"Let's try to do it together," I say. "Have you noticed the increase in finished goods that the division is holding?"
"Yes, I have," he answers. "But why are you surprised? It's exactly what should be expected. Sales are down and the pres-
335
sure to show profits is up, so they build finished goods inventory to generate fictitious inventory profits. I see what you mean. We can take the increase in finished goods as an indicator of the impact of the way we value inventory. Wow, it's about seventy days!"
"Lovely," I say. "Compare it to your four days of receivables. On what should you work? Moreover," I keep on hammering, "what is the impact on throughput?"
"I don't see any," he answers. "I see very clearly the impact on cash, on inventory, and on operating expense, but not on throughput."
"Don't you?" I say mercilessly. "What was the reason that they gave us for not introducing the new models? Can you re- call?"
"Yes," he says slowly. "They are convinced that introducing the new models will force them to declare all the old ones they're holding in stock as obsolete. That would cause a major blow to the bottom line."
"So, we continue to offer the old stuff rather than the new. We continue to lose market share, but it's better than to bite the bullet of write-offs. Do you understand now the impact it has on throughput?"
"Yes, I do. You are right. But Alex, you know what? With some extra effort I think that I can handle them both. I can work on the problem of the way we value inventory and at the same time arrange for more attention to the receivables."
He still doesn't get it but now I think I know how to handle it.
"What about the plant indicators?" I ask him.
"That's a real Pandora's box," he sighs.
"What is the damage there? Slightly bigger than four days? And what about the fact that sales continue to judge opportuni- ties according to the formal 'product cost' and desirable margins. Or even worse, that they will look for anything they can sell above variable cost. What's the damage there? And what about the transfer prices between us and the other divisions; that's a real killer. Do you want more?"
"Stop, stop," he raised his hands. "You made your point. I guess I was inclined to deal with the open receivables issue just because there I know what to do, while in all the others..."
"Afraid?" I ask.
336
"Frankly, yes."
"So am I, so am I." I mutter. "Where do we start? Where do we continue? On what should we concentrate first, on what sec- ond? It's overwhelming."
"We need a process," he says. "That's obvious. It's too bad that the five-step process that we developed turned out to be false. No... Wait a minute Alex, that's not the case. At the end, the problem was not wandering bottlenecks. It was insufficient protection for the existing bottlenecks. Maybe we can use that five-step process?"
"I don't see how, but it's worthwhile to check it. Should we head to the plant and give it a try?"
"Certainly. I'll have to make some phone calls, but it's no problem."
"No," I say. "I have some commitments for tonight." "You're right," he says. "It's very important but not urgent. It can wait for tomorrow."
"Identify the system's constraint(s)," Lou reads from the board. "Do we accept it as the first step?"
"I don't know," I say. "Let's examine the logic that brought us to write it. Do you remember what it was?"
"Roughly," he says. "It was something about the fact that we adopted throughput as the number-one measurement."
"I'm afraid that roughly is not good enough," I say. "At least not at such an early stage in our analysis. Let's try again, from first principles."
"I'm all for it," he groans, "But what do you call first princi- ples?"
"I don't know. Something basic that we accept without hesi- tation."
"Fine. I have one for you. Every organization was built for a purpose. We haven't built any organization just for the sake of its mere existence."
"Correct," I laugh. "Even though I know some people in some organizations who seem to forget it."
"Washington, you mean?"
"That too. I thought about our corporation, but who cares. Let's keep going. Another basic fact is that any organization is comprised of more than one person, otherwise it's not an organi- zation."
337
"Correct," says Lou. "But I don't see the point in all this. I can give you many more correct statements about organizations in general."
"Yes, you probably can, but look at the conclusion that we can derive already. If any organization was built for a purpose and any organization is composed of more than one person, then we must conclude that the purpose of the organization requires the synchronized efforts of more than one person."
"That makes sense," he says. "Otherwise we wouldn't need to create an organization; the efforts of individuals would suffice. So?"
"If we need synchronized efforts," I continue, "Then the contribution of any single person to the organization's purpose is strongly dependent upon the performance of others."
"Yes, that's obvious." With a bitter smile he adds, "Obvious to everybody except for our measurement system."
Even though I wholeheartedly agree, I ignore his last com- ment. "If synchronized efforts are required and the contribution of one link is strongly dependent on the performance of the other links, we cannot ignore the fact that organizations are not just a pile of different links, they should be regarded as chains." "Or at least a grid," he corrects me.
"Yes, but you see, every grid can be viewed as composed of several independent chains. The more complex the organization -the more interdependencies between the various links-the smaller number of independent chains it's composed of."
Lou doesn't want to spend too much time on that point. "If you say so. But that's not so important. The important thing is you've just proven that any organization should be viewed as a chain. I can take it from here. Since the strength of the chain is determined by the weakest link, then the first step to improve an organization must be to identify the weakest link."
"Or links," I correct. "Remember, an organization may be comprised of several independent chains."
"Yes," he agrees impatiently. "But as you said, the complex- ity of our organizations almost guarantees that there are not many of them. In any event, it is taken care of by the S in paren- thesis that we put at the end of the word 'constraint'. Fine, Alex, what do we do about the measurements?"
"Measurements?," I say in surprise. "Where did they come from?"
338
"Didn't we agree yesterday that the distorted measurements are the biggest constraint of the division?"
Bob Donovan is right. Lou certainly has a fixation on mea- surements. "They are definitely a big problem," I say carefully. "But I'm not convinced that they are the constraint . "
"You're not?" Lou is astonished.
"No I'm not," I say firmly. "Do you think that the fact that most of our products are already outdated in comparison to what the competition is offering is not a major problem? Don't you realize that the attitude in engineering, claiming that the basic rule of nature is that a project never finishes on time, is an even bigger problem. And what about marketing, have you seen any marketing plan that has any chance of turning the situation around?"