Where is it? Thank God, it's late. It will not land for another twenty-five minutes. I knew there was no need to rush. A little bit of snow and flights from Chicago are late. Gate 12.

Near the gate, there are no empty seats. It's jam-packed with passengers waiting to depart. I go to a nearby gate and sit down. I can hear the announcement from here as well. And if not, Judith knows to look around for me. It won't be the first time that I forgot myself in a book. The problem is that I don't have a book. I look around, somebody must have left a newspaper. Only the arts section. Oh, well.

Three aisles away a tall woman unloads her garment bag onto a chair. Good figure. She turns around to sit. It's B.J.
My first inclination is to cover myself with the newspaper. Too childish. Too late. She recognizes me. I smile, stand up and walk over to her. I can almost see the Rolodex flipping in her head.
"Good evening, Richard." She shakes my hand. "Any progress on bringing ten more students to our Executive MBA program?"
I was wrong. It's not a Rolodex, it's a whole data base.
I try hard to ignore the sarcasm I think I heard in her soft voice. "Yes, plenty," I hear myself answer.
Why do I have to exaggerate? Why do I feel compelled to show off? But I did make progress. Plenty.
"I think I found a good solution and we are already testing it. On an important project."
"How nice." She sits down.
She is not what one might call excited. I sense that she doesn't believe me. No wonder. A month ago I had a pack of riddles. Now, I claim I have solved them all. It is unbelievable. Can I explain that it's all because I was lucky to be handed such a wonderful foundation from Johnny? No. That would sound even more farfetched.
I'm still standing. She doesn't encourage me to sit. I have to talk her language. It worked before.
"I have a good chance to try it in more places. Once I get results," I promise her, "I'll start to talk with management about sending more of their people."
"And when will that be?"
"Two, three months from now. I hope."
"Good luck." And she opens her briefcase and takes out a book.
"You don't think I stand a chance, do you?"
She gives me a long look. "Professor Silver. Do you know what it takes to persuade a company to send a person to our program?"
Since I don't know, I wait for her to tell me.
"The person must press for it, and the company must be interested in him or her, interested enough to yield to this pressure. You are going about it all wrong. It's not the company that you have to persuade. Companies rarely initiate sending students. It's the people, the mid-level managers, that you have to entice."
"So you think that nothing will come out of my work with industry? I should drop it?"
I'm desperate, but not half as much as I am when I hear her answer. "Not at all. The university always encourages community service."
Community service! I'm so provoked that I forget myself, and bitterly say, "And I thought you meant it when you said that you are interested in us giving valuable know-how to business!"
"Yes, I am." And she opens her book.
"Then extend my term for one more year."
She looks back at me and coldly, so coldly, she answers, "I have a policy, and we have a deal."
"Rick! Hey, honey." I look around. Judith waves at me.
"I have to go," I say.
"Yes. You have to go," she firmly replies.

I enter the classroom. Charlene is still there, arranging her papers and talking to Fred.

I sometimes wonder if giving my course after an accounting class is a plus or a minus. It's a minus because in the beginning the students have a glassy look and it takes time to get them going. On the other hand, I think it's a big plus because whatever you do, the students are going to give you good reviews.

Charlene notices that I'm there. "Can I have a word with you?" She grabs my arm and drags me outside.
"Yes, sure," I pointlessly say.
"Will it be okay if I sit in on your class?"
Two months ago I was in no position to disagree; Charlene sits on the school committee for tenure. Now I don't have to be the nice guy anymore, but what's the point in being rude?
"Be my guest," I say, still wondering why she wants to do it.
"Thank you." And then she explains. "I'm still trying to digest what we heard from Johnny. I mean the ‘cost world' and the ‘throughput world.' Neither are new to management accounting, but . . . but in the existing know-how it's somehow convoluted."

"I don't mind you sitting in on my course, but how is it going to help you?"
"Management accounting deals with decisions and control. You, Jim and Johnny, in your courses, are dealing with the same issues, but from different aspects. So, I decided that in order to straighten out my confusion, I must invest the time, sit in on all your courses, and deepen my understanding."
I want to ask some more questions but I have a class to teach. We go back in.
Nothing is on my table. No wonder. Last time I was so irritated I forgot to give them a homework assignment. Now I don't have a smooth entry into today's topic. No big deal, I'll just jump into it.
"There are two types of projects," I start to talk. They start to write. "A project that is done by vendors and subcontractors, like the plant expansion project that Brian is involved with, and a project that is done mainly by resources of the company itself, like the product development project that Mark is leading.
"We heard from Mark how they implemented our ideas in their environment. Conceptually they have made many changes. Practically it boils down to three. If you recall, the main changes were: One. Persuading the various resources to cut their lead time estimates; Two. Eliminating milestones or, in other words, eliminating completion due dates for individual steps, and Three. Frequent reporting of expected completion times."
They write as fast as they can, but I was talking too fast, and they ask me to repeat the three changes. I do, and then continue.
"As we heard, it was surprisingly easy to implement these changes . . ."
"Whoa!" Mark booms.
Ruth backs him up, "If it weren't for you, explaining everything to our people, persuading them to collaborate. . . . I don't think that such a paradigm shift can be imposed."
"I fully agree," Fred supports his team members. "Thank you," I say. "Persuading people to collaborate is always necessary. The time when you could dictate is over. If you want people to think, to take initiative, you cannot dictate."
They all nod.
"But the fact is that you did implement it in about one week. Mark?"
"About."
"My question is, how can we do it in the other type of project environment, where most of the resources are vendors and subcontractors? Roger, whose job is dealing with them, told us it's impossible. That they will never collaborate. Roger do you still think so?"
"Yes." And being Roger, he must add, "And whatever you say will not change it." He puts his head in his palm and shuts his eyes. I ignore him.
"Are subcontractors and vendors a problem? Did you ever see a project that was significantly delayed because a vendor or subcontractor was late?"
If there ever was a rhetorical question, that's it.
"It is also a problem for us," Mark comments. "We are less dependent on subcontractors, but delays from our vendors are a major problem."
I nod to him and continue. "So, the lead times of our subcontractors and vendors should be of tremendous importance for our projects. Nevertheless, how do we choose them?"
"They can tell you whatever they want," Ted is almost shouting. "But the truth is, it's price. My company is a subcontractor. So I know. They may talk about reliability and quality, but when they come to sign, it's price."
Ted doesn't have to shout. Everybody agrees.
"Price is important," I say. "But lead time is not less important. Sometimes more. That's where the change should start. We must understand the financial impact of a delay. We must understand that a three months' delay sometimes costs us more than giving another ten percent to all our vendors."
Some are nodding, most look skeptical. Brian doesn't seem to agree, and he is not the only one. I have to demonstrate my claim. Otherwise they'll think that I'm just exaggerating in order to make a point.
"Brian, two weeks ago you invited me to spend a day with the team responsible for the expansion project of your plant. The plant manager was there, the project leader and all his key people. They are all concerned that the project will not be finished on time. Can you tell the class a little bit about this project?"
"Sure." Turning to the class, he says, "It's a six-million-dollar expansion project. For us it is big. And it looks like it will be at least four months late. If we are late, let me tell you, some people will be bent out of shape. That's for sure. So, yes, everybody is very concerned. Wouldn't you be?"
I keep on asking, "Do you think that they know the penalty of not finishing this project on time? I mean the damage to the company?" Before he has a chance to dig himself a hole, I continue, "You are a major player on this team. Do you know the damage?"
"Sure," he says. Then, expecting I will ask for the answer, he corrects himself. "If you mean the dollar and cents impact, no I don't."
"What data do we need in order to answer this question?" I ask the class.
For a while nobody answers. Then Brian himself hesitantly says, "Expected sales?"
"Is this an answer or a question?"
"More of a question," he admits.
"But you do know the answer. Let me guide you. We invest in a project in order to get something that will bring us benefits."
"Of course."
"Therefore, it must be that the penalty of not finishing on time is related to the delay in getting the expected benefits."
Everybody nods.
"Brian, let's go back to your specific case. Why is your company investing, how much did you say, six million, to expand the plant? What benefits do they expect?"
"We need the capacity." Responding to my signal to proceed, Brian adds, "We have a very nice product line, of which we cannot supply enough to the market. I see now. The damage to the company will be the delay in getting the additional sales." "We want to quantify it," I remind him. "Now, a minute ago you were not sure if we need to know ‘expected sales.' Do we need it?"
"Without a doubt."
I smile. "I told you that you know the answer. Just think clearly, that's all."
They laugh.
"Now that we've agreed that we need to know expected sales, can you tell it to us? How much more will your company sell due to the additional capacity?"
"The forecast is two million per month. A very conservative forecast. The consensus is that once we are up and running we will surpass it."
"Fine," I say. "Can we now answer ‘what is the penalty of a delay?' Or do we need more data?"
"What are the margins on this product line?" Fred asks. Before Brian can answer, I step in. "Fred, why do you want to know?"
"Because otherwise how can I calculate the impact on the bottom line?"
Remembering what I've learned from Johnny, I interject,"Margins are a lousy way of determining it, but for establishing order of magnitude it will suffice," and I gesture to Brian to answer Fred's question.
"It's a very good product," Brian explains. "The net margins are over thirty-five percent."
Now that there are more facts on the table, I repeat my question. "What is the penalty for the company of a one-month delay in completing the expansion project? Brian?"
He doesn't answer.
"Two million dollars sales per month times thirty-five percent net margin . . ." I feed it to him with a spoon.
"Seven hundred thousand dollars a month. I know how to multiply. But I don't buy it. This money will not be lost, it will just be postponed. Ah, I need to know the interest rate."
"Forget the interest!" Fred tries to help. "Did you ever hear about cash flow?"
"Cash flow is very important," I agree. "But in this case, also net profit is lost. Brian, why do you claim that money is not lost, only postponed? Because you assume that sales will be there also in the future. What other piece of data do we need in order to examine your assumption?"
"I don't know." Nor does anybody else.
I try to help. "Brian, how long do you think your company will be able to command such hefty margins on this product line?"
"Nobody knows. Maybe two years, maybe three. I see your point. It's not just money delayed, a major portion of it is money gone forever." He swallows hard. "We are talking about hundreds of thousands per month. That's huge."
Now I can return to my original question. "Do you think that the project team has a clear idea of the damage the company will suffer if the project is not finished on time?"
"No, they don't," he confidently answers.
"Not realizing the dollar impact of a one-month delay surely has an impact on the way your project team deals with your subcontractors?"
While he thinks about it I turn to the class. "It is surprising, but unfortunately this is the case everywhere. Most people involved in a project don't explicitly recognize the penalties associated with each month that the project is delayed."
"Before we start to discuss how we should negotiate with our vendors, I want every one of you to realize the magnitude of this phenomenon.
So, take your time and think about the projects you are involved in. Now that you know more, try to figure out the actual damage associated with a delay."
"We don't have to think about it," Mark responds immediately. "In our case the penalty is mammoth."
And he explains to the class his company's situation: a hightech company captured in a frantic race, forced to release a new generation of products every six months or so. A few months' delay in their case means a substantial drop in market share. I interrupt to highlight an important point. "In Mark's case the damage is much more severe than in Brian's case. Mark's company is not going to lose just additional sales, they are also going to lose existing market share."
"It's even worse than that," Mark continues. Since our stock value is based on expectations, a drop in market share means mammoth damage to our shareholders. And therefore to our job security."
"Is everybody involved in developing new products as aware of this as you are?" I ask, surprised.
"I don't think so," Ruth answers. "Few see the full ramifications."
I think Mark disagrees with her when he says, "Every project manager knows that it's important not to be late." But then he continues, "They know it because the pressure to finish on time is immense. But, as a project leader, I can tell you, they don't really know why. Until our executive vice-president explained it to the three of us, we didn't know. Maybe Fred did, but I didn't."
"Me, neither. I was not aware of the impact on the shareholders and the impact on the future of the company," Fred confirms.
"This is generally the situation," I conclude for the class.
"Most people involved in the project, often including the project leaders, are not fully aware of the magnitude of damage associated with a delay. No wonder that when we negotiate with vendors or subcontractors we do not pay enough attention to their lead time."
"You may be right," Roger comments, "but it's too late. We have already conditioned the vendors to compete on price."
At first I'm surprised that Roger is bothering to participate. Then I realize that, at last, we are dealing with his subject.
I think I understand what he meant, nevertheless I check. "What do you mean by ‘conditioned to compete on price'?"
He doesn't bother to explain. He just states, "Competing on lead time! It's beyond them."
Noticing my skepticism, he continues, "I don't believe that it is possible to explain to them that lead time is very important for us. Sometimes more important than price."
"What will happen," I suggest, "if in your request for proposals you write a sentence like ‘above X price don't submit, above Y lead time don't submit a proposal.' Don't you think that will drive the message home?"
"To put a price in my request for a proposal?" He is astonished.
"Not a price. A cap on the price."
He doesn't answer. He thinks. So he is not as thick as I thought.
An attack comes from a direction I least expected. "Still, many vendors are conditioned to compete only on price," Ruth declares.
"Why do you say that?" It's my turn to be astonished.
"You know how many times I've tried to squeeze shorter lead times from a printing house? Every time we run into an emergency with our promotional material. Which means, very frequently. I try to offer more money, I beg, I plead. It doesn't help. They behave as if their lead times are cast in iron."
I struggle with it. It's hard for me to believe that's the case. But Ruth is very reliable. I ask some more questions. Ruth fully cooperates. She will not twist around the facts, but she struggles with me. Others contribute. Ruth is not the only one who has to deal with printers. Finally the picture emerges.
You go to a printer and ask for a quote for a brochure. They tell you four weeks. You come with all the needed final material in your hands, and you are willing to pay more, and they agree to do it in four days. They simply have had very bad experiences with clients wasting so much time making up their minds on all the details.
"So there is a way to trade lead time for money," I conclude. "The key is to understand the true impact for us, otherwise we will not be willing to pay for shorter lead times."
"We also have to understand the vendors' concerns," Ruth reminds me. "Otherwise, even if we are willing to pay, they will not be willing to commit."
I fully agree. Now that this issue is cleared up, I can raise the other problem. "We heard from Mark how important it is not to tell a completion date to the person doing the work."
"You do it," Mark emphasizes, "and you almost force the ‘student syndrome'; then lead times cannot be shortened."
"But what do we do with vendors?" I continue. "We force them to commit to a delivery date. Exactly the opposite of what we should do."
"You're telling us not to ask for commitment to a delivery date?" Roger is back in the ring."
"That's exactly what I said."
"How are you going to convince a vendor to leave so much up in the air?" he sarcastically asks.
I don't have an answer. "By talking his language," I say.
He narrows his eyes. "Last time you agreed to come with me to a meeting with a vendor. Is your offer still open?" Smirking, he looks around.
I nod. Any other answer and I'll lose all credibility. Next time I'll be more careful ducking questions.
"Wednesday morning okay?"
"Yes," I quack.
"It will be interesting to see you talk the language of my vendor." Roger doesn't miss the opportunity to turn the dagger. They all laugh.
I give them a pile of homework.
When they've all left, Charlene approaches me. Oh, no. She saw it all.
"It was very interesting," she says. "I learned a lot."
I give her a dirty look.
"After this class, I have to rethink the whole subject of netpresent-value. Something is terribly wrong there."