TOC4U-Focus: Websites I Recommend

TOC4U-Focus: Websites I Recommend: "1. On-Line Guide to the Theory of Constraints by Klevyn Youngman When I read your pages on healthcare I won..."

“Here is Edward Bear, coming downstairs now, bump, bump, bump, on the back of his head.  It is, as far as he knows, the only way of coming downstairs, but sometimes he feels that there really is another way, if only he could stop bumping for a moment and think of it.  And then he feels that perhaps there isn't.” ‑‑ A. A. Milne.

Does our Inertia Prevent (or Slow Down) Improvement?

There are many historical examples of inertia. Examples of new ideas that simply could not make their breakthrough because accepted wisdom, the current paradigm, was so powerful. Human history is littered with examples. What does this mean for business ideas?
The Greek philosopher Democritus first suggested the Germ Theory of disease. In the fourth century B.C. he proposed germ-like substances cause illness. More than two millennia later, in the latter half of the nineteenth century, the French chemist and microbiologist Louis Pasteur and the German physician Robert Koch were finally able to establish the theory, based on microscopic observation and experimental evidence. Even then they still faced skepticism and doubt.

Edward Jenner

“Which MBA? Think Twice!”

 The title is from an article in the Economist (Think-Twice).  The author recommends that most applicants should toss the application form away and enhance their value by gaining more experience. Is it really true that the MBA has lost its lustre and that MBA schools are doing poorly? If it is true, why is it so? For an excellent book on project management coupled with a discussion of business schools and their value to business I recommend Dr. Goldratt’s book, ‘Critical Chain’.

What Might be Missing in MBA Courses?

The Article in the Economist comes to the conclusion that a person is better of gaining more experience working at the sharp end because the return from an investment in an MBA is no longer attractive. This may be so and the chart in the Economist shows it is so – salaries of MBA graduates are significantly lower upon graduation than their last pre-MBA salary. As the economist puts it, “The return on investment on an MBA has gone the way of Greek public debt”.
My problem with this is why has the value of an MBA ‘disappeared’?

Goldratt once called Accounting public enemy number 1. Many of you will be familiar with standard costing (and other methods). Is standard costing helpful or not when you are making your decisions? Accountants are usually very aware of the problems and pitfalls of standard costing, but their colleagues in the other business area place much to high a credence on such numbers. Is this true? What do you think?

Standard Costing - is it a Waste?

Standard costs are developed before a new fiscal year starts. Finance spends considerable effort (possibly together with engineering) to re-estimate the cost of producing a product. They do this for all products - possibly grouping products into product groups to reduce the amount of workload.
Standard cost is based on a lot of assumptions - all of them subject to error, and / or uncertainty. Costs are allocated to products based on:

1. The sales forecast

Swiss Business Under Threat V

One Swiss Franc is currently worth more than one Dollar. The Euro has also significantly weakened vs. the Franc. The Swiss economy is dependent on exports that must now be under threat due to the high price of Swiss goods. If Swiss industry does not find a good solution the strong economy there will suffer greatly. How quickly can Swiss industry react successfully? Since I started this series the Swiss Franc has strengthened making the job even more difficult! (Fortunately imported materials don't increase in price the same way. The short article below counters common practice - the solution to cost problems is to work harder and reduce cost (lay off people).

Be Smart, Don’t Work so Hard!

Swiss industry should refrain from an attempt to cause everyone to work harder. As we will see below, that cannot work. Most of the organisation must be idle some of the time in order to get the most from the constraining or limiting factor. The opportunity for Swiss industry is most factories around the World act as though a resource standing idle

Swiss Business Under Threat IV

One Swiss Franc is currently worth more than one Dollar. The Euro has also significantly weakened vs. the Franc. The Swiss economy is dependent on exports that must now be under threat due to the high price of Swiss goods. If Swiss industry does not find a good solution the strong economy there will suffer greatly. How quickly can Swiss industry react successfully?

4. Don’t Waste the Capacity of your Product Development

Project organisations are not all that different from production. Projects flow through the system and management puts a lot of pressure on resources. A resource standing idle is a major waste is the rule also here.

Similar to production a reduction in the amount of work in process will speed up the flow, make the project environment more reliable and increase capacity through a less chaotic process. So, to not waste your new product development capacity projects must be prioritized (each with a unique priority) and 25 -50% should be stopped (frozen). The frozen projects are reactivated one at a time as the active projects are completed. (Very few project environments have the correct amount of project load in their system – most are overloaded leading to longer lead-times and lost capacity.)

This seems to be detrimental to the frozen projects but experience tells us that not only will the still active projects be finished much sooner, but the frozen ones will also finish earlier than they otherwise would. Many project environments have increased their capacity by 25% and more with this simple step. A few additional steps allow early warning of trouble – which allows operational priorities to be set so that all projects finish on time or the few that are still late are much less late. Look around for explanations about the Critical Chain methodology. Some of the rules are described in the risk-averse articles.

Here are some reading recommendations:

1. “Critical Chain” by Eli Goldratt
2. “Project Management in the Fast Lane” by Rob newbold
3. “Critical Chain Project Management” by Lawrence P/ Leach
4. "Critical Chain - Beschleunigen Sie Ihr Projektmanagement" von Uwe Techt und Holger Lörz

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Swiss Business Under Threat III

 

One Swiss Franc is currently worth more than one Dollar. The Euro has also significantly weakened vs. the Franc. The Swiss economy is dependent on exports that must now be under threat due to the high price of Swiss goods. If Swiss industry does not find a good solution the strong economy there will suffer greatly. How quickly can Swiss industry react successfully?

3. Stop Wasting Sales’ Weakest Link

The  two tactics of the 1st two posts about Swiss Business under Threat can add a lot to the bottom line, but they will not bring much if demand is not there and cannot be created easily. (The speed and reliability we achieve in point 1 creates a competitive advantage that will attract more sales. But if 20 – 50% capacity is discovered sales will have a huge job – they need to develop new customers at a much higher than usual rate.)

In reality the sales process is not much different from production. To gain a new client there are usually a series of steps the sales organisation must go through before the client will buy. One can look at this process as similar to production (or possibly even projects). In any case there is usually a limiting factor that is slowing down sales gains.

If the process is similar to the production process then wasting the limiting factor of that process will damage the ability of the company to gain new customers. Customers are gained more slowly and some will be lost prematurely because they are fed up with a too lengthy process.

Go through your sales process steps – from identifying potential to closing the deal and estimate the sales organisation’s capacity at every step. This does not have to be 100% accurate. You need to know the relative capacity of each step. Once you know where the weakest link is, then you can analyse how capacity is being wasted there, how you can exploit the available capacity better or how you can add to capacity. As in production the decision how to get the most out of the limiting factor will determine how everyone else should behave. The impact here can be the same as in production – a significant capacity increase coupled with a faster process.

There is another aspect that can accelerate sales gains. The speed and reliability advantages achieved in points 1 and 2 are advantages that must be sold correctly. They will help accelerate your business.

Careful! If you are successful with these 3 points companies will want to buy from you. Your capacity can be filled very quickly. Quickly or slowly you must monitor capability and NOT take on new business when the risk of missing due dates becomes too high. Due date reliability starts to suffer at about 85% of your (new) system (sales, production ...) capacity. Don’t waste clients by becoming unreliable again.

Please don't forget clients have very long memories (like elephants!) when they experience hardship! Don’t risk customer loyalty; its better to slow down sales for a while than to annoy them. Regaining a customer, particularly if his business was damaged, will not be easy!

A book recommendation: "The Cash Machine"  by Klapholz and Klarman

We wanted to see moose. They cross roads frequently and we were told to be careful. However, not a single one to be seen. So we took tis picture!

Technorati Tags: Availability, Continual Improvement, Cost, Distribution, Focus, Goldratt, Production, Sales Process, Sales

 

Finished Inventory is much too High!! - Analysis III (Conclusion)

By Eli Schragenheim

This is a case study by Eli Schragenheim that he has allowed me to publish here. Your goal is to analyze the current situation, comment the proposals and develop what you believe are the best strategy and tactics for the company to pursue. The first post is the current situation. (If you are interested in such business cases and their analysis I recommend Eli's book, "Management Dilemmas". The book has many different case studies for you to work through. Eli gives his analysis which he does not claim to be the best possible - nevertheless they are thought provoking.

 

Our Improved Proposal

1. Build a central warehouse with finishing capabilities in the US (currently half the business)
2. Using the Theory of Constraints distribution solution maintain a maximum of 1 weeks inventory for clients in the US and Germany (nearly 80% of the business). 
   NB. Clients forecast for next week’s consumption is accurate.
3. Allow these clients to reduce their commitment to Lisbon Motors inventory from 4 weeks to 1 week (or eliminate this commitment entirely).
   Clients can change to new models without having to pay for 4 weeks of inventory they now don’t need.
4. Introduce penalties if a required motor is not immediately available at the client. (This penalty should be high enough to discourage competitors).

With such an offer Lisbon Motors should be able to...

1. Maintain the loyalty of existing clients – the clients no longer have to pay for about 4 weeks of stock when they go through a model change,
2. New models can actually be introduced more quickly,
3. Shortages of motors no longer occur – as guaranteed by the penalties.

Would this allow Lisbon Motors to “steal” clients from their competitors? Would a 15% increase in sales be a conservative estimate for gains Lisbon-Motors will make in their market? 15% more sales in a stable market would increase Lisbon Motors’ share of the Global market from 11 to 12.7% - will competitors even notice? Would a 1% price premium relative to competitors be justified and not stop the 15% growth? Might the answer to all these questions be a clear “YES”?

What are the Costs and Benefits of our Improved Proposal?

A. Benefits:

1. 1% higher average price (Germany, Eastern Europe and the US) or about 1m$.
   The other markets (Asia) need to be considered – does Lisbon Motors want to compete there?
2. The remote central warehouse in the US needs only 2-3 months inventory. Because only 4 basic models need to be stocked inventory requirements will be further reduced. More than 20m$ of cash will be set free and Lisbon Motors makes a 1m$ savings in interest expense (5% assumed).
3. Since uncompensated scrapped material is no longer an issue the company saves 2.5m$.
4. 15% growth results in 18m$ more sales of which more than 8m$ of margin remains after deducting materials costs. Since no additional operating expenses are necessary to produce this volume (Lisbon Motors has plenty of capacity) all of this 8m$ goes to the bottom line. Will the much better service cause the 15% growth?
5. There will be savings in transportation costs because of the many fewer scrapped motors – 9% of the 12m$ transportation costs or about 1m$.
6. The total of these benefits comes to: 13.5m$.

B. Added Costs:

1. There is an added investment of .5m$ due to the necessary engineering changes to the production process.
2. Renting a US warehouse and the necessary production (finishing) facilities could be up to 1m$
3. Hiring more expensive direct labour in the US (for finishing) means the additional labour cost is not 960k$, but more like 1.5m$
4. Lost margin because of higher materials costs of up to 3m$/year.
5. The total of these added costs comes to: 6.0m$.

C. The Net Benefit:

The net benefit comes, conservatively, to 7.5m$ annually (however, if the new offer is really attractive to Lisbon Motor clients much more seems to be possible)! Net profit increases from 2.5m$ (on 120m$ sales) to 10m$ on 138m$ sales. Return on sales increases from 2.1% to 7.2%.

D. Were the Criteria Met?

1. The new offering must be difficult for competitors to copy.
2. It must give new added value to clients
   Otherwise continued price pressure will undermine any cost improvement
3. Clients must understand and appreciate the value of the new offer
4. The offer must be good enough to lead to additional sales
5. Must show significant improvement to the bottom line improvement even with a conservative assessment
6. The offer must not add significant risk
   There is some risk because the investment must be made and the US warehouse needs to be committed to, for at least some period of time before savings and added income are realized. However, in Europe there is no need to commit to a warehouse and there is usually a way to test the new offering without having to invest in the engineering test.

Technorati Tags: Case Study, Continual Improvement, Cost, Costing, Effectiveness, Efficiency, Goldratt, Inventory, Risk Management, Speed, Theory of Constraints, TOC, Production

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Finished Inventory is much too High!! - Analysis II

 

By Eli Schragenheim

This is a case study by Eli Schragenheim that he has allowed me to publish here. Your goal is to analyze the current situation, comment the proposals and develop what you believe are the best strategy and tactics for the company to pursue. The first post is the current situation. (If you are interested in such business cases and their analysis I recommend Eli's book, "Management Dilemmas". The book has many different case studies for you to work through. Eli gives his analysis which he does not claim to be the best possible - nevertheless they are thought provoking.

Analysis of Ernesto’s Proposal:

Advantages:

• Lower inventory due to a 1-week cut in replenishment time.

1. Significant for the German market as inventories there can be reduced by a considerable amount without jeopardizing availability.
2. For all the rest (the majority of clients) the inventory saving is small – only 1 week out of 8 saved.
3. Bottom line Lisbon Motors saves some of the 30m$ of cash tied up in inventory plus a small amount of the 3m$ of scrap costs.

• Is it worth it?

1. 10% added labour costs an additional 960k$ (10% of 9.6m$).
2. The additional materials cost comes to about 2m$ (3% of 60m$ of materials cost)
3. There is an initial investment of 500k$
4. Lisbon Motors would not realize a reduction in cost, and
5. No additional value is created for clients – so price pressure would continue and there is no real reason for new clients to buy from Lisbon Motors.

• Can we improve upon Ernesto’s good start?

Sources of Ideas for an Improved Proposal:

A. From the Story:

1. The threat that a client can terminate a contract immediately if there is a failure in availability indicates how important this is to washing machine manufacturers. They probably have a similar situation with their customers!
2. That clients will compensate for 4 weeks of motor supply when they change models is a further indication of the first point AND probably a huge expense item for washing machine manufacturers. 1-month supply of motors is about 8% of a years demand, a motor may be 20% of the sales value of a washing machine – so 1 model change takes 1.5% of sales of profits (15% of profits if profits are10% of sales!). That is just 1 model change – it doesn’t say how many model changes there are, but there are many. (If model changes did not cost so much in motor compensation a washing machine manufacturer could increase the rate of changes and possible gain a marketing advantage. 
   All in all this compensation for motor supply at model changes is very expensive – for both parties. (Somehow clients will eventually carry the cost of motor write-offs by suppliers.)
3. Ernesto’s idea reduces the need for stock dramatically because only 4 basic models (to be finished when demand is known) need to be held.
4. The US is far from Portugal in terms of shipping time. The number of motors “on the way” cannot really be reduced, but the 4 basic motors stocked in the US would achieve a major reduction in inventory and opens the possibility (by finishing locally) of very short lead-times to clients (from a local stock). Clients need to hold much, much less to ensure availability as the local warehouse (because it covers all the US demand) can respond quickly to any local client demand fluctuations. The penalty of inventory write-offs (or rework) when a client changes models could practically disappear.
5. Germany and the rest of Europe are close enough to Portugal that they can be supplied in the same way as the US – but directly from Germany – great for clients.
6. Asia remains a problem because it might be too small (for now) and to far flung to apply the same idea of local finishing.
7. We know that if Lisbon Motors margins are squeezed all other competitors will be in the same boat. If a sizeable penalty is offered for late delivery most (maybe all) competitors will be afraid to copy such an offer. We just need to be sure that we can guarantee availability to very near 100%.

B. From the Theory of Constraints - Distribution:

1. We know that aggregating centrally (in the US and in Portugal for Europe) will reduce the relative size of demand fluctuations so that together with the need to store only 4 products Lisbon Motors will need much less stock vs. what is being held at clients today; and Lisbon Motors will (if clients cooperate) be quite sure of being able to meet 100% availability.
2. If Lisbon Motors’ clients supply their inventory levels of motors, Lisbon Motors can replenish frequently based on what was just consumed. 1-weeks supply is likely to be sufficient, because the 1st week’s forecasts are accurate.
3. The local US (and Portugal) stocks of almost finished motors can be replenished in the same way, and with the same level of security.
4. The Theory of Constraints Replenishment method gives early warning of an impending stock-out, manages inventory target levels up and down as demand changes - to always have about the right amount of stock on hand and it provides the knowledge to deal with model changes and other discontinuities in demand.

Technorati Tags: Case Study, Continual Improvement, Cost, Costing, Effectiveness, Policy, Reliability, Risk Management, Speed, Theory of Constraints, TOC, WIP

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Swiss Business Under Threat II

One Swiss Franc is currently worth more than one Dollar. The Euro has also significantly weakened vs. the Franc. The Swiss economy is dependent on exports that must now be under threat due to the high price of Swiss goods. If Swiss industry does not find a good solution the strong economy there will suffer greatly. How quickly can Swiss industry react successfully?

 

2. Stop Wasting the Business’ Weakest Link

Where the limiting factor of a business lies is almost always NOT clear to the people running the business. In fact most businesses waste their limiting factor’s capacity through the policies by which the business operates. Here we will assume the limiting factor is in operations – in fact it is one of the resources within the factory.

If the policies used by operations cause the limiting factor to lose a part of its capacity, then the capability of the business as a whole is damaged, but only if the business could sell more of its products. There is a “policy” or practice in most factories that causes every part of the production system – every resource, every machine to optimize their performance. This will cause behaviour on the majority of the production system’s part to optimize their cost or efficiency or maybe some other parameter. To optimize resources usually have to operate in a way that is not exactly optimal for all other resources. This does not really matter, except at the weakest link. If the limiting factor loses capacity or capability the company cannot produce as much as it could.

Operations at such a firm has the impression that they cannot produce more than what any will call ‘demonstrated capacity’. However if the rest of the organisation, including other departments like finance, sales and marketing etc. behave in a way that helps the limiting factor achieve its maximum, then, very often, 20 – 50% more can often be produced. Not only that, the limiting factor is often also the unit that causes delays to deliveries – so, deliver reliability will most likely also improve. If reliability and speed improve (point 1), then customers become more loyal – the business will lose clients more and more slowly. Even if gains to not speed up, the company should gain market share.

This sounds simple and conceptually it is. But, from a change management perspective it can be very difficult. All units must know what the constraining factor is and how they should behave. They must also not be measured by their local effectiveness. They need to be measured by the positive impact they have on the limiting factor.

Management must watch the situation very carefully. The limiting factor can easily become a unit with more than enough capacity and the constraint shifts to another location.

If the company is able to produce 20% more (on 100m€) then potentially sales could increase by that amount – 20m€. Usually none or very little added operating expense is needed for this jump. Using 60% variable margin again a 20m€ jump in sales would, under these conditions, deliver 12m€ to the bottom line.

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Swiss Business Under Threat - I

 

One Swiss Franc is currently worth more than one Dollar. The Euro has also significantly weakened vs. the Franc. The Swiss economy is dependent on exports that must now be under threat due to the high price of Swiss goods. If Swiss industry does not find a good solution the strong economy there will suffer greatly. How quickly can Swiss industry react successfully?

1. STOP wasting Production Time!

In most industries, Swiss or otherwise, the actual ‘touch-time’ (the time required to produce a product less all the waiting time when product is sitting in a queue waiting to get on a machine) is less than 10% of production lead-time and often it is less than 1% (this despite all those efforts with 6-sigma and Lean).

If my statement is true (it often is) then there is a huge opportunity to increase the speed of production and reduce lead-times significantly. If we are able to increase touch time to 20% of lead-time, then speed will have doubled and the company has a significant advantage – it can offer shorter, and more reliable, lead-times.

Will this lower cost? On the face of it the answer is No. But to achieve such a speed increase means that the amount of Work in Process (WIP) must be reduced by a corresponding amount – cut in half. This will reduce that part of stock by 50% in quantity and financial value.

With much less WIP in production the visibility of orders becomes much clearer to those on the factory floor. Much less time is lost chasing after the right work-order that should be completed next. Capacity to produce more is found. The last 5% produced in any production environment is hugely valuable for profits and profitability. If materials are 40%, then 60% of the last sales go directly to the bottom line. In a 100m€business 5% more would deliver 3m€ to the bottom line.

If a company is able to increase speed, then there is less need for finished product inventory giving another boost to return on investment. Inventory declines for two reasons: 1. Since replenishment is made much sooner our inventory must cover less time – half the time until the next replenishment. 2. Since our forecast needs to look less far into the future, forecast accuracy will improve. We know more about the near term future than what might happen in the more distant future.

We get significant gains in inventory and speed, and some improvement of production capability.

How quickly can a company implement this tactic – cut WIP and lead-time in half? It cannot take vey long!

 

 

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The photo is Timisoara in Rumania

Finished Inventory is much too High!! - Analysis I

By Eli Schragenheim

This is a case study by Eli Schragenheim that he has allowed me to publish here. Your goal is to analyze the current situation, comment the proposals and develop what you believe are the best strategy and tactics for the company to pursue. The first post is the current situation. (If you are interested in such business cases and their analysis I recommend Eli's book, "Management Dilemmas". The book has many different case studies for you to work through. Eli gives his analysis which he does not claim to be the best possible - nevertheless they are thought provoking.

Analysis of Lisbon Motors’ Current Situation:

Lisbon Motors has about 60-65% fixed cost (materials and transportation) in their products – so only 35-40% of their cost is controllable (they can of course try to purchase at lower prices). In any case their situation appears to be approximately as shown in the logic tree

to

the left. You read such a logic tree from the bottom up, the ovals between the entities indicate an 'and'. The first entity is "we operate in the same way as our competitors". If you look at most industries this will be true - competitors generally operate in the same way (this can lead to a lot of discussion whether or not it is true - for many companies it is true and for Lisbon Motors it is also).

So if this entity is true, then it follows that our clients select our products for minor reasons. From here, if price of our products is very important for our clients, and our competitors compete largely on price, and our clients choose our products for minor reasons it is clear that we (Lisbon Motors) must be under constant price pressure. If our costs are not reduced as fast as prices (in absolute terms) and if we are under constant price pressure then our profits might disappear in the (near) future.

 

 

Clearly Lisbon Motors has a problem which, if they do not solve, ensures that their already low profitability is likely to disappear altogether. They are in fact in a dilemma as described in the conflict between Arturo and Ernesto. Arturo represents the status quo – Lisbon Motors continues to operate in much the same way as all their competitors do. Ernesto represents change – Lisbon Motors

operates in a unique way – different from all other competitors. The dilemma or conflict looks something like the following generic representation:

The conflict is read as follows – starting from the left and reading the top arm first.

1. In order for Lisbon Motors to be profitable now and in the future their business must be adequately secure.

2. In order for the business to be adequately secure Lisbon Motors must not change the status quo ...

• • The risk of being forced out of business is very low as all competitors are about the same

  • It is very unlikely any competitor will develop a strikingly new, different and attractive offer.

  • Making significant changes to our way of operating can be risky.

The lower arm is read in the same way. We have the ‘conflict’ that Lisbon Motors cannot both maintain the status quo and operate in a new and unique way.

BUT, the two suggested actions – maintain the status quo or operate in a new way are actually just 2 of the potential actions Lisbon Motors could take. More important are the two prerequisites Lisbon Motors has – to have adequate business security (minimize risk) and to expand their business (and maintain higher prices). What is needed is to fulfill BOTH these two prerequisites.

Would it be fair to say that any solution should meet the following criteria?

1. The new offering must be difficult for competitors to copy.

2. It must give new added value to clients;

   Otherwise continued price pressure will undermine any cost improvement

3. Clients must understand and appreciate the value of the new offer

4. The offer must be good enough to lead to additional sales

5. Must show significant improvement to the bottom line improvement even with a conservative assessment

6. The offer must not add significant risk

What do you think of these criteria? Do you see a way of achieving them?

The picture below is from the highest peak on Madeira - 1800 meters.

 

 

Black Swans in our Supply Chain V

 

Summary of the Book ‘The Black Swan” by Nassim Nicholas Taleb

1. "Black swans" are highly consequential but unlikely events that are easily explainable – but only in retrospect. 
   
2. Black swans have shaped the history of technology, science, business and culture.
   
3. As the world gets more connected, black swans are becoming more consequential.
   
4. The human mind is subject to numerous blind spots, illusions and biases.
   
5. One of the most pernicious biases is misusing standard statistical tools, such as the “bell curve,” that ignore black swans.
   
6. Other statistical tools, such as the "power-law distribution," are far better at modeling many important phenomena.
   
7. Expert advice is often useless.
   
8. Most forecasting is pseudoscience.
   
9. You can retrain yourself to overcome your cognitive biases and to appreciate randomness. But it's not easy. 
   
10. You can hedge against negative black swans while benefiting from positive ones.
    

Little’s Law (Cycle Time = WIP/Output (per unit of time))

Little’s Law should be well known in operations – but it seems to be ignored nevertheless. Two phenomena are active that cause many operations to perpetuate less than their best performance. The first is the  perceived need to keep all resources actively (hard) at work. If every resource is working hard, then costs factory seem to be lowest, but it will fill up with WIP. Double the WIP and production lead-time automatically doubles with it. Increasing lead-times is common practice in operations approaching capacity. As a factory reaches capacity promised lead-times become more and more difficult to meet so the solution is to contact customers to tell them lead-times have increased (a seemingly good tactic since we want to keep our promises reliably). The factory then has a longer lead-time to produce. However almost immediately the factory fills up with more WIP and even the new lead-times will be difficult to meet. It isn’t the lead-time; it’s the factory’s capability or capacity. (Increasing lead-times and consequentially also WIP heightens complexity in the factory – priorities become more and more unclear and schedules are changed more and more frequently.(

The new lead-time cannot be met because we have not actually increased capacity (by increasing lead-time and WIP we actually reduce capability) – so how can we produce more. The increased WIP in the system confirms the longer lead-time, adds to the confusion in the plant (priorities become less and less clear to personnel) and capacity is lost. The situation is aggravated by common practice in sales or marketing. What do you think is the better decision – cause sales to slow down their efforts in order to not overload the factory, maintain good lead-times and maintain delivery reliability; or maximize order intake no matter the situation in the factory? Somehow we will get through this seems to be the attitude; we must take advantage while we have demand from the market. (Won’t poor service eventually cause clients to go elsewhere?). What may not be recognised is that demand would still be high – clients have left only because of ‘crap’ service!

In most factories it is possible to simply stop placing work-orders for half the current lead-time and then release orders with half the original lead-time. This tactic has only beneficial effects – shorter lead-times, less stock, improved reliability, more satisfied clients. Lead-time is cut in half, WIP is cut in half, the production rate actually increases because of less confusion over priorities and less re-scheduling by management; due date performance improves. The result is a Black Swan – at least a significant improvement. All these benefits lead to better customer service and eventually to more business – especially if competitors don’t do the same. (Check how difficult it is to convince your people to implement this (next Monday) and you will see the difficulty competitors will have to copy your competitive move! It will take a while!

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Technorati Tags: 6-Sigma, Continual Improvement, Cost, Costing, Effectiveness, Efficiency, Goldratt, Little's Law, Risk Management, Theory of Constraints, TOC, TQM, Inventory, Reliability, Speed, WIP

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Finished Inventory is much too High!!

 

By Eli Schragenheim

This is a case study by Eli Schragenheim that he has allowed me to publish here. Your goal is to analyze the current situation, comment the proposals and develop what you believe are the best strategy and tactics for the company to pursue. The first post is the current situation. (If you are interested in such business cases and their analysis I recommend Eli's book, "Management Dilemmas". The book has many different case studies for you to work through. Eli gives his analysis which he does not claim to be the best possible - nevertheless they are thought provoking.

Lisbon Motor

Lisbon-Motor is a successful manufacturer of electric motors for washing machines and dishwashers.  Their annual sales are $120 million.  Net profit is quite low:  only $2.5 million, but in the market they are in this is considered a success.  The company has more than 100 clients located (almost) all over the globe.  Sales to US washing machine manufacturers represent more than 50% of Lisbon-Motor sales.  Sales to German factories add another 28%.  Other clients are located in Eastern Europe, South America and Asia.  Lisbon-Motor, located near Lisbon, Portugal, has about 11% of the world market share for the type of motors they produce.

According to Arturo Moriera-Lima, the energetic COO (Chief Operating Officer) of Lisbon-Motors, the huge finished goods inventory held at each client’s site is the most critical problem.  Here is how he describes the problem:

“The big washing machine manufacturers demand that (major) suppliers manage their inventory at the washing machine factory.  They call this VMI, Vendor Managed Inventory, and it is now essential for any important sale.  They give us a forecast for each model they plan to produce.  If we have to write-off our stock because they change models too quickly, then clients compensate us for up to 4 weeks of stock at their factories, based on their forecasts.  They demand 100% availability of motors whenever they need them.  If we fail – they can terminate their contract with us immediately.”

“Usually we can rely on their weekly MRP reports – but they are reliable only for the next two weeks requirements!  Beyond that there are always huge changes in demand.  Since we are responsible for 100% availability of the motors, it is essential for us to maintain huge stocks at our client’s sites.  We have almost $60M of motors in finished goods, (valued at the sales price) sitting at clients. If you take into account that just our raw materials are almost 50% of our selling price then it is easy to understand the size of our problem.  Add another about 10% for transportation cost and 8% direct labor for the complete picture. With the frequent model changes we are lucky if we have to write-off only 9% of the finished goods inventory we hold.  Clients compensate for only about half of this loss.  The problem is so big because the very long transportation times necessitate much more inventory than any client is willing to commit to.  However, lots of inventory is the only way we can compete with the local motor manufacturers.

“Our VP of Engineering, Ernesto Nazareth, came up with the following idea.  Let’s produce only 4 standard motors and store them in our factory warehouse.  Then, when we need to ship to a client we take the closest motor type and introduce the necessary changes to the motors and match them to the particular client’s model.  He demonstrated that every current motor requires just a minor 2% modification to transform it to client specifications from one of the four standard types.  He also showed how easy it is to modify each of those standard types to fit clients’ requirements exactly.  Ernesto claimed that this move would cut inventories and add capacity at our constraining work-centre.”

“This idea looks good to many people, but I simply do not understand it.  We have, at least, 20% excess capacity at what is considered to be our capacity constraint.  So, after this ‘fantastic idea’ we’ll have 30% excess capacity due to time saved on setups. So what?  And, what inventory levels can we reduce?  We still need to hold the same inventory levels at the client’s sites, because of the very long transportation time.  Ernesto speaks about production lead-time reduction however our production lead-time, because we use a DBR production system, is now two weeks at most!  Reducing it to one-week, or even to 3-4 days, won’t help much considering transportation to the US is 5 to 6 weeks.”

“On top of all that, the engineering change to our production lines would cost us $500,000.  Direct labor would increase by 10% as the changes require more work, and even material cost would increase by 3% due to a higher level of scrap.  Considering all this, where is the business advantage for Lisbon-Motors to justify such a move?”

We need to be careful with Arturo’s reservations.  Arturo is known as the conservative almost always against any proposed change.  This is certainly so if the idea comes from Ernesto, considered to be a possible future COO.  The story goes that Arturo was dead set against the introduction of the DBR planning, even though today he is all for it.

The other senior Lisbon-Motors executives point to the on-going price pressure as the major problem not the very high inventory levels.  In fact some of our long-term contracts with clients state very clearly that we are committed to lowering prices by an agreed percentage every year.  Most of our other clients constantly ask for bids from all possible suppliers to drive prices down further.

Is Arturo wrong in his criticism of Ernesto’s idea?  Assuming it is possible to implement Ernesto’s idea and Arturo’s numbers are correct, is there a way that makes Ernesto’s proposed engineering change profitable?

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Black Swans in our Supply Chain IV

 

Summary of the Book ‘The Black Swan” by Nassim Nicholas Taleb

1. "Black swans" are highly consequential but unlikely events that are easily explainable – but only in retrospect. 
   
2. Black swans have shaped the history of technology, science, business and culture.
   
3. As the world gets more connected, black swans are becoming more consequential.
   
4. The human mind is subject to numerous blind spots, illusions and biases.
   
5. One of the most pernicious biases is misusing standard statistical tools, such as the “bell curve,” that ignore black swans.
   
6. Other statistical tools, such as the "power-law distribution," are far better at modeling many important phenomena.
   
7. Expert advice is often useless.
   
8. Most forecasting is pseudoscience.
   
9. You can retrain yourself to overcome your cognitive biases and to appreciate randomness. But it's not easy. 
   
10. You can hedge against negative black swans while benefiting from positive ones.

Frederick Winslow Taylor (The father of scientific management)

Taylor’s ideas appear to be rejected by business managers of today. Yet, even today, efficiency everywhere is the norm. A resource standing idle is still considered to be a major waste – by management and workers alike. Managers detest resources that are not producing – if they have nothing to do they will find them something to do! Workers are afraid to be idle because being not needed risks being fired – so workers make sure they always at least look as though they are busy.

Common practice is to not waste resources – everything should be working. On the other hand Pareto and Goldratt have shown that only 1 resource needs to be working flat out – the weakest link, the constraint, the bottleneck. If everyone must always be working just imagine how much inventory will pile up – the limiting factor will not be able to keep up. Fortunately space and the dictates of cash flow will prevent companies from going way too far. Nevertheless are they not going far beyond the necessary? Shouldn’t most resources be idle, at least part of the time? Shouldn’t most resources have spare capacity so that they can guarantee the limiting factor is in fact able to produce at 100%?

It seems Taylor's ideas are important – but only at the limiting factor – the constraint or the .1%. Traditional Taylorism cannot help us find a Black Swan – it will most likely prevent us from consciously seeking the Black Swan.

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Black Swans in our Supply Chain - III

 

Summary of the Book ‘The Black Swan” by Nassim Nicholas Taleb

1. "Black swans" are highly consequential but unlikely events that are easily explainable – but only in retrospect.

2. Black swans have shaped the history of technology, science, business and culture.

3. As the world gets more connected, black swans are becoming more consequential.

4. The human mind is subject to numerous blind spots, illusions and biases.

5. One of the most pernicious biases is misusing standard statistical tools, such as the “bell curve,” that ignore black swans.

6. Other statistical tools, such as the "power-law distribution," are far better at modeling many important phenomena.

7. Expert advice is often useless.

8. Most forecasting is pseudoscience.

9. You can retrain yourself to overcome your cognitive biases and to appreciate randomness. But it's not easy.

10. You can hedge against negative black swans while benefiting from positive ones.

Dr. Eliyahu M Goldratt – The Theory of Constraints; 5 Focusing Steps

Goldratt’s theory claims that every (business) system must have one (and only one) constraint or weakest link . If there are two or more entities with the same capacity the system becomes more and more chaotic – and capacity and reliability collapse. His conclusion is, for all practical purposes, the same as Pareto’s (the 99:1 second law). Using this insight Goldratt developed his 5 focusing steps (more than 20 years ago).

To use the 5 focusing steps it is important to preface them with two important (bullet( points:

• Determine the goal of the organisation (for a business this is likely to be to maximize profits – now and in the future).
• Determine how the organisation will measure its performance to know whether or not the goal is being achieved.

1. IDENTIFY the constraint (the single limiting factor) that prevents the organisation from achieving more of its goal.
2. DECIDE how to EXPLOIT the constraint – how will the company get the maximum from its limiting factor. Quite an important decision if the business wants to achieve more of its goal – more profit and higher returns. This decision is a (maybe the) major determinant of profits and profitability. If focus is in the wrong area (the one that shouts loudest for instance) the business will have a good chance of disappointing results.
3. SUBORDINATE everything else to the above decision! The only way we can get the most from the limiting factor is to make sure it is able to realize its potential. Policies such as local optimisation everywhere will certainly waste a limiting factor’s capacity. They will cause all local organisations (divisions, departments, groups, business areas) to act selfishly. The will optimize their own (little) area with a very high chance of causing the real constraint serious difficulties and thus reducing company profits. On top of this local areas may well get a bonus for excellent local optimization. 
   NB. The first 3 steps also prevent unnecessary investment in new equipment and human resources before the limiting factor is fully exploited. The company’s return on Investment improves through a much more effective use of resources – the limiting factor is never wasted and unnecessary investments are prevented. Proper exploitation costs your business nothing and benefits it enormously.
4. ELEVATE the constraint. Once the constraint is fully exploited and assuming it is still the constraint of the system then is the time to expand capacity. If exploit and subordinate have been implemented successfully financing an expansion will be no problem.
5. IF during any of the previous steps the constraint has been broken then go back to step 1. WARNING: Do NOT let your inertia become the system’s constraint! The warning is essential and will often be disregarded nevertheless. We love our paradigms and hang on to them for dear life – after all when we let go of a paradigm we are not sure how we should behave under which new one! We may even be unsure whether or not the chosen new paradigm is valid.

Could these 5 simple steps help you to generate your own Black Swan and amaze the business World? What you don’t know, yet, is the impact this kind of focus has. Nevertheless maybe we should learn to question (and often drop) our paradigms in order to develop new and better ones.

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Project Managers Risk Averse? - Part IX

There are many stories of projects where 90% of the project takes 100 days and the last 10% also take 100 days. Too often project managers and top management get significant surprises late in the project. Could these surprises be known about earlier? What needs to be done to get the appropriate information? If we can get the information risk will be less.

9. Minimize Risk; Early Warning

Common practice, as discussed earlier, is to get a commitment from resources performing tasks. They try their best to make commitments that gives them a high chance of finishing their task(s) on time.

During execution it is not really ‘polite’ to ask for progress in tasks that have just started – after all the task is not due yet and the project manager has a commitment. So, at least early on during a task there is no report on progress – and therefore no knowledge of a possible problem.

When a task is planned the task owner must make assumptions about the task and his environment (for instance the number of tasks he has). When a resource starts work on a task he soon knows how long the task will take with much greater accuracy than at the time he made his estimate for the project plan. Why don’t project managers get this information and use it to help manage their projects better?

How about applying the following tactics. Instead of reporting completion progress e.g. a task or project is 25% complete let’s request the time remaining in tasks. All resources report how many more days they need to complete their task. That way (if they make an honest evaluation) the project manager knows immediately when a problem arises – rather when it is already to late from saving the project from missing its due date. (Remember cutting scope, or spending more money are the equivalent of missing the due date.)

There is the question of what to report and how frequently. Since project managers want early warning, report frequency must be high – say daily. To achieve such a frequency reporting must not be onerous. If only resources with started tasks report and all they report is the expected remaining task time, is that onerous? If WIP and multi-tasking have been reduced, then there will be fewer tasks to report and knowledge over remaining time will be better.

Does this make sense? Will this give the project manager a better view of the status of their project? Will it give top management a better view of their portfolio of projects?

What are the obstacles to implementation?

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Individual and Tribal Behaviour

I have been a proponent of the Theory of Constraints (TOC) for many years now and still it is very difficult to ‘sell’ TOC to business people around the World – despite agreement that everything in TOC makes eminent sense. My friends in the TOC community experience the same things. That something new is a difficult sell is nothing new. Just read about the difficulties all sorts of inventors have had.

Confirmation Bias

Your personal experience should tell you that young liberal and open people are likely to believe that marijuana is harmless. You see them read or watch information about marijuana and retain only the positive (marijuana is not dangerous) parts of the presentation – even if the article or TV show is totally balanced for or against.

On the other hand the older, conservative (in relation to marijuana) less open person will do the exact opposite – he will retain only what confirms his existing views.

Both parties are exhibiting ‘confirmation bias’ – people everywhere seek out those things that confirm their preconception and tend to ignore contrary opinions, arguments and facts.

Look at your own behaviour. You and your partner have an argument about something. Try and notice how you respond to the facts, opinions and arguments put forward by others – which do you truly consider. D you really look at and logically think through the other positions? Or do you reject them quickly. What does it feel like when you suddenly realize your partner is correct – you are about to lose the argument?

As a proponent of the Theory of Constraints and as a human being I must behave in a similar way when confronted by other improvement methodologies. Lean, TPS and 6-Sigma experts must be similar, but they have a different bias.

In fact all of these improvement philosophies have a lot to offer, but this confirmation bias is getting in the way of progress and constructive discussion – at last many times.

The book “RISK The Science and Politics of Fear” by Dan Gardner discusses confirmation bias and many other topics of interest.

Tribes (Culture)

We are all members of tribes. I am a member of the TOC tribe; you might be a member of the Lean or 6-Sigma tribe. Within each tribe there are a series of (un-)spoken rules and expected behaviours. In the TOC community many of us look to Eli Goldratt for guidance (even if he wishes us to THINK on our own). Some try to emulate our leader. Some simply follow the generally accepted practices and thoughts of the community as a whole. As long as you conform you have the support of the community. If you don’t you run the risk of being ostracized by the group. This tribal behaviour means that many of us cannot accept Lean, 6-Sigma etc. We even have more explanations why these other methods are ‘wrong’ rather than looking for the good.

Other improvement methodologies probably react in similar ways – so it takes a very long time to get an integrated even more powerful toolset that incorporates the best from each. (Goldratt in his article ‘Standing on the Shoulders of Giants’ tries to show the way. However even this article must cause other tribes (other than the TOC tribe) to react less than positively.)

What we are experiencing is tribal behaviour – we are protecting our own community, our ideas etc. Given tribal behaviour and confirmation bias it is amazing that a coming together happens at all!

I would like to invite everyone that reads this to join the TLS group on Linkedin. TPS stands for Theory of Constraints, Lean and Six-Sigma. I would like to invite you all to join the TLS - TOC Lean & Six Sigma group in Linkedin. (I am a member, but not the group’s owner)

For more on tribal behavior read “Great Boss-Dead Boss” by Ray Immelman

The Challenge for ALL of Us

• How can we cause the various improvement methodology communities to integrate? How can we improve management processes far beyond where they are now? How can we foster real discussion and avoid confirmation bias?
• How can we create one CI (Continual Improvement) tribe that encompasses 6-Sigma, Lean, TOC and whatever else is out there or about to come on the scene?
• How can we speed up progress without the risk of embracing something truly wrong and risky?

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Black Swans in our Supply Chain - II

 

Summary of the Book ‘The Black Swan” by Nassim Nicholas Taleb

1. "Black swans" are highly consequential but unlikely events that are easily explainable – but only in retrospect.

2. Black swans have shaped the history of technology, science, business and culture.

3. As the world gets more connected, black swans are becoming more consequential.

4. The human mind is subject to numerous blind spots, illusions and biases.

5. One of the most pernicious biases is misusing standard statistical tools, such as the “bell curve,” that ignore black swans.

6. Other statistical tools, such as the "power-law distribution," are far better at modeling many important phenomena.

7. Expert advice is often useless.

8. Most forecasting is pseudoscience.

9. You can retrain yourself to overcome your cognitive biases and to appreciate randomness. But it's not easy.

10. You can hedge against negative black swans while benefiting from positive ones.

Pareto’s Law – The Law of the Vital Few and the Trivial Many

Pareto’s 80:20 rule is so well known to most people that it is part of the business (6-Sigma) gospel. This common knowledge is incomplete and leads the majority of business managers to very significant errors of judgement about what is important in the way they manage their resources. Correct application would simplify their business processes and help make significant bottom line improvement.

Pareto’s Law is valid if the population being studied is made up of independent entities. In systems of dependent entities the 80:20 rule does not hold. In such a system of interdependent entities (such as your business system) the rule is more like 99:1! Your focus should be on the one entity (and there can be only one) that limits, that prevents you from achieving more of your goal. I believe Pareto recognized this and postulated this second Pareto’s law along with the first.

The consequence is 1 operation, 1 resource or 1 division determines 99% of profit! When enough businesses realize this simple fact and learn how to use it to their advantage the World economy can experience a Black Swan and what a wonderful one! If you must focus on just one resource for bottom line improvement, would that not be a major simplification? (It is not quite as simple as I am making out, once you have the correct focus and know how to get the most from the limiting factor the rest of your organisation must be aligned to that. Everyone must support the decision how the business will get the most from its constraint.

Today every department or division is given marching orders – IMPROVE! Being good soldiers they all shout ‘YES SIR’ and do their best to improve the area they are responsible for. Since the 99:1 ratio holds, the result is inevitable – relative to the effort expended very little bottom line effect will be achieved. Oh yes, every manager can point to his improvements and as a result even get a bonus and/or a raise. But whatever most managers have done, 99% of it is a waste – at least for the time it takes for their part of the organisation to become the constraint.

In a business the first questions should be: “What should be our focal point? Where can we find the focal point? How will we deal with it? The focal point must be the limiting factor.

The next question must be: “How should the rest of our organisation behave to support the focal point?”

Could we be the source of a Black Swan? Could we trigger a Black Swan? If they are just random events the answer is NO! If someone (anyone) can discover a powerful leverage point – the limiting factor - and the way to exploit it then … why could WE not hatch a black swan?

A consequence, for you (a person within a large organisation) is you are probably not the limiting factor. Before you go looking for the limiting factor you need to recognize that the way management thinks is to get improvement everywhere. Your job is “make the boss aware of Pareto’s second rule.” Then a self-generated Black Swan becomes possible, even quite probable

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Black Swans in our Supply Chain I

 

Summary of the Book ‘The Black Swan” by Nassim Nicholas Taleb

1. "Black swans" are highly consequential but unlikely events that are easily explainable – but only in retrospect.

2. Black swans have shaped the history of technology, science, business and culture.

3. As the world gets more connected, black swans are becoming more consequential.

4. The human mind is subject to numerous blind spots, illusions and biases.

5. One of the most pernicious biases is misusing standard statistical tools, such as the “bell curve,” that ignore black swans.

6. Other statistical tools, such as the "power-law distribution," are far better at modeling many important phenomena.

7. Expert advice is often useless.

8. Most forecasting is pseudoscience.

9. You can retrain yourself to overcome your cognitive biases and to appreciate randomness. But it's not easy.

10. You can hedge against negative black swans while benefiting from positive ones.

Could the Tail Wag the Dog?

Taleb claims that Black Swans are unlikely events explainable only in retrospect. His statement seems to be true, but does it have to be so? Taleb also claims that power-law distribution and other statistical tools are better suited to explain many important phenomena, while the often used normal curve is not. Combining the two statements leads me to speculate that opportunity lies in the tail of a (statistical) distribution. While everyone focuses on the majority of the outcomes – the “big pile”, maybe we should pay attention to the tail.

Goldratt relates an excellent (historical) example. Automobiles. Back in the 50ies and 60ies automobile quality was poor. Even then the automobile manufacturers did analyse sales and customer satisfaction statistics. These statistics showed that the vast majority of car owners were satisfied with their purchase - except for a very few. As Goldratt relates it .2% indicated strong dissatisfaction with the quality of cars they owned. Such a small part of the population complained that to improve quality was not even considered important by most manufacturers.

As we now know this was not a good decision. What probably happened is a smart Japanese or German or both looked at this distribution and understood the dissatisfaction of those extremely critical people way out there in the tail. If those people expressed their dissatisfaction, then everyone else might have the same problem – those people did not know that much better quality is possible – they did not complain. They accepted the level of quality as normal. (It’s like the story about how to cook a frog. If you throw a frog into boiling water he will immediately leap out again. However if you put him in at room temperature and then slowly raise the water’s temperature he will enjoy the nice warm bath and become more and more lethargic. Eventually he is so sleepy, so dopey, that he forgets to jump out and is cooked – just like the western automobile industry was.)

The Japanese started to build quality cars and export them to the West. Some few people frustrated with poor quality bought them - after all the prices of Japanese products were low. Probably none of these people expected superb quality – Deming, Juran and others were not known yet. These first customers were pleasantly surprised. Japanese cars are really good. They spread the story and a trickle of sales became the flood we all know about. The rest is history (despite Toyota’s recent difficulties with brake pedals).

Maybe we need to learn where to look for the Black Swan. He certainly does NOT lurk in the big heap. Don’t blame 6-Sigma or TQM – outliers and skewed distributions are part of the subject matter. We are at fault – is it because we feel safe in the big heap?

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Project Managers Risk Averse? - Part VIII

Insurances use the concept of aggregation to reduce the relative risk and thus are able to charge us low premiums for all types of insurance (it is the pooling effect). Why don’t project plans and project managers take advantage of this simple and well-known concept?

8. "Project Insurance"

Life insurance, car insurance, in fact every insurance uses the aggregation principle to allow then to charge premiums much smaller than they would have to if an insurance was for a single event. If the average number of accidents is 1 in a 1000, then premiums can reflect that every individual has only 1 chance in 1000 to suffer and accident (of course insurances charge according to the likelihood of partial or complete loss, and they charge for the administration of the insurances they manage. We, the consumers of insurance, benefit because our cost of coverage is significantly lower – we suffer a small/(ish( insurance cost to avoid the catastrophic cost of a total loss.

Why don’t project plans and project managers take advantage of the same aggregation effect?

We estimate the time for every defined task and include a certain amount of safety buffer in each estimate. In Part II of this series I claim a reasonable resource must give himself a 80-90% chance of completing his tasks on time. Less could endanger his career and remuneration. In fact he and his colleagues are in a reliability competition (and of course in a promised due date competition). Which is in fact more important reliability or an early due date promise? Whatever the truth is experience tells us (if you measure this) that the majority of tasks are on time, a few are early and a few are late to very late.

It must be the late or very late tasks that cause the majority of projects to miss their due dates. (Budgets probably show a similar logic.)

We should expect the vast majority of actual project completions to be completed early or on time – if it is true that project resources and their time estimates are reasonable – 80 to 90 out of 100 tasks should finish on time. Reality seems to be the reverse. Why?

The explanation I have learned (From Eli Goldratt) goes something like the following (I am explaining in my own words, I hope he is OK with my description of reality.

Imagine an individual resource. He has several tasks that he must work on; tasks that are necessary for a number of different projects. He has estimated all his tasks to give himself 80-90% certainty of finishing them on time. In his reflections he has considered the weather, things others must complete before he can start, surprise requests from management to do some urgent thing for them, and he has considered that he must work on several things at the same time (for several project managers). He is a reasonable resource with lots of experience. Lets say he has estimated 20 days for a particular task.

Now it is time to implement. Our resource knows that if he were not disturbed at all he would easily finish complete the task in 5 – 10 days. So, he exhibits ‘student syndrome’ and works on something more urgent instead (not necessarily important and urgent, but some manager is putting pressure on him. So, he works on other things and time passes – wasting the particular tasks planned time and consuming the safety buffer. Eventually our task becomes urgent – the time remaining is now so little, that our resource has at best a 50:50 chance of finishing on time. What was 80-90% certain is now just 50:50.

Alternatively our resource has no other pressures – so he does start the task immediately and, because he is not disturbed much (or can resist the pressure to do something else) he finishes in 12 days – half the estimated time.

Now our resource has a problem. If he actually delivers his task, he will be scrutinized the next time. There is a fair chance that his time estimates will be cut more than usually. What does the resource do? He either delivers the task early (assuming his boss will understand) or he will deliver on the due date – which will show great reliability and confirm his time estimate. If he takes the second option (the normal option?) he is wasting a lot of time that could be used by a task that is in real trouble.

The two phenomena can explain why most tasks are on time, very few are early and some are late to very late (the very late ones are those that have something truly bad happen). Multi-tasking (too many active projects) aggravates the situation. Project managers put pressure on task owners to work on the ‘right’ task – the others suffer student syndrome.

What we have seen is that every task owner includes his own insurance (80-90% certainty of an on time finish) and then wastes it in one way or another. Why not make a simple change in the structure of project plans – aggregate insurance in one place in order to protect your project. Whether or not any individual task is late is immaterial. It is the project that needs to be on time.

So cut every task’s time to just a 50:50 chance of finishing on time and aggregate what you have cut at the project’s end. Remember also that with this aggregation you have the same situation as all insurances. You do not need all that safety – some tasks will still finish early (a 50:50 chance means 50 out of 100 will be early and 50 late). The amount of safety can be cut.

Assuming this sounds reasonable; there is a major obstacle to overcome – common practice. How do I make the change and what other actions are essential for success?

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