Authored by Ravi Gilani, Founder and Managing Consultant, Goldratt India and Ira Gilani, Director, Goldratt India
This article was originally published in Outlook Business Magazine.
I have often observed during my interactions with business leaders that they correctly understand the Theory of Constraints (TOC) to be a management philosophy that looks at an organisation as a chain, where identification of the weakest link and exploiting it suitably can lead to unprecedented improvement in the performance of the system. Yes, that might be an accurate description of TOC, but its scope is much wider than that. Under TOC, there is a fundamental belief that every system is inherently simple. Dr Eliyahu M Goldratt, the founder of TOC, postulated that as there are no conflicts in hard sciences, there must not be any conflicts in the real world. In case we do find one, we should look for the wrong assumptions — one set of assumptions has to be erroneous. Once we are able to surface them, invalidating assumptions is not a Herculean task and, thereby, conflicts can be eliminated. Uncovering these deep-rooted hidden assumptions, invalidating them, not accepting status quo and challenging industry practices are some of the traits one would associate with TOC practitioners.
As a management consultant, these days the common grouse I hear is about the poor macro environment, lack of demand, stagnation of economy, policy paralysis, etc. I am often asked if TOC can help companies in such an environment of multiple constraints. I urge them to introspect instead of blaming the external environment and factors that are not under their control.
Blame it on demand
Most organisations today complain that they are unable to grow because demand is an issue. Though I agree, I would like to challenge the corollary that since organisations cannot secure fresh orders, maintaining or growing profitability is a challenge.
Let me explain. If order flow has reduced significantly, there has to be excess capacity in the system. In other words, companies should be able to deliver existing orders faster and more reliably. But, in reality, how many organisations are able to achieve on time in full (OTIF) of close to 100%? In my 20 years of consulting experience in the manufacturing sector, I have rarely seen organisations achieving OTIF above 50%. When some of my potential clients argue that this is not the case, I ask them that if they are so sure of delivering reliably, would they be okay with accepting 30% of order value as penalty for a delay of one day or delivery of even one piece less. Bedford, a privately-owned company in central Pennsylvania, manufactures structural fiberglass products to serve a wide range of applications and markets. It offers nation-wide distribution through warehouse facilities from coast to coast. The company not only has a unique standard structural performance guarantee, but also is willing to pay a heavy penalty for each day’s delay.
Imagine if one of your competitors were to actually offer this — what would happen to your business? Or, if you could offer this to your customers, what would be the impact on your business? Needless to say, it is assumed that you would then try to develop a delivery process that helped you consistently avoid paying a penalty.
Blame it on the slowdown
These days, whenever I ask people in the industry how their business is doing, the standard response is: the market is in the dumps. This is akin to a father asking his son, “How much did you score?” and the son responding, “Shyam failed as well!”
It is very easy to pinpoint the external environment as the cause for our problems (low sales, low profits). Whenever I ask any salesperson in India or abroad why his or her company is receiving fewer orders these days, I get every possible reason as to why business is slow. Not once have I met a sales head who has confessed, “I do not know how to sell”.
It is easy to pinpoint the external environment as the cause of our problems. Not once have I met a sales head who confessed: “I don’t know how to sell”
Let us dive a little deeper into this matter. In business, you make your money only when you provide a solution or a product that addresses somebody’s needs or problems. If the consensus is that the overall magnitude or quantum of pain in the world is increasing, then the opportunities for making money should increase, and not the other way around. Pain or opportunity may shift, but avenues for making money will only multiply. In the 1980s, the waiting time for getting a phone connection was about seven to 10 years. Today, getting a phone connection is a breeze. Though the pain of getting a phone connection has disappeared, a new pain has surfaced: unwanted calls, SMS, mobile fraud, viruses and radiation, to name a few.
To put it differently, I believe that the recession is a state where consumers are no longer excited by the current goods and services in the market. Firms that are able to solve a customer’s pain will be able to command a higher price, no matter what the economic conditions. Of course, to be able to do that, marketers and decision makers need to know the pain points of their customers and develop capabilities to tackle the same.
Just remember that there were overnight queues outside Apple’s stores for buying the iPhone when it was launched in 2007. Again, in 2012, there were queues for buying the new iPad. So much for a slowdown. The real issue is perhaps sticking with our deeply held beliefs.
Most sales managers confess that they are forced to reduce prices to procure orders. Do you know their underlying assumption? More often than not, the assumption is that their product has no competitive edge other than lower prices. (Think about it, does a sales guy ever suggest an increase in prices?) Though not necessarily easy, the answer is quite simple. If a product or service does not have any other competitive edge other than a lower price, then the company needs to work towards creating one. Yes, it may take some months or even years. If not, what is the alternative — can a company sustain itself in the long run without a competitive advantage?
So the next question is: can one create a competitive edge? My favourite example is about an organisation operating in a highly commoditised business — milk. There is a company known as Chitale Bandhu in Pune. When I started my career in Pune in 1972, Chitale Bandhu was commanding a 15-20% price premium for home delivery of milk. Today, not only does it command a similar price premium but also boasts of a waiting period. It must have some competitive edge that customers are willing to wait and pay a premium. The point here is: not only has the company created a competitive edge, it has been able to sustain it over the past 42 years. Now, the typical defence to that will be: “We are not dealing with households, we negotiate with hardcore professionals in the B2B space”. For these sceptics, I can share the case of a privately-owned firm in the extremely competitive automotive component manufacturing business that has been able to increase its profits continuously for the past 37 quarters. The core issue is not the volatile external environment; rather, it is our erroneous assumption that the cause of our problems is outside our control and we have limited ability to influence the environment. Those familiar with Steven Covey’s work know of this concept as ‘circle of concern vs. circle of influence’.
Over the past 15 years, ever since I was besotted with the TOC concept, every year, at least one of my clients has achieved an order of magnitude improvement in its financial performance. They are also operating in an ostensibly volatile environment, but what sets them apart from competition is their mindset.
Measurements: Global and Local
In the last quarter of calendar 2008, Toyota Motor Corporation achieved two distinctions. First, it became the largest seller of vehicles, overtaking General Motors. Second, it declared a loss in the quarter, after 70 years. While ‘sales’ is definitely a means for achieving the organisational goal, it is definitely not the goal.
Most organisations regularly invest significant time in tracking a large number of local parameters with the assumption that the more we measure them, the better our decision-making will be. A few years back, I was invited by a reputed automobile manufacturing organisation to help it turn around its auto component manufacturing division, which was losing money continuously for the previous seven years. In my meeting with the senior management team, I asked them about their goal. The team was extremely knowledgeable and articulate. When asked how they measure their organisational performance, the answer was ‘tonne of products made and sold’. The team was quite open to changing their organisational performance measure from tonne to a financial parameter.
The core issue isn’t the volatile external environment; it is our assumption that the cause of our problems is outside our control and we have limited ability to influence it
However, there was nearly a revolt when I suggested that all of them should be evaluated and rewarded by the achievement of the overall organisational goal and not by their respective functional KPI (key performance indices). I requested each one of them to share how many promotions each one got during the same period that the unit was going downhill. The shocking answer: the average number of promotions was two, and some even got three promotions. How come? The answer is painfully obvious — local parameters were not aligned with the global parameters. This is an illustration that excellent local performances do not necessarily measure up to a good global performance.
My mentor, Dr Goldratt, repeatedly emphasised that measurements drive behaviour. When asked to share what is TOC in one sentence, his response was that one sentence is too long, one word would suffice — focus. That being the case, organisations today should worry more about getting their house in order rather than delude themselves in a recessionary cocoon.