Nassim Nicholas Taleb on Accepting Uncertainty, Embracing Volatility - Knowledge@Wharton

Nassim Nicholas Taleb on Accepting Uncertainty, Embracing Volatility - Knowledge@Wharton

No New Hires; No Replacements

From time to time corporate management will put such a restriction on a division that is performing poorly. This policy is actually not that unusual in industry. But, does it make sense? Could it be this policy that makes it impossible for the business to survive? The feeling in the targeted business might be that the policy is just the first step before it will be shutdown. If this is the feeling, won’t it cause employees to jump ship in search of greener pastures? Is there a better way?

 

The Goal

A company’s goal is to make money. A corporation that supports a business with insufficient profitability will feel that such a business is draining a lot of energy from management to try and deal with the problem. If the lack of profitability persists there will eventually come an ultimatum – something like, “Please don’t ask for more resources until you have shown proven positive bottom line results.” Fair enough? I think it is fair, although I also believe there is a better way to motivate the business and properly support it when it does hit the resource wall. (When it hits that wall the business cannot produce any more sales and the only remaining hope will be to reduce cost wherever excess exists – a very demoralizing tactic.) The Goal will seem to recede into the distance, impossible to meet it. At this point employees are quite likely to jump ship – especially those with that alternative.

The Approach for Success

The business in trouble needs a way to focus so that it gets the absolute maximum Throughput possible. (Throughput is meant as the money they generate through sales). To do this they have no choice but to find and then exploit their limiting factor to its absolute maximum. This means the limiting factor should work 24/7 and it should produce only the most lucrative products. The rest of the organisation makes sure that not a single minute of the limiting factor (the constraint) is wasted by a work stoppage or through the production of a low value product. What the paragraph above describes the first three steps of the 5 focusing steps for continual improvement.

1. Find the constraint (the limiting factor). The limiting factor is key … if its limiting results, then we must use it well.
   
   Many times a company will believe there are many constraints throughout their production process. This is in reality not possible. The impression of many constraints or constraints that move from one place to another are the result of the way the production process is managed. The policies that control how production is managed are very often the source of ‘many constraints’.
   
   To find the real constraint, operate with smaller batches and look for the operation before which work piles up and must wait. The real constraint is usually immediately after the pile of waiting work. 
2. Now that we know where and what our constraint or limiting factor is, we need to decide how to get the most from the limiting factor. Only if we can get this maximum can we expect our business to maximize its results.
   
   What this means is not only to maximize the output of the limiting factor, but the constraint must also be used effectively – it should produce those items that produce the greatest Throughput (sales less materials cost) with the least amount of constraint effort. That maximizes the result.
   
   There may be products that do not require the constraint resource – they give the highest amount of Throughput of all since they require zero from the limiting factor (as long as Throughput is positive. Decide to maximize sales of these products. 
3. We have decided how we want to exploit (get the maximum from) the limiting factor. How should the rest of the organisation behave?
   
   All of the rest of the organisation, including senior management, should subordinate to the limiting factor – even if this means their efficiency will suffer. If any other resource seeks to optimize his or her efficiency and in doing so hurts the limiting factor then the business as a whole suffers – the bottom line and all employees!
   
   Subordinate starts with management. Management sets targets and Key Performance Indicators for the business and functions within the business. This usually a good thing, but must be done with the decision how to exploit the constraint in mind. Resources (being good people) will seek to reach their targets. If targets and KPIs are set incorrectly they will inadvertently harm business Throughput.
   
   In the discussion of the exploit decision we recommended the production and sale of items that do not require the constraint. This tactic must be monitored carefully since too much of it can cause the constraint to be starved of work … a feeding resource is working on a product that does not pass through the limiting factor. 

These first 3 focusing steps are an excellent framework but they must not be used blindly. The business must continue to think and reflect about the consequences of its actions … focused especially the consequences for the limiting factor.

The advantage of these three steps is the focus on the limiting factor. The 3 steps give a logical framework to the corporate policy “No new hires, no replacements”. They help the business successfully achieve the desired outcome of more profit from existing resources. In fact followed correctly they will by themselves prevent new hires or replacements or investment in equipment until no more Throughput can be wrung from the limiting factor. (These 3 focusing steps should be used in every business in order to prevent unnecessary investment in additional resources until these are truly necessary. The focusing steps should be in continual use.

Many times the decision to exploit and the actions taken to subordinate cause the constraint to move – the business has a new limiting factor. The business must identify the new constraint; decide how to exploit it and how the rest of the organisation should subordinate to it. Care must be taken to do this correctly … the initially identified constraint may not have so much spare capacity.

 

The Value of One Hour

Previously we recommended focus on the limiting factor in order to maximize Throughput. How much is an hour at the limiting factor worth?

Assuming a month has 30 days of 24 hours (our operation runs around the clock) then there is an absolute maximum of 720 hours. Clearly some of these hours are not productive as resources (machines) must be maintained or if they are people there are very few than work 100% of the time during an 8-hour shift. For the purposes of this experiment lets assume 100 hours are currently not productive for one reason or another … so net we are using our resource for 620 hours every 30-day month.

The resource of interest is our limiting factor … it currently is the limiting factor in our production that results in 10 million€ turnover. If materials are 38% of sales, then Throughput is 6.2 million€ and 1 hour of constraint time produces 10000€ Throughput. Every additional hour we are able to utilize our limiting factor produces 10000€ to the bottom line … additional profit! If the business is able to utilize the limiting factor for an additional 50 hours, that means an extra .5 million€ to the bottom line. That is an extra 5% of return on sales.

Utilizing a non-constraint an extra hour has a negative effect on the business unless the constraint can use the extra material. Otherwise utilizing a non-constraint for more than capability of the constraint simply increases work in process and increases lead times (Little’s Law).

It does make sense to utilize a non-constraint for extra hours; if the time is used to produce products that do not have to go through the limiting factor. Such hours are also very valuable since every € of Throughput goes straight to the bottom line.

 

The Limiting Factor can do no More; What Then?

The fourth focusing step is, “Elevate the Constraint” – expand the constraint’s capacity in some way … through overtime, outsourcing, adding resources etc. The step is the correct action if the limiting factor (constraint) truly has been exploited to the maximum and no more subordination steps are possible. Management’s job is to understand where the organisation stands – they should allow an expansion only at the correct time.

The value of elevating the constraint or limiting factor is enormous (as long as the market will actually buy the additional products).

If the constraining resource is 10 people responsible for 10 million€ sales then adding just 1 person should allow the business to grow from 10 to 11 million€ sales. This 1 extra person would generate 1 million€ in sales, and 600’000€ in additional Throughput and profit (of course I assume the rest of the operation can handle the extra 10% load).

An extra employee in any other area adds only cost. The added person cannot add to the bottom line because the limiting factor is running at its capacity. Such an added person adds no value.

The rule, no new hires and no replacements gets seriously in the way at this point – especially if even outsourcing, over-time and the like are not possible. The business is blocked from progress until the capacity of the limiting factor can be increased. Management needs to seriously consider this fact as well as the time it might take to train an additional constraint resource.

A corporation may not want to hire additional people into a poorly performing division. But if this division is now blocked by the limiting factor and the type of resource necessary at the constraint can easily be placed elsewhere; then the question is why not expand the capacity of the limiting factor? It would seem to make eminent sense.

There may be pressure to reduce costs in areas other than the limiting factor. This might be OK as long as the capacity of all other resources remains sufficiently larger than that of the constraint – there needs to be sufficient protective capacity. Also, consider that employees in operations generally represent just a small percentage of the total fixed costs … less than 10% and often much less. Cost in modern businesses lies in overheads. If overhead costs are reduced care must be taken to not take away essential support for proper exploitation of the limiting factor.

 

When to Allow Expansion

The Focusing Steps define when expansion should be allowed … whenever the exploit and subordinate steps are successfully and completely implemented. The limiting factor is at its limit and only an expansion of its capacity will lead to more Throughput (sales less materials cost).

However, people have two ways of thinking … fast and slow (see Daniel Kahneman's book "Thinking Fast and Slow"). We use our intuition and experience to come to conclusions quickly and possibly make a serious mistake. There could still be capability left in the organisation if only we would take the time (slow thinking) to go over all possible options to exploit the limiting factor better and/or subordinate to it better!

A recent experience demonstrated to me again; the truth of fast and slow thinking! The organisation believed it had reached the limit of what could be done with and for the constraint. However senior management stood by their no hire and no replacements policy. What happened next was amazing – the organisation found more ways to subordinate even more effectively to the limiting factor and some more capacity was found.

 

Protective Capacity

If a business in trouble follows the actions outlined above it will very soon be operating near the limit of its capacity – assuming the market buys its products. It is common knowledge that as an operation approaches capacity its flexibility and delivery reliability decline while lead-times extend. These three parameters are, however, extremely important in many competitive environments – flexibility, reliability and short lead-times help ensure the business wins orders. As these qualities deteriorate demand will decrease. A certain amount of protective capacity is essential to maintain these important parameters so that sales can continue to increase.

When the corporation considers their strategy and tactics for a particular (poorly performing) business they should include protective capacity in their considerations. Management can ignore protective capacity; the market will not ignore it. The market will soon realize flexibility, reliability and speed are deteriorating and will react accordingly. Demand will drop, price pressure will increase and all the good work to exploit the limiting factor can be undone. Why go to all the effort if a lack of protective capacity will undo the work?

Within the business all non-constraint resources have and must continue to have sufficient protective capacity to make sure the constraint can always be exploited to its maximum. There is a strong likelihood that the business will experience pressure to reduce costs wherever excess resources exist. Excess resources can be reduced, but the sufficient protective capacity must alwazs be available.

 

Summary

The 5 Focusing Steps process is an ideal replacement for the commonly applied rule “No New Hires and No Replacements”. Applied correctly it does the same thing as the rule I wish corporations would change. The difference is in the process when no further improvement from the limiting factor is possible. At that point the corporation should allow expansion at the constraint because of the high leverage found at this point. If the limiting factor cannot be expanded, then the business concerned may as well be shut down. No further significant improvement in the bottom line can be expected.

Management should, before they embark on an exercise to try and improve a business in trouble, decide at what point they will allow expansion (at the limiting factor) and this should be communicated to the organisation concerned. The proper exploitation of the constraint becomes the businesses first target. Management needs to be knowledgeable enough to recognise when the organisation has not yet squeezed the maximum from the limiting factor and when they must allow expansion – in the right place.

Following the 5 steps as described should, in the majority of cases result in 20-50% greater internal capability, that if it can be sold should bring most businesses in trouble to profitability! (20% greater internal capability represents 2million€ added sales and 1.2million€ to the bottom line (Throughput is assumed to be 60% of sales) (IF, and only IF you can sell the extra capability)!

If you are wondering, the 5th step is, "If during any previous step the constraint or limiting factor is broken during any of the previous steps, go back to step 1. BUT, DO NOT let your own inertia (fast thinking!) become the system's constraint!

Technorati Tags: Continual Improvement, Cost, Costing, Efficiency, Goldratt, Key Performance Indicator, KPI, Little's Law, Management, Shareholder Value Add, Supply Chain, SVA, Theory of Constraints, TOC, TQM, Value Chain

Dr. Eliyahu M. Goldratt Foundation 5K Run/Walk & Thinker's Run/Walk

I did it!
I had one sponsor (Michael Bork) who could not it, make plus me. My son came along to pick up the pieces (of me when I collapse).
We started off at 10:30AM at a too fast pace in sweltering heat (it was only 86 degrees F, felt like a lot more!) but beautiful blue sky. Anyway up the first steep pitch everything seemed fine until about 10 paces after the top of that … then i got the message to cool it a bit. Walking with my 21year old son was a bit too much for my almost 67 year old legs.
We made to the 1 hour mark right on schedule and kept on going - the longest steep part followed. We made it to the 2 hour point about 10 minutes late - I had to stop for my crams! 1 hour to go … in 50 minutes. Fortunately this part is easier and I think the 1 hour is way to generous. Anyway we had time to photograph the cows, some flowers and the view. Got there pin 2 hours and 54 minutes. Bloody cramps … could have been quicker. Guess I need to get in shape.
Hope all the people on the run in Chicago had fun too. I hope they all have a great conference.
Pictures from the walk:



























































 This how long it took!!!

Technorati Tags: Theory of Constraints, TOC

Dr. Eliyahu M. Goldratt Foundation 5K Run/Walk or Thinker's Run/Walk

To be sure I can actually make it up to the pass I tried it yesterday. Goal will be 3 hours on June 2nd.

Well I made it up, despite some leftover bits of snow (I walked up in sandals and got cold feet) ... just in 3 hours. So Google's estimate is generous.

Also had to walk down for an hour before my phone could find the network - so got quite a bit more exercise and thinking than i expected.

I am ready to perform on June 2nd!

Anyone coming???

It was NOT like this!!  (Geneva lakeside in February)

Rudi

Dr. Eliyahu M. Goldratt Foundation 5K Run/Walk & Thinker's Run/Walk

The event in Chicago is hosted by the Theory of Constraints International Certification Organization to benefit the Dr. Eliyahu M. Goldratt Foundation.
Following his untimely death in June 2011, the TOCICO set up the Dr. Eliyahu Goldratt Foundation. The goal of the foundation is to encourage and reward continued development of knowledge through fellowships in memory of Dr. Goldratt. These fellowships will be awarded for applied research that significantly enhances the TOC knowledge and will be funded by businesses and corporations.
The TOCICO will utilize the funds raised in this 5K Run/Walk to grant fellowships focused on the development and recognition of the next big ideas that upgrade the Theory of Constraints knowledge.
For more information on the Chicago event please click on the following link: http://www.runningguru.com/WebSite.asp?webSiteID=61

Rudi Burkhard’s Thinker's Run/Walk, June 2nd, 2012

for the Dr. Eliyahu M. Goldratt Foundation

Since I am unable to attend the TOCICO conference in Chicago I also cannot participate in the run/walk. To make up for this I am organizing my own walk near my home above beautiful Lake Geneva. This is an active thinker's walk - about 8 miles and 2400 feet to the col du Marchairuz.
Anyone that is or can be in the Geneva region is welcome to join me. From A to B is said to be 3 hours and 18 minutes; it is 13.8 km. and a 730 meter climb! There is a restaurant at the top. Below is a selection of photos from a previous walk! If you do wish to join me – please let me know. Your cost to participate is 30CHF plus your transportation to St. Oyens and from the Marchairuz and your living expenses. The 30CHF will all go to the foundation.
Here is the route to the col due Marchairuz and some photos from the route? Further info about hiking in the region: http://wanderland.myswitzerland.com/en/orte_detail.cfm?id=31345.  I hope this gets at least a few people to join me.




















At the Start in St. Oyens



















Still at the start in St. Oyens.

























About 2 hours from the Marcairuz.

























About 80 minutes to the Marchairuz from here. Nearby is a sinkhole that used to be a source of ice in the summer - before modern refrigerators.



















Next to the bear - water comes out of the cliff!

























60 minutes to go, My legs start to ache!



















The GOAL. Drinks and restaurant here! From here you can walk back down or get someone to pick you up!














The view from up there somewhere



















Another view … part way down where I usually get picked up. You can just barely see the Mont Blanc.
Technorati Tags: Goldratt, Theory of Constraints, TOC

“Shit Happens” Deal with It! - 3

Almost everyone desires security, the natural reaction is to forecast and plan. Still, even with the best laid plans “shit will still happen”! We live in a chaotic World and might as well get used to it. The question is how to deal with uncertainty – is it better forecasts, budgets and plans, or is it better strategies, tactics, procedures and algorithms to deal with “shit” when it does happen.

I choose better strategies and tactics to deal with the consequences of “shit”. I do not have a crystal ball so I know that I cannot forecast with any accuracy – so why waste my time fine tuning forecasts and plans?

About Cause and Effect analysis to gain competitive advantage (the beginning!)

 

What does all this mean for our Business?

Every business has many policies, rules, common practices (the way we do business around here), culture and key performance indicators that are the things that should result in good positive bottom line results, hopefully better than our competitors’ results. Look around the business World – in many industries (maybe yours too) market shares are almost ‘locked in’ (they barely change from year to year) indicating (this is a cause and effect supposition) that all competitors are more or less the equal … why should your competitors suffer the hassle of switching to your product … they would gain no advantage by working with you.

In most industries it is difficult to gain a product advantage. If you do achieve an advantage competitors will soon copy with something very much the equivalent. If competitors generally copy any product innovation very quickly then, the way we do business is a possible source of significant advantage possibly even with advantages competitors find difficult to copy. Could the way we do business within an industry be a profitable area for a company to seek a significant or decisive competitive advantage?

Given your business and the situation in your industry might a rigorous cause and effect analysis lead to the direction of a solution – the direction to growth, market share gains and (much) better profitability? Could we build solutions, validated with rigorous cause and effect analysis, that we can forecast will (not might) have a strong positive effect on our bottom line? (NB. Cause and Effect analysis and prediction is an integral part of the scientific method.)

Technorati Tags: Continual Improvement, Efficiency, Execution Management, Focus, Goldratt, Management, Product Development, Strategy and Tactics, SVA, Theory of Constraints, TOC, Value Chain

“Shit Happens” Deal with It! - 2

Almost everyone desires security, the natural reaction is to forecast and plan. Still, even with the best laid plans “shit will still happen”! We live in a chaotic World and might as well get used to it. The question is how to deal with uncertainty – is it better forecasts, budgets and plans, or is it better strategies, tactics, procedures and algorithms to deal with “shit” when it does happen.
I choose better strategies and tactics to deal with the consequences of “shit”. I do not have a crystal ball so I know that I cannot forecast with any accuracy – so why waste my time fine tuning forecasts and plans?

January 2009 – “Think Globally”

Dr. Goldratt’s short lecture can be found here: "Think Globally" It is about the assumptions companies made in January 2009 – forecast assumptions about future demand after reading and experiencing the start of the recession in December 2008 and after suffering a 50% drop in orders in that month.
I recommend you watch this short video as Goldratt takes you through his cause and effect analysis about the situation then. He showed that while orders had already declined by 50%, by May normal or almost normal demand levels would be back. If you listen carefully all the necessary information was available from the Internet and from common knowledge about how people and businessmen tend to react – so that the cause and effect analysis could be developed. The short lecture is a description of an electronic component manufacturer and their response to the recession in January 2009. I contend that we can do the same kind of analysis for any other market and any other situation – all we need is to learn how to develop rigorous cause and effect ‘trees’.
As it turned out at least 1 company followed the recommendations from the video, and therefore gained significant market share from their competitors in an otherwise tough market. Competitors responded as expected after the forecast of a deep recession and after experiencing a steep decline in demand.
Before we panic because newspapers and TV business forecast a deep recession or some other economic calamity, let us think the situation through, thoroughly check the available data and use rigorous cause and effect logic before we decide whether we really should panic. Maybe we should question news with a big “REALLY???”
If more business leaders would stop and consider their entire supply chain, then some of the panicky forecasts that sell newspaper and TV advertising may no longer become self-fulfilling prophecies. Our newspapers and the evening news relies on correlation and classification to describe what is going on the business and economic World – using historical ‘parallels’ often based on too little data and information to draw valid conclusions (conclusions may actually become valid because of the forecasts made; news-people create the self-fulfilling prophecies!). Statistics don’t lie, but the people that use them often do.
Try to think in a cause and effect way to decide – don’t trust the news … unless you are sure the analysis is truly valid because your source has developed a rigorous case and effect analysis. Do this and you will have information you can use profitably.

Discussion of Goldratt’s Lecture

The lecture’s content is of course interesting in itself, but look at the structure Goldratt has in his lecture – how he builds up to the conclusion that to lay-off people in January 2009 would be a major mistake (for the type of businesses discussed). Goldratt was a person that trained himself to ask the question: “Really?” when someone makes a (sweeping) statement like, “a recession (or maybe a depression) is coming”. He always sought to answer the question WHY does someone think so. Warren Buffet appears to be another such person that never relies on what others say, but much more on his powers of deduction – his ability to build the cause-effect relationships from what is known, what can be discovered and from life experience to come to what might be a quite different conclusion. If Buffett cannot understand it (like the dot.com boom) he will not invest.
Take a second look at the video and see if you can build the logical tree Goldratt developed for us.
I recommend that you look at some other literature that takes such a quite different approach to thinking. Malcolm Gladwells books question some commonly held beliefs about many different things … one I remember is intelligence … Asians are more intelligent than Whites; they are better at math than Whites. Certainly Asians as a group achieve higher test scores. However Gladwell concludes the Asian environment is much more conducive to learning than our Western learning culture. The way Asian languages encode numbers is much more logical and fast than our complicated way of counting. The Asians advantage comes from their environment and culture and not from any genetic advantage. (You may not agree with Gladwell, so build the cause and effect logic found in his books and attempt to find his faulty conclusion.)
If you look around the Internet, libraries etc. you will find a number of people (Steven Levitt and Freakonomics for instance) that offer different conclusions from those commonly held. Some are of these people are cranks; but some do have good valid conclusions. For us readers the important thing is to analyse what has been written … not just does the information correlate with what we ‘know’ but are the cause and effect links valid?










'Shit Happens"


Technorati Tags: 6-Sigma, Continual Improvement, Efficiency, Focus, Key Performance Indicator, KPI, Sales, Theory of Constraints, TQM

“Shit Happens” Deal with It! - 1

Almost everyone desires security, the natural reaction is to forecast and plan. Still, even with the best laid plans “shit will still happen”! We live in a chaotic World and might as well get used to it. The question is how to deal with uncertainty – is it better forecasts, budgets and plans, or is it better strategies, tactics, procedures and algorithms to deal with “shit” when it does happen.

I choose better strategies and tactics to deal with the consequences of “shit”. I do not have a crystal ball so I know that I cannot forecast with any accuracy – so why waste my time fine tuning forecasts and plans?

The Past is what is wrong with Forecasts

We simply have not enough of a clue about the future – we have no knowledge of what is really going to happen. Every forecast I have ever seen is an assumption about the future – most often this assumption is some sort of extrapolation (very often linear) made from the past. Extrapolation in some form or another occurs whether or not a person or a computer makes the forecast – it is the only way most of us know how to visualize the future. After all we have to base our forecast on some sort of information and assumptions.

In my career I have seen interesting situations that demonstrate the unreliability of our forecasting and planning capabilities (as long as the future looks like the past forecasts will be Ok – when something jolts the economy (even just a little bit) accuracy goes out the window.

• I was responsible for a type of Nylon for hosiery that had a superb texture and feel to it, but it was significantly more expensive than other, conventional, nylons. This, rather superb, product was not selling well around the World and my sales area was no exception. Based on forecasts we would never make any money with it. Management decided to get out of the business – starting with my market; told me to get out of the market – stop selling the product.As sales manager for the region the best way I knew to cut demand was to increase price dramatically. So I doubled it. What happened next was a surprise … demand increased! Doubling the price did not work, so I did it again. Demand continued to increase and at this new price the product became very profitable. What I had done – quite accidentally – was to create a luxury product.Our forecast based on historical demand and therefore our business plan indicated the best we could was to get out of the market. As it turned out, we did not understand our (customers’) market and by total accident created a success. The lesson I learned was to be ready for surprises, and when they happen take advantage of them.
• Later on I was manager of another business and had the good fortune to have two excellent years of growth in sales and profit. It was budget time near the end of the second year and my sales forecast was due. From what my gut was telling me (I could not prove it and extrapolation of the trend showed continued growth) sales in the following year would at best match what we had just achieved. Well the computer’s projection out of the past indicated my business would grow again. In the end my gut lost to the computer’s forecast – management ‘talked me into’ a growth forecast (despite the knowledge that our industry was operating at close to capacity). Reality showed that my gut (which I could not explain well) was the much more accurate forecast. (NB. In this case my gut was correct, but could just as well been way off with the computer’s gut delivering the better, more appropriate, forecast.We don’t know which forecast will be correct – what we need are tools and processes to react to reality correctly.
• A long time ago double knit polyester fabrics were all the rage – they were cheap and did the job. Every year we made new 5-year forecasts always showing that the dramatic increases in sales would not continue – demand would be flat the following year. Well, it was not – the same fantastic growth went on for more than 5-years. After a number of years of forecasting too low, we learned – this market was growing at a fantastic rate and we had better forecast and plan capacity accordingly. So we extrapolated from history – which by that time looked like almost vertical exponential growth … so you can imagine what our latest 5-year forecast looked like.That was the year growth went from almost exponential to flat and then decline! Clearly using history was a big mistake!

The lesson from this and many other such stories is not that we should stop making plans. We must, however, recognize the fallibility of our plans and therefore the need to build processes and tools that help us respond correctly to surprises in either direction.

The story that follows should speak to many of us. It takes place in January 2009 soon after the recession started.

 

 

 

 

 

 

 

 

Technorati Tags: 6-Sigma, Continual Improvement, Efficiency, Execution Management, Focus, Goldratt, Key Performance Indicator, KPI, Management, Production, Replenishment, Sales, Supply Chain

Project Management - Critical Chain Challenged! I

A response to a recent article in the GPM (The German Association for Project Management) contain the following reservations in relation to Critical Chain:

1. "Critical Chain proponents claim that projects are shortened by an average of 25% and that the project throughput is significantly increased. By my understanding of the logic of project management both methods will have about the same Throughput." (I guess the author of the response means the critical path and the critical chain methods result in the same throughput.)
   
2. "The author of the blog entry claims that many Critical Chain users are unwilling to report their success - since it represents a competitive advantage. How can the effectiveness of a method be proven if users are unwilling to report and describe their successes. Or is it simply so that Critical Chain des not have any success?"

Does Critical Chain Shorten Projects?

There are 2 ways to convince yourself of the likelihood that Critical Chain does actually cause projects to be significantly shorter than other methods.

1. Perform a thought experiment. Test the logic of Critical Chain in your mind. Based on what you know about single and multi- project environments build up the logic that either disproves or proves whether or not the Critical Chain method will be successful. If you choose this method you will have to build the cause and effect logic that leads to the correct conclusion. To ensure a correct conclusion every step in the cause and effect chain(s) must be checked using the categories of legitimate reservations. Not that difficult a task, but one that you must validate with colleagues, both those familiar with project management and others that are not.
2. You can evaluate the simple Critical Chain solutions that are supposed to achieve the spectacular results claimed - they are risk free since the actual work does not change; just the organization of that work.
   • Critical Chain cuts task times in half and places half of what was cut at the end as a project buffer. So the plan is 75% of what you started with - which proves nothing about project execution. The action places an aggregated project buffer at the end of the Critical Chain instead of spreading it over all the tasks (Side paths are handled in the same way but do NOT add to the project buffer.) The actual work we need to do is not reduced. What we have is a buffer at the end of the project plan that is to be used to give us early warning that trouble is brewing in the project - if buffer consumption is greater than the rate of project completion we are heading for trouble.
     
     Why can we cut task times in half and the live with only half the buffer aggregated at the end?
     
     The assumption Goldratt made was that we all include a significant amount of safety in every task - because every resource in a project wants to be seen as reliable. Since the time a task will take does not follow a normal (Gaussian) distribution - the distribution is skewed significantly to the right (statistics of repetitive actual projects show this well). The amount of safety for say 90% certainty of completing a task on time is very high - probably even more than the amount cut using Goldratt's rules. According to Goldratt's assumption we have plenty of safety, but we find ways to waste it. Putting the buffer at the end puts that safety under the control of the project manager so that any gains made in one task can help another in trouble. (Delays are still passed on, but task time gains are now also passed on - in very many of current and historical cases you  know about most tasks were finished on time - but rarely early (more than half should be early). If tasks are rarely delivered early, then we must be wasting time by delivering on time instead of when we actually finished our task … early. (If we make task time efforts that are relatively certain to finish on time (before implementing Critical Chain), then it follows that more than 50% of the time a task should finish early. The fact the many tasks do not helps prove that time allotted to tasks is often wasted.
     
     Try it … not much can go wrong and your information about the project is improved because of monitoring the buffer. Think about the risk is zero … at worst the project will take the same time as before.
   • When Critical Chain is introduced in an environment one of the first actions is to freeze at least 25% of all projects - stop all work on these projects. The impact of this action is to seemingly delay some projects in favour of others - so a good prioritization is essential. The further impact will be that resources will  focus their efforts better - they will no longer be pushed to switch tasks as often. Multi-tasking will reduce significantly and the flow of projects will increase. This is not so easy to prove, but professor John D. Little (of MIT) did just that. His proof  known as Little's Law. You can find his proof on the internet … but for most of us understanding the math it is not easy.
     
     Another way to show the impact of freezing 25% or more projects is to use simulations. There are several that could be used including the bead simulation,  the confetti factory and the columns of numbers. At least some of these simulations are explained somewhere on the web. Simulations are a simplification of reality, nevertheless they may convince you enough to at least try the freeze tactic.
     
     What is the risk with freeze? Customers whose projects have been frozen for a time may complain initially. However, after doing the simulations you may well realize that even if a client must wait now, he will still get his project earlier than otherwise. Projects will complete much sooner (those not frozen) and the frozen ones have an excellent chance of finishing earlier than they otherwise would. Time lost due to multi-tasking is recuperated and ensures even the frozen projects complete earlier than they otherwise would. Risk is low, but you must explain to clients what  you are doing and why!
     
     (As projects complete, you can defrost a corresponding amount. Workload on resources should remain about constant … or be lowered further if multitasking is still very high.)
3. Get references from successful implementations. I am certain you can find these in several place - Critical Chain software suppliers, Critical Chain consultants, Academia and the TOCICO. However, every project environment will be different from yours so even when you find the success stories you will still need to check the logic, check your paradigms and in the end check out the methodology on real projects.

When we were young … Baie Comeau, Quebec, 1953.
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Yield (or Scrap) Targets

To improve yield or reduce scrap is on the face of it a good thing. But what could be the consequences?

Corporate Policy

The corporation, a multi-billion corporation, requested their internal consultants to calculate what yield (or scrap) was costing the company. A 1 billion€ corporation with materials costs of 50% of turnover and a 85% materials yield could save 75m€ if 100% yield were achieved. Every %age point yield improvement would add 5m€ to the bottom line and increase return on sales  .5%. Not a bad result if profits are at about 10% of sales.

So, the corporation decides that all factories should improve their yield by 4 per cent in the next forecast period (next year).

Polymer Factory

The polymer factory of this corporation received the dictate from corporate and wondered how they would be able to meet the targets set by management. It turns out that the majority of polymer produced by this factory is one of 3 colours – white, black or natural. These 3 products already have very high yield or low scrap rates – not much was possible here. However a sizeable part of production was for polymer pigmented in many of the colours of the rainbow. Each of these colours was produced in small quantities and therefore had correspondingly low yields and high scrap rates. Maybe the solution lies here – improving the yield of all these small volume products would allow this factory to achieve their target. But how could it be done?

The machines of the factory are all sized for the three high volume products. These machines, while used to produce colours are not suited for that job. Set-up losses are simply too high. What the factory needed was small machines for small production runs. However because funds for investment were not available the factory could not invest in such machines.

Factory management was in a real bind – with the available equipment and given the product mix they had to produce yield improvements were impossible. At the same time not to achieve improvements was also not an option.

The Factory’s Solution

The factory’s purchasing people had already developed a series of suppliers; as a safety valve should demand exceed capability. The solution was therefore simple. Since these potential suppliers all had smaller equipment production of colours was outsourced to them. The yield targets were achieved, BUT… The added outsourcing cost outweighed the yield savings by about 1m€/year.

The factory could not reduce their operating expenses so their operators were standing idle more often – when colours would have been produced. The suppliers charged for their work – since a small machine takes as many operators as a large one, and since these suppliers want to make money the price for the outsourced production was high – therefore the negative impact.

What are the ugly policies at work here?

When I was young!!!

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TOC4U-Focus: Pharma under Pressure

TOC4U-Focus: Pharma under Pressure: The FT of today (couple of weeks ago now) published an article about many of the Worlds leading Pharmaceutical companies and their success i...

Pharma under Pressure

The FT of today (couple of weeks ago now) published an article about many of the Worlds leading Pharmaceutical companies and their success in R&D. It turns out that all but one of the companies reviewed have a pipeline with an expected value less than their investment in R&D. All of them are in need – they all must improve the productivity of their R&D. The approach taken seems to be cost and risk reduction through outsourcing. Is this really a solution?Could the solution be to question common practice – if what we do is faulty there might be a chance. There might be a chance much more powerful than the cost and risk reduction described in the article.

Does Outsourcing Lower Cost?

It depends! Most companies have a cost accounting that allocates overheads to  their R&D operations (overheads are allocated to practically all functions). When they outsource they may be able to reduce direct expenses, but in most cases overheads remain – they are simply spread over the other functions. On top of this the companies outsourced to all want to make a profit that must be paid for and they need management – someone to control what they are doing.It feels as though no or very minimal savings can be made – no matter how the actions might be reported.

Does Outsourcing Reduce Risk?

Well maybe – but only to the extent that risk is transferred to the company doing the actual work. The supplier’s risk is actually higher since he will have fewer developments (I assume) to spread their risk across. Major companies plan to simply transfer this risk to others and wash their hands of it. Well maybe not quite – it seems outsourcing brings risk with it –does the new supplier, who probably needs the business have the necessary relevant competency? If we squeeze the supplier too much, will he survive? If a supplier goes under who will finish the project?

Might there be a Better Way?

Project performance is notoriously poor in most, if not all, project environments. Even project environments that apparently do a good job (they deliver approximately on time) still take too long and cost too much. It is not the people, they are doing their best, given the situation. The bottom line is that project organisations are not delivering enough value the business needs. They take too long for the economic viability of the business. No wonder management seeks to reduce R&D cost. Reducing cost, though, does not solve the problem. It ensures the company will develop less since capacity is now less. Cost reduction cannot be the way. But, is there a better way?A better way would be a more effective project organisation. One that can reliably deliver more projects, reliably and more quickly is the magic we need. With the value of 1 extra day’s sales being (in Pharma) huge such a solution, if it is at all possible would bring enormous value.How could this dream be realized? Our people are already all working to their limit; so how much more effective can we become? If we want to improve significantly we must assume that more projects, reliably on time and more quickly is possible – our job is to find out how to do it!

Common Practice?

If Pharma (or any project environment) wants to improve then common practice must be questioned. Improvement can only be made through changes (I make the assumption that people will have optimized the present way of working already – so we cannot expect much improvement by simply doing what we have always done better. We must question today’s common practice, rules, policies and behaviours if we want to find the key.

Test the following statements – are they at least partially true?

Work in Process.

• A resource standing idle is a major waste. If some is not working make sure we give him or her something to do.
• Employees believe they must always be busy – otherwise their job may be in danger.

Task and Project Time Estimates

• Project task timings and project timings are estimated for management approval.
• There is pressure from management to deliver projects sooner.
• Once task and project timings are determined they become commitments – management measures project teams against these ‘commitments’. Estimates (subject to considerable uncertainty) are transformed into fixed commitments.
• Resources know that their estimates will be under pressure (to be cut) and their estimates will be transformed into commitments.
• Resources include enough time (safety buffers) to ensure their ‘commitments’ can be met – even after cuts.
• Because of points 3-7 here is a lot of safety time in all projects.
• Since most projects still take even more time than estimated, project teams must be wasting the time they have in some way … otherwise all projects should be delivered on time or earlier. At least this assumption must be true if an improvement is to be found.

Full Kit

• Since there is pressure for all resources to be busy working ‘all the time’ then tasks and projects are often started without ‘Full Kit’ – without all materials, information, authorisations etc. being available.
• Since there is pressure to finish as soon as possible projects are often started without ‘Full Kit’

If these statements are true, then on the one hand there will be a lot of work in process and all project plans must have plenty of safety – but its wasted.

Work in Process (WIP)

Professor John Little (of MIT) proved that the more WIP slows down your throughput. “The more patients in the waiting room, the longer the waiting time.” The same happens with projects – the more projects underway, the longer they will all take. All because resources are ‘forced’ to divide their time among all projects – all project managers want their elephant (project) to get through the gate ASAP. And yet we all know that our herd of elephants will get through the gate much quicker in single file – each elephant hold the tail of the elephant in front with his trunk!Work in process increases because there is always plenty of work available. Because it’s available it starts to get done slowing down the overall process. Some tasks or projects end up being late aided by Murphy (uncertainty) – Murphy will never die! The delayed tasks/projects cause projects to be released as soon as possible aggravating the situation. We have a negative spiral.Multi-tasking is part of this negative spiral. Generally speaking we know that multitasking is not a good idea, but we are not aware of how devastating the effect is. Simple experiments show that 50-100% lost capability is definitely in the realms of the possible or probable. Organisations that have been able to ban ‘bad multitasking’ have seen their capability jump by 50% or more.To reduce Work in Process requires just a very simple tactic – prioritize your projects and freeze the last 25 – 50% of the list. Flow, the number of projects completed per period, will immediately increase dramatically. Pharma companies may want to wait with implementing the tactic in order to put in place the proper formal process and maximize their benefits.

Task and Project Time Estimates

The 7 points above describe common practice and resources’ behaviour in order to protect themselves. The fact remains that every task will have significant safety in it that will be wasted – a resource will not finish early (certainly not by much) because he cannot admit to sandbagging his task times. This behaviour will even lead to late tasks (and projects) because when Murphy does attack (always in the worst possible moment) there will be too little task time left to recover.Why not remove safety from all tasks and bundle it at the end of the project – the safety buffer becomes the project manager’s and is used to protect the project and NOT the tasks. A late task is immaterial, it’s the project that counts. It is worth remembering that statistically we need less safety buffer if we bundle it in one place – at the end!

Full Kit

The pressures to start ASAP cause tasks and projects to start with inadequate preparation. Mountaineers do not climb Everest without ensuring all necessary authorisations; necessary equipment, maps etc. are in their kit. It would be dangerous to NOT have Full Kit. If mountaineers won’t start a climb without Full Kit why do we do it in projects? Its because of management and business pressures.Missing Full Kit is a source of rework, multi-tasking, poor quality and lots of lost time. Full Kit is an extremely simple concept that has been forgotten because the physical damage of an early start is so low … or its ‘invisible’ to us.To implement Full Kit is easy – just decide where it makes sense and make someone responsible for it.

Pharma Companies

They are no different from anyone else. Projects in this industry take much longer than in most others, so the benefit of 25% shorter projects will be even greater – probably can be counted in the many millions. All it takes is to decide to question common practice and start the process of implementation. We call the methodology Critical Chain – it is the way to manage projects in planning and during execution.The potential is surely there!

 

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