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TOC, it's enterprise wide!

Q1: Why do most Continuous Improvement success stories tend to be limited in scope rather than spreading throughout an organization?

Q2: Even for the rare organization that does successfully integrate the necessary concepts throughout its organization, why is it so difficult to spread these concepts onward through the supply chain?

Dr. Eli Goldratt, author of the best selling book The Goal and originator of the concepts that make up what we usually refer to as TOC, offers his answer to these very important questions. His major premise is that most managers have a limited view and, therefore, a limited understanding of the organization. They understand the things that effect success and failure in their domain, but not in the global view. Usually different departments don’t even "speak the same language."

These sessions are designed so that if your core management team will attend all 8 sessions, they will learn how TOC enables everyone in the company to speak a common language and to grasp the global perspective. This will make it possible for everyone to make better decisions! That is, to decide what to do at the local level based on the impact on the organization as a whole!

Week 1: Operations

Brief Summary

Dr. Goldratt emphasized the importance of taking a "systems" or "holistic" approach to solving problems in operations. He took as an example, four problems that seem to plague all manufacturers in the steel industry world wide. Most companies tend to attack these issues in isolation. Goldratt showed a "Current Reality Tree" that used solid cause-and-effect logic to show that there is a core problem that underlies all 4 issues. That problem was the use of an efficiency based measurement for the industry standard of success/productivity.

To have correctly identified the core problem is necessary, but not sufficient to solve it. Goldratt went on to show how the TOC Thinking Process tools, the "Evaporating Cloud" in this case, can be used to show why this problematic measurement continues to be used by everyone in the industry, and has for decades, in spite of the fact they

know it causes problems. The Evaporating Cloud showed clearly the core conflict, and allowed Goldratt to identify the key assumption that perpetuates  this conflict. It is ability to invalidate this assumption that has the power to evaporate the cloud...that can take away the "fog" that is preventing companies from seeing their way out of this conflict. To invalidate the assumption, Goldratt showed several examples of how pursuit of efficiency can lead an operation the wrong direction, i.e. away from its goal.

Once Goldratt had established what needs to be changed, he discussed what to change to. He explained the concepts of a Bottleneck, of Drum-Buffer-Rope and Buffer Management, and the Roadrunner work ethic. He also discussed key operational and tactical issues when implementing Drum-Buffer-Rope.

Week 2: Finance & Measurements

Brief Summary

Dr. Goldratt explained that Finance is the scorekeeper for the organization. They issue numbers that are judgements of the decisions made in 5 key areas:
- the system as a whole
- investment in equipment
- make-buy alternatives
- profit centers
- product/service profit

Goldratt took the position that if you ask managers is there is a problem with the measurements they get from the accounting department, they will say, "Yes. The problem is it takes too long to get the reports." Controllers may even say that there is a problem with the accuracy of the data they were given as input. But there is no perceived problem with the validity/accuracy of the output measurements.

Goldratt attacked this notion by giving examples of how the

typical company routinely gets numbers from their financial reporting system that lead them in the wrong direction—that is, these numbers support decisions that actually decrease profitability, not increase it.

Goldratt gave examples of faulty decisions in all 5 areas; and, in all five areas he identified the same assumption that causes the problem. Goldratt then went back to all 5 areas and showed how TOC will change the outcome on these important decisions. He even touched on "transfer pricing" and said he will discuss this in more detail in session 4 on distribution.

Goldratt concluded by urging participants to beware of judging actions based on local impact. Use throughput, inventory and operating expenses as the guide instead. He urged people to reassess all requests for expenditures currently pending in their systems, and to reevaluate the contribution of your various products and/or services.

Week 3: Project Management/Engineering

Brief Summary

Dr. Goldratt began by saying that project management is a topic with very broad application: installing a new piece of equipment is a project; switching software systems is a project; adding onto the facility is a project; introducing a new product or service is a project. Probably all of us are involved in projects in one way or another. But the projects are so different! Is there enough commonality that will allow there to be a universal solution to the problems faced in various projects?

To answer this Goldratt shared a list of complaints he got from a friend of his who manages projects. He then made the observation that each of us could probably have composed the exact same list, even though we work on totally different kinds of projects. These complaints are called "Undesirable Effects" or UDEs in TOC terminology. An UDE, said Goldratt, is really a title for a conflict we find ourselves stuck in. So he chose 3 of the UDEs and created the Evaporating Cloud for each so that the inherent conflict would be evident. Next Goldratt used the 3 clouds to create a "generic cloud," that is, a description of the core conflict that underlies all the problems in project management.

As always, the next step is to surface the assumptions behind the connecting arrows. He reminded us that during Session 2, he showed that the key assumption that gets us in trouble on measurements is the fact that we typically believe the best way to judge the impact of any action on the global system is to measure the local impact of that action. Said another way, we typically

believe that the global impact is the sum of all the local impacts. Turns out that the erroneous assumption behind the core conflict for managing projects is a variation on this assumption.

After identifying the faulty assumption, Goldratt set out to prove it wrong. To do so, he discussed the concepts of "safety" in time estimates, the student syndrome, and Parkinson's law. He also showed the difference between a linear series of dependent events where statistical fluctuations do average out, and typical project networks that involve independent events (such as integration and resource dependencies) where statistical fluctuations do not average out. A computer simulator was used to show just how bad the situation is, and how our traditional efforts seem to create a downward spiral that makes things worse. And, in so-called "multi-project" environments, the situation is much worse because of "bad multi-tasking."

In order to get out of a downward spiral, or a self-reinforcing negative feedback loop, it is necessary to do something that is counter-intuitive, Goldratt said. You must do something that seems backwards. It was in this light that he introduced the concept of Critical Chain. He explained the necessary changes in human behavior, the buffering required, and the necessary measurements. He then used the computer simulator to show how adding each of these factors to the solution produced significant improvements in due date performance.

Week 4: Distribution and Supply Chain

Brief Summary

The constraint of a supply chain, of course, is usually the clients who come to buy the products/services. In order to Exploit that constraint, it is necessary to have the right product in the right place at the right time.

Dr. Goldratt developed the generic conflict for supply chains, which revolves around holding the right amount of inventory... in the right places... at the right time. Conventional solutions have not been able to resolve this successfully in most cases.

The TOC Distribution solution is based on moving the supply chain from a push system to a pull system and an understanding of variation in demand at the different points of the supply chain.

Dr. Goldratt discussed operational measurements like "throughput dollar days" and "inventory dollar days." He also discussed the impact of the Distribution solution on the manufacturing activities of production scheduling, expediting, seasonality, efforts to improve lead time, quality improvements, etc.

Finally, Dr. Goldratt tackled a very difficult question: how do you price things at different levels in the supply chain? He answered the question for two circumstances. The first is for instances where each link in the chain is an independent company; the second instance is for "internal" supply chains where several of the links are part of the same company. His solution to this "transfer price" dilemma is very provocative.

Week 5: Marketing

Brief Summary

Defining Marketing was Dr. Goldratt's first task because, he said, it is so often confused with Sales. He uses an analogy that spreading corn on the ground to attract ducks is Marketing, while sales is the equivalent of shooting a sitting duck.

What then is the core problem of marketing? What needs to be changed? He brought the issue back to the assumption that the 'ensuring local optimum is the best way to ensure global optimum.' Dr. Goldratt explained the marketing equivalent of this assumption and diagrammed the Evaporating Cloud. He then attacked the entity in the Cloud that contained the words "product margin." But even after replacing the wording, the basic conflict still exists. Which means there is no easy way out of this conflict, it must be dealt with. Goldratt's breakthrough idea (called an "injection" in TOC terminology) is to choose the "customer's perception of value" side of the cloud.

In other problems like production or project management there was an assumption that could be invalidated and the Cloud was then evaporated. This meant that we didn't have to deal with the conflict; rather, a "generic" solution is available that includes certain policies, measurements and behaviors that will resolve the core problems. (There will, of course, be obstacles and negative branches that need to be dealt with individually; but the basic  changes are the same for everyone.)

This is not the case in Marketing. A company must create a customized solution to each marketing case. Not only is it the case that what works for company ABC will not work for company XYZ; what works for company ABC in one market will not work for company ABC in another market.

That's the "bad news." The good news is that TOC does provide a well defined process for developing a customized market solution— a so-called "unrefusable offer." Dr. Goldratt went through that process in detail and illustrated it with an actual example from a very significant, unnamed client. But, we were warned, when the unrefusable offer is completed, the process is NOT complete.

Dr. Goldratt then discussed the concept of "segmentation." He distinguished it from a "niche." He illustrated the difference using a couple examples from the airlines, his own satellite program, and the computer industry.

Dr. Goldratt closed by giving a little look forward to the last session on strategy and sowing the seeds of how the key concepts of getting a competitive advantage in a particular market tie directly into the concepts necessary for a long-term corporate strategy.

Week 6: Sales

Brief Summary

Dr. Goldratt began considering which type of sales is more difficult: internal selling of ideas and decisions; or external selling of products and services. He explained the one you choose depends on your perspective. Both are difficult. He covered internal sales first because almost every participant is involved in selling ideas or decisions, and because it turns out that the solution to this problem is actually the "generic" solution to selling (which means that the external selling is actually a derivative of this generic solution).

The first premise that Dr. Goldratt proposed in this session is that the strongest force for improvement is the resistance to change. This centered the discussion around the 6 layers of resistance. It was shown how the process of selling your ideas is actually a very ordered sequence of overcoming the 6 layers of resistance. To skip any layer usually means you will not get buy-in to your ideas. This is especially true of the first two layers...which are often skipped because it is believed that it is quite obvious what the problem is and what the direction of the solution is.

The external selling process is, as stated earlier, an adaptation of the process of selling internally. Thus it also is a process of taking

the prospect through the 6 layers of resistance (also called the 6 stages of buy-in). Dr. Goldratt quoted research done by Dr. Neil Rackham published in the book Spin Selling (McGraw-Hill, 1988). This study showed the core conflict of the seller revolves around when and how to "show" the product/solution to the prospect.

To illustrate how the prospect's resistance to buying (i.e. the buyer's resistance to change), Dr. Goldratt used an example of a "mafia" offer. In this case, the seller expects to be readily accepted; however, the chances of resistance are even higher in such a case. The answer was again to take the prospect through the 6 layers of resistance. First a seller needs to: build rapport to overcome layer 1; "set the stage" properly will overcome layer 2; bring the buyer to want the product/service by overcoming layers 3 and 4; and overcome layer 5 by closing properly. (If a seller encounters layer 6 from an external prospect, Dr. Goldratt did not offer much hope of completing the sale. However, he did say that when this happens, he believes it is usually caused by a failure to get full buy-in at an earlier layer —usually layers 1 or 2.)

Week 7: Managing People - Respect

Brief Summary

This may have been the most powerful session. Dr. Goldratt began by saying that managing people boils down to one word: respect! He then focused on two examples where employees do not feel respected: when their ideas are ignored; and, when they lack true empowerment.

In addressing the issues underlying why managers often times "ignore" someone's good ideas, Goldratt showed the conflict they face: on the one hand the manager wants to avoid pointing out any unintended negative consequences of the idea to avoid offending the inventor; on the other hand, the manager feels obligated to point out the negatives to insure positive results. To avoid confrontation, the manager often says, "Let me think about it."

Usually they do not think much more about it, and the person who proposed the idea feels ignored...disrespected. Goldratt showed a methodology of how to avoid offending the presenter AND pointing out the potential unintended negative consequences.

Regarding lack of empowerment, Goldratt focused on situations where a person comes to their boss with an urgent "fire" that must be put out. In most of these cases, it is an indication that there is a misalignment between the responsibility and the authority. That is, the person feels they are responsible for a certain outcome, but they don't feel they have sufficient authority over some key aspect of making that outcome become reality.

In this case, the evaporating cloud is used...twice. It is used the first time to understand the situation. There is a specific sequence used to fill in the boxes (called "entities") so that the conflict becomes clear. There is a specific arrow that is the likely location of the assumption that must be dealt with. Once the solution is discovered, the cloud is used a second time with the effected employee. The entities are revealed in a different sequence that is designed to induce the un-empowered person to create their own solution. Do so successfully will eliminate the misalignment and produce true empowerment!

Week 8: Strategy

Brief Summary

What is strategy? According to Dr. Goldratt, it is the direction you chose to the organization now and in the future. And what makes for a good strategy? There are 3 necessary conditions:
1. It provides a way to make money (or the appropriate goal unit) now as well as in the future.
2. It provides a secure and satisfying environment for employees now as well as in the future.
3. It provides satisfaction to the market now as well as in the future.

To many it seems that these necessary conditions are in conflict with each other. For example, in order to make money now and in the future it will sometimes be necessary (when markets drop drastically) to lay off employees. But doing so violates the 2nd necessary condition.

Dr. Goldratt examined in detail this conflict, which he calls the POOGI Cloud. He exposed the assumption that must be invalidated. He then went through the transition tree that must be followed to invalidate the assumption and to develop a "good" strategy that meets all 3 necessary conditions.

He illustrated many things, including his "green curve vs. red curve" comparison. He listed the primary barriers that must be overcome to make the sustained growth represented by the red curve a reality. Goldratt urged the audience to move on making this happen. In fact, he made a plea to all to help continue the development of knowledge in the TOC management arena. He asked all of us to help do three things:
1. Polish emerging solutions
2. Help construct new solutions
3. Suggest issues that need a solution.