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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Technorati Tags: Continual Improvement, Cost, Effectiveness, Efficiency, Goldratt, Theory of Constraints, TOC

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Technorati Tags: Continual Improvement, Cost, Effectiveness, Efficiency, Goldratt, Theory of Constraints, TOC