Dynamic Buffer Management (DBM) for the Supply Chain

Dynamic Buffer Management (DBM) for Inventory and the Supply Chain on Prezi

Here is the presentation I made to the RKL eSolutions ERP User Group in Lancaster, PA, on Friday, 11 May 2012. Please contact me directly via the link below if you would like a copy of the accompanying white paper, as well.

Increased supply chain confidence through simplicity

Traditional approaches to inventory management and replenishment divide inventory stocks into two portions:

1. Working stock – the inventories designed to cover daily demand
   
2. Safety stock – the inventory quantities designed to cover variation in supply or demand or both
   

Years of statistical analytics and software development have been focused on improving the ways in which lead-time, demand and safety stock values are calculated. So much, in fact, that most of the people who use supply chain management, inventory management, or replenishment software frequently do not even understand what the software is doing, how it is doing it, or why it works or does not work.

Some years ago I was consulting a firm and, in the course of the business, reviewing how they went about their inventory management and replenishment. They had software that did inventory management and that included replenishment calculations.

So, we were sitting together and he was describing to me what he was doing on his computer. He said, “Here’s the ordering screen. It shows historical demand here [pointing], and the recommended order quantity here [again, pointing]. And, I don’t know exactly what this number is for [pointing], but if I think the system is suggesting that I buy too much or two little, I can adjust this number until the suggested order quantity lines up with what I think it ought to be.”

Well, of course, what the system was doing was exponential-smoothing of demand and the value he was adjusting was the value of alpha in the formula.

What I refrained from asking him (only by biting my tongue) was, “If you are going to simply adjust the system’s findings to your intuition, why use the system at all?”

The moral is: Systems that are not understood—and most complex systems are not understood—are also not trusted. Especially if they frequently—or even, regularly—produce what are perceived to be unreliable results.

The artificial divide

The artificial subdividing of stock quantities into “working stock” versus “safety stock,” and adding complexities around the factors used to calculate the one value versus the other provides no added value. In fact, the complexity actually leads to less reliability because the users frequently do not know how to set the input parameters effectively. Not to mention the fact that the parameters that are effective today may not—in fact, likely will not—be effective tomorrow or next week.

The fact of the matter is, in most cases, the only awareness of the division between “working stock” and “safety stock” quantities is found in the software itself and those that may be intimately acquainted with the software and its configuration. The people on the warehouse floor typically do not know when they have made an incursion into “safety stock.” They don’t know that the first 41 units they picked for order number 8789089 were from “working stock,” and the last nine units were taken from “safety stock.” And, they should not care.

Even the managers frequently have no visual signal that an incursion has been made into “safety stock.”

Inherent simplicity

Employing Theory of Constraints (ToC) Dynamic Buffer Management (DBM) makes life easier to understand for those responsible for inventory management and replenishment (read: supply chain managers). The buffer size (for any given item in any given stocking location) is a single number. (Let’s say, 1,000 units.)

The formula for setting the initial buffer size is simple and easily understood. Typically that formula is something like this:

Initial Buffer Qty = [Average Daily Demand] * [ToC Replenishment Days] * [2] * [Paranoia Factor]

The only factor that really needs any kind of explanation is the “Paranoia Factor.” This is merely a multiplier selected by intuition and based on senses of the criticality of an item. An item might be critical because it is used in the production of 800 other items; or because the majority of your customers all buy this item; or because one hugely important customer relies upon you for this item; or dozens of other reasons.

Once the initial buffer size has been calculated and set, the buffer is divided (mathematically) into three “zones.” The top third is called the green zone, the middle third is called the yellow zone, and the bottom third is called the red zone.

Going forward, the DBM system simply monitors for conditions at each replenishment cycle and adjusts the buffer size according to rules. The rules are typically:

1. Too Much Green – The item has been found in the green zone on three consecutive replenishment cycles; therefore, reduce the buffer size by one-third.
   
2. Too Much Red – The item has been found in the red zone on two consecutive replenishment cycles; therefore, increase the buffer size by one-third.

It’s that simple. No complex formulas for calculating and managing variability in demand or supply.

On top of that, supply chain managers can have simple visual signals as to the status of their buffers. A simple view of the inventory data (by location) can readily provide red light, yellow light, and green light indicators for the buffer status in any stocking location for any item. No math and easy to equate to action:

• Green light – no action required
• Yellow light – take note, perhaps investigate critical factors like larger-than-normal orders or orders pending for critical customers
• Red light – consider expediting measures, if necessary

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NOTE: There are more options available with DBM, such as identifying and managing SDCs (sudden demand change items—like seasonality), managing Virtual Buffers (between stocking locations, such as warehouse-to-warehouse replenishment, or broader supply chain visibility and collaboration). It is not the intent of this article to exhaust the applicability of DBM.

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RKL eSolutions, LLC is in the process building a cloud-based solution to help you manage your inventory in just such a way—using Dynamic Buffer Management and the Theory of Constraints. Contact me or fill out the contact form here if you would like more information.

Consider the possibilities (especially now, in these challenging times)

A recent survey of published results by manufacturing and service companies[1] that have applied constraint management methods effectively shows:

• A mean reduction in lead time of 70%
• A mean reduction in manufacturing cycle times of 65%
• A mean improvement in due-date performance of 44%
• Mean inventory reductions of 49%
• A mean combined financial improvement (revenue, throughput, profit) of 76%

[1] Mabin, Victoria J. and Steven J. Balderstone, The World of the Theory of Constraints: A Review of the International Literature, St. Lucie Press, Boca Raton, FL, 2000

[Excerpt from Schragenheim, Eli and H. William Dettmer, Manufacturing at Warp Speed – Optimizing Supply Chain Financial Performance, St. Lucie Press, Boca Raton, FL, 2001]

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If you would like help getting started with apply constrain management to your business for rapid ROI and ongoing improvement, please contact me. Find me on LinkedIn.

Simpler is better: Dynamic Buffer Management (DBM)

Somehow, in the dark recesses of the past, someone came up with the idea that we should (at least in our minds) segregate our regular stock (inventory quantities) from our “safety stock” as if there were some difference between the two. “Safety stock,” APICS and others suggest, is to cover “variations” in lead-time or demand, while our “regular stock” is to cover “normal demand”—whatever that is. But for most businesses today, variation in demand is the rule, and not the exception. Furthermore, isn’t it true that our whole stock quantity is really what we want to manage—not some isolated portion of our stock that we describe logically as “safety stock.”

Simpler is better. Our whole stock quantity should buffer the system (read: the whole enterprise) from losses in throughput (read: profits).

For years I have worked with small-to midsized enterprises (SMEs), many of which I first touched when they were in transition from entrepreneurial to enterprise in nature. When I found them, they generally knew very little about their inventory. Oh, sure: they knew in a general sense which items were profitable and which were not. They also had a general handle on which items in their inventory were the “fast movers” and which were “the dogs.” Nevertheless, when it came to managing their inventory quantities they almost all struggled with the all too common problem of being sold-out of some items (and thus incurring losses of potential sales and profits) while, at the same time finding that they were overstocked on dozens of other items (so that they were simultaneously incurring high carrying costs and lower cash flows as a result). The problem was, from month to month, it was almost never the same items that were sold-out versus over-stocked. They could never predict what quantities were going to sell, so they couldn’t predict what quantities to stock.

Constraints management (Theory of Constraints) suggests—as I said above—that our whole stock of any item (taken in total) should serve one purpose: to buffer the system from losses to throughput. Now, it is not the purpose of this present writing cover all of the various details of a full Dynamic Buffer Management solution. The simplicity of Dynamic Buffer Management (DBM) is what makes it so appealing. The following is a real-life application of DBM in action.

The raw data we have on our example SKU looks like this:

We have just two months of data from 2007, full years’ data from 2008 and 2009, and a partial year for 2010. Note that demand in 2008 was fairly stable, ranging between 72 and 220 units per day. However, demand is 2009 become wildly erratic—ranging from just 1 unit per day to 389 units per day. Over the entire recorded history for this SKU, we find the following statistics:

If we graph these data, the results look like this:

Now, it’s nice to know that a third-order polynomial curve fits pretty nicely with a six-period moving average of these data, but most SMEs do not have a staff statistician available to them to help analyze all their inventory history in order to determine how to set parameters like stock levels, safety stock, reorder points, line points and more. Nor, do they have confidence that statistics will necessarily serve them better than their intuition has in the past.

What they are looking for is something SIMPLE, RELIABLE, EASY TO UNDERSTAND and EFFECTIVE. Dynamic buffer management is all of that.

Let’s imagine that we are at the end of year 2008 and we want to set up DBM for year 2009. We’re going to do so based on our 2008 history.

The first thing we need to know is: how big should our starting buffer be for this item?

Well, it ain’t rocket science! Establishing a starting buffer quantity requires the knowledge of a few facts because it is more important to be “approximately right” than to be “precisely wrong.” No matter how much precision (read: time, energy and money) is put into calculating a “precise number” for the size of the buffer (or any other business ‘forecast’ number) that number will end up being “precisely wrong” 99.999 percent of the time.

So, to find an “approximately right” number for the starting buffer is more important than finding a “precisely wrong” one. In our example, we used the following formula:

Starting Buffer Size = average period consumption over the Last 12 months + (safe replenishment time in days * average consumption/day * 2 * paranoia factor)

Some of these numbers are arbitrary:

1. “Safe Replenishment Time” is nothing more than a “safe” estimate of the time it would take to replenish the item under normal circumstances. Almost anyone working in purchasing or replenishment or manufacturing can pick that number for items with which they work day-in and day-out. If one says, “Five,” and another says, “Eight,” then use eight. It’s that simple.
2. The number “2” used in the formula is also arbitrary. It is nothing more than an additional safety factor to cover unusually high demand or unusually slow delivery. In a moment you’ll see why it is not terribly important in the long run.
3. “Paranoia Factor” is our third arbitrary number. This value is used to cover management’s concern about things like:
1. “Our inventory will skyrocket” – so let management set a paranoia factor of less than 1.0 on some items
2. “If we run out of this item, we lose sales on other things, too! – so increase the paranoia factor
3. “This is a high-margin item and we don’t want to lose a single sale” – so make the paranoia factor larger

For our example, we calculated a starting buffer size of 11,954 base on a paranoia factor of 1.000. Let’s watch what happens using the actual consumption figures from year 2009.

Now, let’s see how DBM helps us out:

• Period 1: We just stocked up to almost 12,000 units and in period one we had the worst month ever! We sold only 23 units! Have we done the right thing here?!?
  Even though it seems like we have plenty of stock, we follow our basic rule: Whatever we consume, we replenish. So, we place a replenishment order for 23 units.
  
  At the end of the period, our “Buffer Status” = 99.81 percent. We have almost a full buffer.
• Period 2: Things return to normal now. We consume 3,315 units, we get our replenishment supply of 23 units, and we end the period with a buffer status of 72.27 percent. That’s okay. We really don’t get concerned as long as the buffer remains in the green zone—that is, above two-thirds.
  
  We dutifully place our replenishment order for your consumed quantity—3,315 units.
• Period 3: We consume 2,153 units and get our 3,315 units from our replenishment order. True to form, we order replenishment for the 2,153 units, and we end with the buffer solidly in the green at 81.99 percent.
• Period 4: Wow! We consume 7,903 units; get our replenishment of 2,153 units and our buffer status ends up in the red zone. The red zone is a buffer below 33.33 percent full. [NOTE: Here I’m going to play along with some anomaly in Excel’s failure to calculate and apply conditional formatting correctly. We’re at 33.89 percent and this should be “Yellow,” but it’s not. Excel says it’s “Red,” so we’re going to call it “red.” Close enough!] We take no immediate action other than to note that this is the FIRST PERIOD in which our buffer has fallen into the red zone.
  
  We place our standard order to replenish period consumption.
• Period 5: We have another great period for this item. We consume 8.476 units; get our replenishment order for 7,903 units, and end the period for the SECOND PERIOD IN SUCCESSION in the red zone. The buffer reached 29.09 percent.
  
  Other than placing our replenishment order, we take no specific action.
• Period 6: We’re hit with record sales and move 11,666 units. Even after replenishment order arrives, we still are sitting near the bottom of the red zone at 2.41 percent.
  
  Since this is the THIRD SUCCESSIVE PERIOD where we have ended up in the red zone for this buffer, we take action to INCREASE THE BUFFER SIZE BY ONE-THIRD. Our replenishment order is now for the 11,666 units consumed PLUS the buffer increase of 3,985 units.
• Periods 7 and beyond: We will continue to monitor and manage the buffer dynamically applying these simple rules…
• THREE CONSECUTIVE PERIODS IN THE RED ZONE, then INCREASE the BUFFER by ONE-THIRD
• FOUR CONSECUTIVE PERIODS IN THE GREEN ZONE, then DECREASE the BUFFER by ONE-THIRD

As you can see, this is a very SIMPLE, YET EFFECTIVE, way to facilitate stock management. There are some other principles that should be understood—such as the fact that the BUFFER actually contains both the stock in the warehouse and what is in-transit (or, in manufacturing, if a make-item) and is due within one “Safe Replenishment Time” period.

This is so simple!

Most inventory systems could do this with relatively minor tweaks. It is really just managing inventory by “max stock level”—when quantities fall below the maximum stock level, replenish back to the maximum stock level—with some kind of data view (perhaps even using Microsoft Excel™) to display the buffer status with action signals.

Let me know what you think.

[Cross-posted at Kinaxis Supply Chain Community.]

A logical approach to making more money

IF [100] we sometimes make changes in our business expecting one result, but we get a different (e.g., unexpected or even negative) result…

THEN [110] we sometimes miss or misunderstand the cause-and-effect relationships in how our business is actually working; AND [120] we sometimes have doubts about what we think we know about how our enterprise actually works.

IF [120] we sometimes have doubts about what we think we know about how our enterprise actually works… AND [130] we (as a management team, or the company as a whole) could somehow put our intuitive knowledge about how our business works on paper…

THEN [140] we could read and reread our logic about how our organization really works (and fails to work) in reaching our goals.

IF [120] we sometimes have doubts about what we think we know about how our enterprise actually works; AND [140] we could read and reread our logic about how our organization really works (and fails to work) in reaching our goals…

THEN [150] we might discover flaws in our thinking and reasoning regarding how our organization really works (or fails to work) in reaching our goals.

IF [130] we (as a management team, or the company as a whole) could somehow put our intuitive knowledge about how our business works on paper…

THEN [160] others can also read and review our logic concerning what we believe is really happening in our business and how it all works.

IF [160] others can also read and review our logic concerning what we believe is really happening in our business and how it all works…

THEN [170] others may be able to help us find flaws in our thinking about how our business works (or fails to work) in reaching our goals.

IF [170] others may be able to help us find flaws in our thinking about how our business works (or fails to work) in reaching our goals;

OR IF [140] we could read and reread our logic about how our organization really works (and fails to work) in reaching our goals…

THEN [180] we may realize that we have some flaws in our thinking about what is really happening in our business enterprise.

IF [170] others may be able to help us find flaws in our thinking about how our business works (or fails to work) in reaching our goals;

THEN [190] others may also gain a better understanding of how our organization works (or fails to work) in reaching our goals.

IF  [190] others may also gain a better understanding of how our organization works (or fails to work) in reaching our goals; AND [200] discussions based in documented logic may help convince others (in a way presumption or other discussions may not)…

THEN [210] other stakeholders (e.g., employees, vendors, customers, board members) may be persuaded to help us in taking effective action to change our enterprise in ways that will help us achieve more of our goals.

IF [210] other stakeholders (e.g., employees, vendors, customers, board members) may be persuaded to help us in taking effective action to change our enterprise in ways that will help us achieve more of our goals; AND [220] other stakeholders want to help us in taking effective action to change our enterprise…

THEN [230] other stakeholders will help us in taking effective action to improve our business.

IF [150] we might discover flaws in our thinking and reasoning regarding how our organization really works (or fails to work) in reaching our goals; OR [180] we may realize that we have some flaws in our thinking about what is really happening in our business enterprise…

THEN [240] we will gain a better understanding of how our business really works (or fails to work) in reaching our goals.

IF [240] we will gain a better understanding of how our business really works (or fails to work) in reaching our goals; AND [250] we want to take actions that will really help our enterprise achieve more of its goals…

THEN [260] we will be guided (by what we have learned through this process) to take effective action to help our business reach more of its goals.

IF [260] we will be guided (by what we have learned through this process) to take effective action to help our business reach more of its goals; OR [230] other stakeholders will help us in taking effective action to improve our business…

THEN [270] our business will improve and we will achieve more of our goals.

What you have just experienced is “reading through” a logical “tree” as used in the Thinking Processes. In this case, the end result [270] is a business that is virtually assured of improving and reaching more of its goal (read: making more money, if it is a for-profit institution).

What was their first step: First, to realize that their own history of false-starts and attempts at improvement that produced little or no beneficial results proves to them that they do not really understand their own business enterprise. This is revealed in entities 100, 110, and 120 above.

This management team does not necessarily need a consultant; but what they do need is a framework (a theory) by which to understand how their organization really works – and, indeed, fails to work – in attempts to make more money tomorrow than it is making today.

“Experience teaches you nothing without theory.” – W. Edwards Deming

Second, this management team needed a method by which create a theory or framework as to how their organization really works and fails in its attempts to reach more of its goals. Most organizations have no such framework to guide them and have discovered no method by which to build and document such a framework. As a result, they tend to be guided by numbers (which frequently lie to them) and by “tribal knowledge” (which is all of the important intuitive knowledge contained in your organization that is valuable but entirely undocumented).

That’s it: It took this management team a realization that trial-and-error was no longer a satisfactory way to run a business enterprise – especially in a recession; and the discovery of a tool to help them document and reconsider what they already knew but did not know how to exploit for a breakthrough.

Read more about Goldratt’s Thinking Processes as developed in the context of the Theory of Constraints (ToC) by doing an online search for terms such as:

·         Thinking Processes

·         Theory of Constraints

·         Goldratt

·         Current Reality Tree

If you and your management team would like help in getting started with these tools that can bring rapid and dramatic improvement, contact me at rcushing@geewhiz2roi.com.

©2010 Richard D. Cushing

Surviving the recession with breakthrough thinking - Part 2

[Continuation]
Thinking should be a process
Now that your management team is has identified a goal and they have a theory by which to consider the data they might collect, they are far better situated to determine what information might be valuable to them. If your team is focused on gathering relevant information where the goal is making more money, and the framework or theory tells us that there must be at least one bottleneck or constraint in our system (the whole enterprise), your team now knows the very first question to ask and answer. That question is: “What is our constraint or bottleneck to making more money tomorrow than we are making today?”
 
While we might find some hints in the data stored within your existing ERP database and other computer systems, it is far more likely that what is really valuable in finding the answer to this critical question is presently being held in the minds of your own firm’s managers and leaders all across the organization. We call this kind of undocumented information consciously or subconsciously filed away by the organization’s people day by day “tribal knowledge.” Tribal knowledge is what they have learned through facts and circumstances accompanied by their subjective intuition about what they have garnered objectively.
 
The relatively limited amount of information that is required to soundly answer the key question we have identified is actually better defined from probing the staffs’ intuitions – tribal knowledge – regarding the context of the organization, the uniqueness found in it and its products, and how it works or does not work in delivering value to its customers.
 
In almost every problem, the value of the factual details pales in significance when compared to the framework and setting in which the details transpire. Breakthrough thinking comes from the application of intuition that gives meaning and cohesiveness to the observations made.
 
Traditional information-gathering efforts focus on the past (historical data captured in computer systems or elsewhere) or the present failings. Unfortunately, since these cannot – by their nature – be an effective guide for the future, the real breakthroughs emerge from the intuition of those closest to the workings of the “system” – the organization taken as a whole.
 
You and your management team might begin by gathering a cross-functional team of staff whom you deem to be trustworthy and experienced in their functions within your enterprise. Then, simply commence by asking this simple question: “What small handful of things do each of you see as keeping our firm from making more money tomorrow than we are making today?”
 
 Give each of them several three-by-five cards or large stick-notes and ask them to jot down these factors for you. Before they begin writing, give them the following guidelines:

• State each thought as clearly as possible 
• Include an “actor,” as in “Our vendors provide us with too many defective components for Product Line A.”
• Do not include assumed cause-and-effect statements. For example, do not say “Competition is driving prices down, so our salespeople offer too many discounts to make sales.” Instead, make each of these comments stand on their own if you believe them to be true. Write them as separate items thus: “Our competitors are driving prices down,” and “Our salespeople offer too many discounts in order to make sales.”
• Put each statement on a separate card or stick-note.

You should refer to these as undesirable effects or UDEs (pronounced: YOU-dee-ees) as did Eli Goldratt when he first promulgated the Thinking Processes. Naturally, some of the participants will have more ideas to jot down than others. Your object in this part of the exercise is to come up with roughly 20 unique UDEs with which to begin creating your organization’s Current Reality Tree – a logical tree that will depict what is not working – what is keeping your organization from making more money tomorrow than it is making today.
 
You can learn more about Eliyahu Goldratt and the Thinking Processes, including Current Reality Trees by doing an Internet search on any or all of these terms, or review this and related Wikipedia articles. You will also find additional references and application of the Thinking Processes right here at GeeWhiz to R.O.I.
 
Every problem is unique and is likely to require a unique solution
A wise man once said, “No man crosses the same river twice: for both the man and the river have changed with each crossing.” The must be said in the realm of business problem-solving.

One of the most frequently occurring and devastating errors executives and managers make in problem-solving and planning is that one problem or situation is identical to another. Fads in management come and go, but no fad or prior experience can take into account fully the differences in time, place, people involved, surrounding conditions, and the present purpose of reaching a breakthrough. The Thinking Processes, however, are able to leverage the “tribal knowledge” and intuition available within your organization to discover unique responses to unique situations even when they may appear (on the surface) to be “just like” what you faced last month or last year.
 
Furthermore, the Thinking Processes are able to decipher and disarm cultural differences and conflicting values within your organization without compromise – which is nothing more than accepting the best of the worst options and blending it with the worst of the best solutions.
 
Far too many managers and executives go out of the way to draw comparisons between their present reality and some other situation believed to be similar. These similarities may be expounded to great length even though the two situations may be separated by miles, years and even involve entirely different companies and personnel. This propensity stems from a desire to reach an “efficient” solution while feeling some satisfaction about being “objective,” as well. It also reduces or eliminates much of the requirement for actually thinking about the uniqueness of the organizations present situation. The Thinking Processes’ Current Reality Tree (CRT) simplifies that while providing management with a truly objective and rational view of what is keeping the “system” from achieving more of its goal.
 
[To be continued]
©2010 Richard D. Cushing

The New ERP - Part 6

Creating Your CRT (continued)

STEP 2:
Having collected some ten to 20 UDEs from your team, weed out any duplicates and make certain that the UDEs are clearly understood by everyone on the team, rewording them as necessary.

A well-written UDE will contain an "actor" as well as some description of the affects being experienced. For example, your team would need to clarify further a UDE that says only "poor quality." Is the poor quality coming from a vendor or is it your own organization that is producing poor quality? You will need to clarify such a UDE, after discussion, by rewriting it as, "We are getting up to 10% defect rates on widgets coming from ABC Company."

Another factor to consider: If you end up with UDEs that read something like "Because we get poor quality widgets from ABC Company, we end up with high scrap rates in Z-machine processing," then you will want to break that down into two UDEs that might read as:

1. "QC reports that we are getting up to 10% defect rates on widgets coming from ABC Company" and
   
2. "We have high scrap rates in our Z-machine process"

The reason for doing this is that the CRT construction itself will define the cause-and-effect logic, as we will see shortly.

Once everyone on the team is clear on the meanings of the UDEs you have collected, you and your team will be ready to move on to the next step in the construction of your CRT.

STEP 3:
In this step you and your team will begin linking the UDEs in cause-and-effect relationships. We usually do this on a whiteboard using the sticky-notes for the UDE entities and drawing in the connecting if-then arrows on the whiteboard.

Since one of the UDEs submitted had a "because" in it, and since we needed to break down that UDE into its components, we have a great place to start building our CRT, using logic already implied in our discussion.

Note that we assign numbers to the entities as we place them on the board. This is merely for the purpose of facilitating discussion and documentation. The numbers become shorthand for referring to an entity (rather than restating the entities whole contents).

One would read this beginning logic as: "IF [10] we get up to 10% defect rates on widgets from ABC Company, THEN [20] we have high scrap rates on our Z-machine processing."

There is additional logic implied in this statement, and everyone may be fully satisfied with the statement as it stands (understanding that the defective widgets consumed by the Z-machine process contribute to the defect coming out of that processing. However, if there are any questions, one might simply add a clarifying entity (as shown below).

Here you will note that we used a letter (rather than a number) to identify clarifying entities in the logic tree. We have also used an oval to encircle the two arrows leading from [A] and [10] to [20]. This oval constitutes an AND JOIN, so that the logic would be read as: "IF [10] we get up to 10% defect rates on widgets from ABC Company, AND [A] we use widgets from ABC Company in our Z-machine processing, THEN [20] we get high scrap rates on our Z-machine processing."

When building your CRT, you and your team may begin anywhere. Pick a couple of UDEs that appear to have some fairly obvious cause-and-effect relationship and place them on the whiteboard and join them with an arrow. Then seek the team's agreement with the logic before moving on to add another entity.

As I said, we typically do this on a whiteboard using sticky-notes. It can get a little messy. Don't let it get too out of hand, as you will need to be able to read your CRT and make sense of it when you're through building it.

However, once you're done with building it on the whiteboard, someone will have to undertake to document the CRT for review and final approval. We generally do this using Microsoft Visio, but any flow charting software (or even the drawing tools in Microsoft Word) could be used to create your final version. When creating a first draft, clean up the language in the entities to make the tree read relatively naturally from bottom to top. Also, rearrange the entities to reduce the number of arrows crossing one another just for general clarity.

[To be continued]

The New ERP - Part 5

Thinking Processes to the rescue

Dr. Eliyahu M. Goldratt introduced the Theory of Constraints (TOC) to the world in his book entitled The Goal, back in 1984. In the 25 years since its introduction, TOC has been applied successfully in a vast array of businesses, industries, not-for-profit organizations and government entities.

Too many executives and managers are stumbled by the use of the word "theory" in TOC. Unfortunately, this is something you'll likely have to just "get over." Dr. Goldratt was a physicist before becoming involved in the world of business, so he calls it a "theory," under the assumption that someone, someday may prove it wrong -- that an exception may be found. To date, however, no such exception has been discovered.

The "Thinking Processes" are five interrelated methods to allow the rational analysis of any system in support of focused improvement leading to ongoing improvement. By applying these tools, it is possible for an organization to construct a rational framework that accurately describes how an organization works and interacts within its industry and the economy in general. The primary Thinking Process to be applied in mapping the system's (organization's) current state is the Current Reality Tree (CRT). The accompanying figure is an example of such a logical tree.

The Current Reality Tree (CRT)
The CRT is predicated upon the fact that, in most organizations or "systems," the many factors that may be identified as "problems" really arise from a relatively small number of "roots" or "root causes." Applying the CRT Thinking Process allows executives and managers to capture and decode "tribal knowledge" about how their organizations function, and what is or is not working in a logical, re-readable written form.

Once placed in the CRT form, using rules of logic, this written document may be used by the entire management team to read, re-read, discuss and modify the logic until everyone is certain that the logic presented in the CRT reflects the "reality" expressed within the organization's operations. Hence, the tool's name is the "Current Reality Tree."

Constructing a Current Reality Tree
While experience in guiding a team through the Thinking Processes is beneficial, there is no magic in creating a CRT or applying any of the other TOC principles. You do not need me or any other consultant to do this. There are a number of good resources available online and in print that may be used to guide your firm through the effort. However, if you want a short-cut to effective, first-time application the Thinking Processes -- if you'd like to make real progress in the first day of your effort -- then using an experienced consultant may be the most cost-effective way of getting there.

Nevertheless, here are the basic steps:

STEP ONE
To begin constructing a CRT, executives should gather a cross-functional team of ten or 15 key people from across the organization. This team should be briefed on the goal of creating a CRT and why it is important to the organization.

Having gathered the team, the members of the team should be asked select a single "goal" for the system (organization). In a for-profit organization, and where working on the "big picture" for the entire system, we recommend a goal similar to "To make more money -- both today and in the future." (While this is likely not something you want to put on company brochures as a mission statement, it is the true goal of every for-profit organization and every other goal is subsidiary to it. Quality, customer service, market leadership, or any other goal cannot be maintained for long in the absence of making money.)

With the single goal in mind, the next question to set before the team is this: "What is keeping us from reaching this goal?"

Naturally, when this question is asked, you are likely to get different responses from the sales and marketing folks than you will get from accounting or the production department. Ask them to jot down their responses as simple, clear sentences. Generally, I ask them to do so on 3"x3" sticky-notes. Ask them to include an "actor" in each sentence. Also, ask them to NOT include any "because" statements. Simply state the hurdle or blockage to achieving the goal.

Examples might be:

• Salespeople spend too much time in the office doing paperwork
• Our prices aren't competitive
• The warehouse has too many out-of-stocks
• Our lead times aren't competitive
• ... and so forth

In working with the Thinking Processes, we stop referring to these as "problems," right away. We call these "Un-Desirable Effects" or "UDEs" (pronounced: YOU-dee-eez), for short. The reason we do this is because when we have "problems" we want to solve them. But, as we will see, all of these cannot be "solved" by addressing them directly. They are caused by occurrences elsewhere in the "system."

[To be continued]

The danger of "We know!" - Part 3

In this portion of our series, we're going to talk about how to put a "framework" or "theory" around what you already know about your business enterprise. This is not an exercise in "business theory." This is a real and practical approach to gaining effective control of your enterprise after (perhaps) years of "muddling through" with more or less mediocre results.

One of the reasons executives and managers are not able to really "understand" what they "know" about their own organizations is that, since they are unaware of a "tool set" to aid them, they never actually put what management "knows" (we call it "tribal knowledge") about how their organization works -- or doesn't work -- on paper. Therefore, in the absence of such a written document, the managers themselves cannot read and re-read their own logic about cause-and-effect relationships that flow throughout their enterprise.

Our mind makes thousands of assumptions about what we think we know. Our mind processes these assumptions and incoming information so rapidly, we are unable to filter out our incorrect thinking or invalid assumptions adequately. Putting our thoughts down on paper helps us step through the logic that is leading us to certain conclusions.

Equally important, however, is that fact that, if we never get our reasoning down on paper, it is nearly impossible for us to invite others to truly analyze our logic -- to critically review our logic -- in an effort to help us bring about lasting improvement. As a result, not only do we not realize that we have flaws in our thinking about what's happening in our organization, others who might bring beneficial insights to our aid cannot do so because they, too, cannot help us find the flaws in our rationale. This inevitably leads to the fact that these undiscovered flaws in our thinking about how our organization really works -- or does not work -- remain embedded in our decision-making processes.

The good news is that there is an outstanding set of tools that are readily accessible, easily understood, and relatively simple to apply that will help executives and managers lay hold of "tribal knowledge" and reduce it to an understandable framework (or "theory") about how their organizations function in a real and practical way. Others that have applied that tool set have said things like:

• "I have never seen my business so clearly before."
  
  
• "We truly understand our business for the first time."
  
  
• "This process has helped us regain a sense of control over our enterprise."
  
  
• "For the first time in a long time, we are empowered to move proactively toward real, lasting improvement."
  
  
• "We now have a consistent framework for diagnosing problems and planning for improvement."
  

What is this simple, yet amazing, tool set for executives and managers?

It is simply the TOC (Theory of Constraints) Thinking Processes as developed by Eliyahu Goldratt, a suite of logic trees that provide a simple, yet effective, road map for diagnosis and change.

So, continue to say, "We know!" and miss out on the opportunity for real, practical and sustainable improvements to your enterprise, or discover a whole new, easy-to-use and effective tool set for starting down the road to ongoing improvement.

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Contact me!
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Getting more of what you want - Part 7

So, let's suppose that you've decided that applying the TOC Thinking Processes might really help your organization bridge the chasm -- successfully make the leap from entrepreneurial to enterprise. What kind of results might your firm expect from a sound and diligent application of TOC-based continuous improvement?

Here's a summary from an independent study as the results were published in a white paper available from AGI - Goldratt Institute:

• Mean reduction in lead times = 70%
• Mean improvement in on-time deliveries = 44%
• Mean reduction in cycle times = 65%
• Mean increase in combined financial variables performance = 63%
• Mean reduction in inventory levels = 49%
• Mean increase in revenue/throughput = 73%

If you'd like to get started on a path to improvements like these, contact me today at rcushing(at)ceoexpress(dot)com.

Thank you.

Contact me!

...

Getting more of what you want - Part 6

So, what is this "tool set" that can help the entrepreneur and his management team decode the complexity of the growing enterprise in order to extract simplicity out of its seemingly endless layers of complexity?

The answer is: The TOC (Theory of Constraints) Thinking Processes.

As Victoria Mabin of the School of Business and Public Management of the Victoria University of Wellington states: "[T]he TOC Thinking Processes... are a suite of logical trees that provide a roadmap for change, by addressing the three basic questions of What to change, What to change to, and How to cause the change. They guide the user through the decision making process of problem structuring, problem identification, solution building, identification of barriers to be overcome, and implementation of the solution." [Emphasis added.]

This tool set is not new, as Mabin makes clear: "The TOC has evolved over [more than] 20 years.... [and] is now used worldwide by companies of all sizes.... [M]any managers who routinely use TOC believe they understand their businesses for the first time.... [T]hey gain a sense of control and of being able to act proactively.... TOC empowers managers by providing a consistent framework for diagnosing problems." [Emphasis added.]

Now, even though I'm a consultant and I get paid for helping companies make effective decisions by applying the TOC Thinking Processes, let me say up front: You don't need me to apply the TOC Thinking Processes. You could attend a workshop or do self-study in order to learn how to apply these tools in your business.

The workshops will likely cost you $5,000 to upwards of $10,000. Self-study and trial-and-error might take you some months -- or even years. There are, however, a good number of books available to guide you through this process.

So, while you don't need me to leverage these tools, connecting with me might be the fastest and lowest-cost method of getting to solutions you need in the very near future. If you'd like to connect with me, email me at rcushing(at)ceoexpress(dot)com.

In our next post, we'll talk about what kinds of results are typical with the application of TOC principles.

[To be continued...]

Contact me!

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Getting more of what you want - Part 5

How many things does an executive or a manager need to know to manage an organization -- a "system" -- effectively?

Answer: Exactly 3 things!

Here they are:

1. What needs to change
   
   
2. What the change should look like
   
   
3. How to effect the change in the system
   

This sound easy and hard at the same time, doesn't it?

Well, I am a firm believer in a concept called inherent simplicity, although I cannot take credit for creating the concept. The concept was developed and articulated by Eliyahu Goldratt in his recent book The Choice. The basic thought of inherent simplicity is that underlying all complexity in systems is a concealed simplicity. If that simplicity can be made apparent, then any "problems" within the complex system will require only relatively simple solutions.

Consider a complex manufacturing machine with hundreds of moving and interrelated parts. No one would design such a machine so as to require that one touch every one of the hundreds of parts in order to effect an adjustment in the machine's operations and outcomes. A machine with hundreds -- or even thousands -- of interrelated, interdependent moving parts may often be adjusted to produce different results simply by making changes in a small handful of parts. These simple adjustments are made available because the inter-dependencies between the various moving parts are known and understood -- at least to the persons that designed the machine and wrote the instruction manual.

Similarly, if the entrepreneur can find a tool set that will help him or her decipher, document and understand the inter-dependencies in the organization (i.e., system) as it moves toward enterprise proportions and complexity, then the entrepreneur will also be able to discover the relatively small handful of places he or she needs to "adjust" the "system" in order to produce different results.

Is there such a tool set? Is it readily available? Is it of a nature that the entrepreneur can readily grasp the tools and make use of them effectively?

I firmly believe that there is.

[To be continued...]

Contact me!

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