Critical Chain: A Business Novel (9 page)

"UniCo is very famous today. This conglomerate, as you well know, is exhibiting unheard of growth and profits. It is of particular interest to our community since they are building a major high-tech operation here. Their growth is not just in their hightech subsidiaries, but in all their businesses. Every single one of them. My grant had a hefty travel budget, so believe me I checked."

"That's what I call a grant." Rick is probably not the only professor who had this thought cross his mind.
"It's apparent that they have embarked on a different way to manage their business," Johnny continues with his introduction. "And they don't hide it. They call it Theory of Constraints, or for those of us who love three-letter acronyms, TOC. But what is TOC? That's what I've tried to get a good grasp of. Not the details, but the concept, the framework."
Rick, like everybody else, has heard more and more about TOC in the last ten years or so. What he has heard and read made a lot of sense, but it kept changing. At first it was related to production scheduling. Then it became a banner to attack "product cost" methods. Then marketing. Lately, it seems TOC is more connected with methods to remove friction between people. If Johnny could provide some order for this mess, it might be worthwhile sitting for a hour. Not much more than an hour.
"My impression is," Johnny says, as he turns on one of the overhead projectors, "that TOC is a blend of three different, yet related, breakthroughs."
He puts up his first transparency. "The first one, as we all suspected, is that TOC is actually a new management philosophy."
"Another one of those," Rick whispers to himself.
"In the past ten years," Johnny echoes Rick's discomfort as he resumes his pacing, "we came to know many new management philosophies. They came one after the other: TQM, JIT, re-engineering, the learning organization. . . . At first it looked like we were moving from one fad to another. It was confusing. Nobody liked it. Especially not us, the professors, who all of a sudden were forced to update our course material at an unprecedented pace.
"But then we started to realize that each one had its important contribution. Moreover, not like fashions of the past, all these philosophies are not contradicting each other. On the contrary, in many ways they are complimentary. Many started to believe that they all are just pieces of the same puzzle. Now that I have been intimately exposed to TOC, I think I know. They actually are. And in a much more fascinating way than we suspected. I'm going to demonstrate it."
He moves back to the overhead projector and points to the second line. "The second, and most important breakthrough of TOC, at least in my eyes, is the research methods it introduces. Methods that were adapted from the accurate sciences, adapted to fit systems that contain, not just atoms and electrons, but human beings.
"And the third breakthrough is, of course, the one TOC is known for the most, its broad spectrum of robust applications."
He pauses, goes back to the podium and points to the three sentences on the screen. "New management philosophy, new research methods and robust applications. I think the best way to demonstrate them all is by raising the question, ‘What is the biggest problem managers are facing today?' Anybody care to answer?"
A white-haired person in the front row is the first to answer, "How to win against the competition!"
Rick doesn't recognize him. He must be some hotshot from industry. But his answer, as trivial as it might sound, makes sense.
"Any other answers?"
"My opinion is different," says another top manager. "I think that the real problem is how, exactly, we should go about inducing our people to improve. We hear so much about the importance of empowerment, communication, teamwork. At the same time we hear so little about how to actually achieve it."
"He has a point," Jim whispers in Rick's ear. Rick is not so sure.
"In my company, we know exactly how to handle the competitors, and we don't have any problem inducing our people to improve. Our problem is how to shrink the development time of new products. Does TOC have an answer to this problem? If so, I'm very interested."
"So am I," Rick thinks, and whispers to Jim, "Who is that guy?"
"That's Pullman, the chairman of Genemodem," Jim tells him. "Some of their people are in our program."
"My problem is different," says the person sitting next to Pullman. "My biggest problem is my clients. They drive us crazy."
More answers are coming from all directions. Johnny raises his hands. "Please, that's enough. I'm sure that all your answers have merit, but let's not forget the subject of this presentation."
When it becomes quiet, he continues. "TOC regards what was said here as just symptoms. It claims that they all stem from one, single core problem. If true, this is a very profound statement. How am I going to prove it?"
He starts to pace again. "Let me start with the observation that most managers want to manage well; I don't know many who come to work each morning saying ‘How can I mess things up today.' But what does it mean, to manage well? Many things. For our discussion, we don't have to list them all. It's enough to agree that two things are absolutely necessary conditions. In order to manage well, managers must control cost, and at the same time, managers must protect throughput—they must ensure that the right products will reach the right clients in a way that they will pay for them."
He stops, faces the audience, and using his hands extensively, he elaborates. "Suppose that one of your managers tells you that he has done an excellent job of controlling cost, that he cut expenses by twenty percent. By the way, he also enraged half your clients. Would you call him a good manager? Or, another one protected throughput, shipped everything on time, but for that he hired more people and put everybody on endless overtime.
Good manager?"
"I didn't know Johnny was such a good speaker," Rick comments to Jim, who gives him a look that says, I told you so. "Controlling cost and protecting throughput. Two absolutely necessary conditions. We cannot be satisfied with one without the other.
"What I would like to show you now is that each implies a different mode of management. So different that there is no acceptable compromise between the two. To demonstrate it let me use an analogy. Let's view your company as a chain. A physical chain. It's not difficult to see why such an analogy makes sense."
He goes to the overhead and puts up a blank transparency. "One link, the purchasing department, is in charge of bringing the materials. Another department, another link, is in charge of starting production. Another department, another link, is in charge of finishing production." As he speaks he draws ovals representing the links. A chain starts to form on the screen. "Yet other links are in charge of shipping, getting the clients, invoicing and collecting." The chain becomes longer. He puts the marker down and asks, "What is analogous to ‘cost' in our physical chain?" Without waiting, he asks another question. "What typifies cost? Cost is drained by each and every department. We pay money to and through our purchasing department, our production departments, and so forth. No department is free. And if we want to know the total cost of the organization, one way to find it is to sum up the cost drained by each department."
He pauses to check if the audience is with him. Satisfied, he continues, "In our chain, the closest thing to cost will be weight, each link has its weight. And if we want to know what the total weight of the organization is, one way to find out is to sum up the weight of all the links. What are we going to do with this analogy?"
"That's what I want to know," Rick whispers impatiently.
"We are going to use it," Johnny answers, "to demonstrate that controlling cost implies a certain way of managing." And without delay he continues. "Suppose that you are the president in charge of the entire chain. I'm working for you. I'm in charge of a specific department, a specific link. Now you instruct me to ‘improve!' And I am obedient. After some time I come back to you and tell you that with ingenuity, of course with ingenuity, and also time and money, I improved my link. I made it one hundred grams lighter. You are not interested in my link, you are interested in the whole chain. But when I tell you that I reduced the weight of my link by one hundred grams you know that the entire chain becomes lighter by that amount. Do you know what that implies?"
Rick doesn't.
"It implies a management philosophy. It implies that any local improvement automatically translates into an improvement of the organization. Which means that to achieve the global improvement, the improvement of the organization, we know that we have to induce many local improvements. I call it the ‘cost world."' He pauses.
"What is he talking about?" Rick is irritated. "Why so much fuss about something first-year students know?"
"Wait," Jim whispers back. "Johnny must have some point here, even though I don't see it yet."
"You're probably wondering," Johnny is smiling, "why I am hammering on the obvious. But it is so trivial to all of us not because it's the only management philosophy, but because it's the management philosophy we all used for so long. We have managed according to the ‘cost world' probably since the beginning of the industrial revolution."
He raises his voice. "What is not common knowledge is that ‘protecting throughput' implies a contradictory philosophy. It implies the ‘throughput world.' What is that?"
Everybody is now quiet. Even Rick.
"First, let's clarify to ourselves the essence of throughput." Pointing to the chain on the screen, Johnny explains: "One link is purchasing, another starts production, another finishes production, another assembles, still another ships to clients, et cetera. If one link, just one link, drops the ball, what happens to the throughput of the company?"
"Drops," many answer.
"When we deal with throughput, it is not just the links that are important; the linkages are just as important."
Rick finds himself nodding in agreement.
"What is the equivalent of throughput in our physical chain? What is determined not just by the links, but by the fact that they interact with each other? It's not weight. If we remove all interaction, all linkages, and we are left with just a pile of links, the weight is still the same. So what property typifies a chain? It is the strength of the chain. If one link breaks, just one link, the chain is broken; the strength of the chain drops to zero.
"Now, I have some seemingly trivial, but very important questions for you. What determines the strength of a chain?"
"The weakest link," somebody in the front answers loudly.
"And how many weakest links do we have in a chain?" Johnny stresses the word ‘weakest."'
"One."
Rick doesn't like Johnny's style. He would never stress such trivialities. But he must admit that it's effective. Johnny now has everybody's attention.
"Now," Johnny says, in an invigorating voice, "now, let's see what that implies. You are still the president in charge of the entire chain. I'm still in charge of just one department. Since there is only one weakest link, let's take the more general case, the case where I'm in charge of a department that is not the weakest link. And . . . and once again you tell me to improve. To improve the strength this time. And once again I come back and report to you that with ingenuity and time and money I improved. I strengthened my link. I made it three times stronger. Give me a medal."
He pauses and smiles. "Remember, you are not really interested in my link. You are interested in the chain. My link wasn't the weakest. If I made my link stronger, how much did I improve the strength of your chain? Nothing. Absolutely nothing."
Jim looks at Rick. "I told you." Rick doesn't respond. His mind is racing.
"Don't you see what we are facing now?" Johnny starts to pace again. His strides are full of energy. "Most of the local improvements do not contribute to the global!" he almost shouts. "And we do want the global, we do want the organization as a whole to improve. Now we know that since any improvement requires attention and time and money, the way to improve the total organization is definitely not through inducing many local improvements, the more the better. That's not the way."
"Interesting," Jim says to himself.
"So where do we stand? In order to control cost, managers must manage according to the ‘cost world,' while in order to protect throughput they must manage according to the ‘throughput world.' Can they manage according to both at the same time?"
Nobody volunteers even a speculation.
"We try," Johnny sighs. "We definitely try. For example, are you familiar with the term, ‘the end of the month syndrome'?"
Many laugh. Especially the guests from industry.
"At the beginning of the month," Johnny explains, "we control cost. Tight fist on overtime. Batch sizes must be optimal. But at the end of the month, forget it. Do everything to ship the damn goods out the door. Expedite these three pieces, go on overtime for the entire weekend. Ship!"
Johnny lowers his voice. "What happens? At the beginning of the month these companies are managed according to the cost world, at the end of the month according to the throughput world.
"Fewer and fewer of these companies survive today. Why? Because compromises that were acceptable yesterday are intolerable today. And not because we have become more fussy, but because our clients have. Ten years ago we shipped eighty percent on time and everything was okay. Today we ship ninetyfive percent on time and they still dare to bitch and moan. Ten years ago we shipped the best quality we could produce. Today if we ship that same quality our clients will ship it back. Protecting throughput has become much harder. The margins that enabled us to live with compromises are no longer there.
"But let me prove to you that there is no compromise between the cost world and the throughput world. Not even theoretically. Do you want to see the proof?"
"Yes," the auditorium echoes.
Johnny takes a handkerchief out of his pocket and wipes his forehead.
"For that, I first have to direct your attention to another topic. That of focusing."
Rick straightens in his chair. Maybe he can pick up a clue that will help in his subject.
"We all know that focusing is important." Johnny speaks softly. "A manager who does not know how to focus will not succeed in controlling cost and will not protect throughput. But what is focusing for us? We have come to know it as the Pareto principle. Focus on solving twenty percent of the important problems, and you'll reap eighty percent of the benefits. This is a statistical rule. But those who teach statistics know that the twenty-eighty rule applies only to systems composed of independent variables; it applies only to the cost world where each link is managed individually.
"What about the throughput world? Since in our organizations we do have many more than five links, it's obvious that improving twenty percent means that many of these improvements will not contribute to improving the performance of the organization as a whole. Linkages are important, the variables are dependent. The Pareto principle is not applicable. "So how can we find out on what to focus? What process can we use?"