The Goal: a process of Ongoing Improvement

particular product. The bastard had the nerve to offer seven hundred and one
dollars. Did you hear that! Seven hundred and one dollars. Now you
understand?’’
I turn to Ralph, "What’s our material cost for Model Twelve?’’
"Three hundred thirty-four dollars and seven cents,’’ Lou answers without
any hesitation.
"Johnny, are you sure that accepting this order will not have any impact on
our domestic clients?’’
"Not unless we go out, and sing it from the rooftops. On this point Dick is
right, no impact. But the whole idea is ridiculous. Why are we wasting our
time?’’
I look at Lou, he nods.
"We’ll take it,’’ I say.
When Johnny doesn’t respond, I repeat, "We’ll take it.’’
"Can you explain what is going on?’’ he finally says, between gritted teeth.
"It’s very simple,’’ I answer. "I told you that I have spare capacity. If we take
this order, the only out-of-pocket cost to produce these products will be the
cost of the materials. We’ll get seven hundred and one dollars, and we’ll pay
three hundred and thirty-four dollars. That’s three hundred seventy-eight
dollars to the bottom line per unit.’’
"It’s three hundred sixty-six ninety-three per unit, and you forgot the
freight,’’ Lou corrects me.
"Thank you. How much is the air freight per unit?’’ I ask Johnny.

---

"I don’t remember, but it’s not more than thirty bucks.’’
"Can we see the details of that deal?’’ I ask him. "What I’m particularly
interested in is the products, the quantities per month, and the prices.’’
Johnny gives me a long look and then turns to Dick, "Bring it.’’
Once Dick is on his way, Johnny says in a puzzled voice, "I don’t get it. You
want to sell in Europe for a price that is much less than what we get here,
even less than the production cost, and you still claim that you’ll make a lot
of money? Lou, you’re a controller, does it make sense to you?’’
"Yes,’’ Lou says.
Seeing the miserable expression on Johnny’s face, I jump in before Lou has a
chance to explain. Financial calculations, showing the fallacy of the ‘product
cost’ concept won’t help, it will just confuse Johnny even more than he’s
confused now. I decide to approach it from another angle.
"Johnny, where do you prefer to buy a Japanese camera, in Tokyo or in
Manhattan?’’
"In Manhattan, of course.’’
"Why?’’
"Because in Manhattan it’s cheaper, everybody knows that,’’ Johnny says
confidently, here he’s on solid ground. "I know a place on Forty-seventh
Street where you can get a real bargain— half price compared to what they
asked me to pay in Tokyo.’’
"Why do you think it is cheaper in Manhattan?’’ I ask, and then answer my
own question, "Ah, we know, transportation prices must be negative.’’
We all laugh.
"O.K. Alex. You’ve convinced me. I still don’t understand but if it’s good for

---

the Japanese, it must be profitable.’’
We work on the numbers for almost three hours. It’s a good thing that I
brought both Ralph and Lou.
We calculate the load that this large deal will place on the bottlenecks—no
problem. We check the impact on each of the seven problematic work centers
—two might reach the dangerous zone, but we can manage. Then we
calculate the financial impact —impressive. Very impressive. At last we’re
ready.
"Johnny, I have one more question. What guarantees that the European
manufacturers won’t start a price war?’’
"What do you care,’’ Johnny brushes the issue aside. "With such ridiculous
prices I’m going to lock in Monsieur Djangler for at least one year.’’
"Not good enough,’’ I say.
"Now you’re really getting difficult. I knew that this was too good to be
true.’’
"That’s not the point, Johnny. I want to use this deal as a beachhead to
penetrate Europe. We can’t afford a price war. We must come up with
something else besides price, something that will make it very difficult to
compete with us. Tell me, what’s the average supply time in Europe?’’
"About the same as here, eight to twelve weeks,’’ he answers.
"Good. Promise your Monsieur that if he commits to the quantities per year,
we’ll deliver any reasonable quantity within three weeks of receiving his
fax.’’
In astonishment he asks, "Are you serious?’’
"Dead serious. And by the way, I can start to deliver immediately. I have
whatever’s needed for the first shipment in stock.’’

---

"I guess it’s your neck,’’ he sighs. "What the heck, in any event you will have
full responsibility very shortly. If I don’t hear from you, I’ll fax him
tomorrow. Consider it a done deal.’’
Only after we pull out of the parking lot do we let ourselves go; it takes
us more than fifteen minutes to settle down. That is, Lou and Ralph dive into
polishing the numbers. From time to time they come up with a slight
correction, usually not more than a few hundred dollars. Compared to the
total deal it’s not significant at all. But Lou finds it relaxing.
I don’t let it bother me. I sing at the top of my voice. It takes us more than
half the way home until they are satisfied. Lou announces the final number.
The contribution to the net profit of the plant is an impressive seven digits, a
fact that doesn’t deter him from specifying it down to the last cent.
"Quite a profitable deal,’’ I say. "And to think that Johnny was about to drop
it.... What a strange world.’’
"One thing for sure,’’ Lou concludes. "You can’t rely on marketing people to
solve the marketing problems. They’re captured by old, devastating, common
practices to an even larger extent than production.
"Try to imagine,’’ he continues, "the reaction of people when I start to
explain to them they are the ones who believe too much in cost accounting.’’
"Yes, I sigh. "Judging from today I shouldn’t expect much help from these
guys. Even though, you know, there might be something in Dick.’’
"Hard to tell,’’ he comments. "Especially when Johnny is holding him so
tightly under his thumb. Alex, how are you going to do it?’’
"Do what?’’
"Change the entire division?’’
That puts an end to my euphoria. Damn you Lou, why did you have to bring

---

it up?
"God have mercy on me,’’ I say. "Yesterday we were talking about inertia.
We were complaining about the inertia that we have. Compare it to the inertia
that we are going to face in the division.’’
Ralph laughs, Lou groans, and I feel pity for myself.
This week, even though we made such impressive progress, one thing was
definitely proven—I’m still managing by the seat of my pants.
Take yesterday, for example. If it weren’t for Ralph’s instinct that something
was missing, we wouldn’t even have noticed the huge, open opportunities. Or
today. How close was I to giving up? If it hadn’t been for Lou putting us on
the right track ....
I must find out just what are the management techniques I should master. It’s
simply too risky not to. I must concentrate on it. I even know where to begin.
. . .
Maybe I was holding the key all along. What did I say to Julie in the
restaurant? My own words echo in my head: "When did Jonah have the time
to learn so much? As far as I know he never worked one day of his life in
industry. He’s a physicist. I can’t believe that a scientist, sitting in his ivory
tower, can know so much about the detailed realities of the shop floor.’’
And then, the idea of ‘scientist’ came up again, when Lou and Ralph were
arguing about the usefulness of classifying data. And I myself supplied the
answer: How does one go about revealing the intrinsic order? Lou asked it as
if it is a rhetorical question, as if the obvious answer is that it is impossible.
But scientists do reveal the intrinsic order of things . . . and Jonah is a
scientist.
Somewhere in the scientific method lies the answer for the needed
management techniques. It is obvious. But what can I do? I cannot read a
book in physics, I don’t know enough mathematics to get through even the
first page.

---

But maybe I don’t need it. Jonah stressed that he wasn’t asking me to
develop the methods, just to determine clearly what they should be. Maybe
popular science books would be sufficient? At least I should give it a try.
I should go to the library and start digging. The first modern physicist was
Newton, that’s probably the place to start.
I’m sitting in my office, my feet up on the desk and staring blankly into
the room.
The entire morning, I got only two calls—both from Johnny Jons. First he
called to inform me that the deal with the French is signed. He was very
proud of the fact that he negotiated a better deal than expected; in return for
the flexibility and immediacy of our response to their future requests, he
succeeded in squeezing slightly higher prices.
The second time he wanted to know if he could approach our domestic clients
with the same concept. That is, to shoot for a long-term contract where only
the overall yearly quantities are fixed, and we promise three weeks’ delivery
for any specific request.
I assured him that we don’t have any problem responding, and encouraged
him to go ahead.
He’s excited. I’m far from it.
Everybody is busy. Launching this huge new deal has made them really busy.
I’m the only one who has nothing to do. I feel redundant. Where are the days
of the telephone ringing off the hook, when I had to run from one important
issue to the other, when there were not enough hours in the day?
All those calls and meetings were fire fighting. I remind myself. No fires, no
fighting. Now, everything is running smoothly— almost too smoothly.
Actually, what bothers me is that I know what I should be doing. I need to
guarantee that the current situation will continue, that things are thought out

---

in advance so fires will not break out. But this means finding the answer to
Jonah’s question.
I stand up and leave. On my way out I say to Fran, "In the unlikely event that
anyone needs me, I’ll be at the public library.’’
"Enough for today,’’ I say and close the book. I stand up and stretch,
"Julie, join me for a cup of tea?’’
"Good idea, I’ll be with you in a minute.’’
"You’re really into it,’’ I comment as she joins me at the kitchen table.
"Yeah, it’s fascinating.’’
I hand her a steaming cup. "What can be so fascinating about ancient Greek
philosophy?’’ I wonder aloud.
"It’s not what you think,’’ she laughs. "These dialogues of Socrates are really
interesting.’’
"If you say so,’’ I don’t try to disguise my skepticism.
"Alex, your perceptions are all wrong, it’s not at all like what you think.’’
"So what is it?’’ I ask.
"Well, It’s hard to explain,’’ she hedges. "Why don’t you try to read them
yourself?’’
"Maybe one day I will,’’ I say, "but for the moment I’ve enough reading to
do.’’
She takes a sip from her cup. "Did you find what you’re looking for?’’
"Not exactly,’’ I admit. "Reading popular science books doesn’t lead you
directly to management techniques. But I’ve started to see something

---

interesting.’’
"Yes?’’ she says encouragingly.
"It’s how physicists approach a subject; it’s so vastly different from what we
do in business. They don’t start by collecting as much data as possible. On
the contrary, they start with one phenomenon, some fact of life, almost
randomly chosen, and then they raise a hypothesis: a speculation of a
plausible cause for the existence of that fact. And here’s the interesting part.
It all seems to be based on one key relationship: IF... THEN.’’
Somehow this last sentence causes Julie to straighten up in her chair. "Keep
going,’’ she says intensely.
"What they actually do is to derive the unavoidable results logically from
their hypothesis. They say: IF the hypothesis is right THEN logically another
fact must also exist. With these logical derivations they open up a whole
spectrum of other effects. Of course the major effort is to verify whether or
not the predicted effects do exist. As more and more predictions are verified,
it becomes more obvious that the underlying hypothesis is correct. To read,
for example, how Newton did it for the law of gravity is fascinating.’’
"Why?’’ she asks, as if she knows the answer but is anxious to hear it from
me.
"Things start to be connected to each other. Things that we never thought
were related start to be strongly connected to each other. One single common
cause is the reason for a very large spectrum of different effects. You know
Julie, it’s like order is built out of chaos. What can be more beautiful than
that?’’
With glittering eyes she asks, "Do you know what you have just described?
The Socratic dialogues. They’re done in exactly the same way, through
exactly the same relationship, IF . . . THEN. Maybe the only difference is that
the facts do not concern material but human behavior.’’
"Interesting, very interesting. Come to think about it,’’ I say, "my field,

---

management, involves both material and people behavior. If the same method
can be used for each then it’s probably the basis for Jonah’s techniques.’’
She thinks about it for a while. "You’re probably right. But if you are then
I’m willing to bet that when Jonah starts to teach you those techniques you’ll
find that they are much more than techniques. They must be thinking
processes.’’
We each dive into our thoughts.
"Where do we take it from here?’’
"I don’t know,’’ I answer. "Frankly, I don’t think that all this reading really
gets me closer to answering Jonah’s question. Remember what he said? ‘I’m
not asking you to develop the management techniques, only to determine
what they should be.’ I’m afraid I’m trying to jump to the next step, to
develop them. Determining the management techniques must come from the
need itself, from examining how I currently operate and then trying to find
out how I should operate.’’

---

39
"Any messages?’’ I ask Fran.
"Yes,’’ she answers, to my surprise. "From Bill Peach. He wants to talk to
you.’’
I get him on the phone. "Hey Bill, what’s up?’’
"I just received your numbers for last month,’’ he says. "Congratulations
hotshot, you definitely made your point. I’ve never seen anything even
remotely close to this.’’
"Thank you,’’ I say pleased. "By the way, what are the results at Hilton
Smyth’s plant?’’
"You must turn the dagger, huh?’’ he laughs. "As you predicted, Hilton is not
doing too well. His indicators continue to improve, but his bottom line
continues to sink into the red.’’
I cannot contain myself, "I told you that those indicators are based on local
optimum and that they have nothing to do with the global picture.’’
"I know, I know,’’ he sighs. "As a matter of fact, I think that I knew it all
along, but I guess an old mule like me needs to see the proof in black and red.
Well, I think that I’ve finally seen it.’’
"It’s about time,’’ I think to myself but to the phone I say, "So what’s next?’’
"This is actually why I called you, Alex. I spent the entire day yesterday with
Ethan
Frost. It seems that he’s in agreement with you, but I can’t understand
what he is talking about.’’ Bill sounds quite desperate. "There was a time that
I thought I understood all this mumbo jumbo of ‘cost of goods sold’ and

---

variances, but after yesterday, it’s obvious that I don’t. I need someone who
can explain it to me in straight terms, someone like you. You do understand
all this, don’t you?’’
"I think I do,’’ I answer. "Actually it is very simple. It’s all a matter of....’’
"No, no,’’ he interrupts me. "Not on the phone. Besides, you have to come
here anyway—only one month left, you should get familiar with the details of
your new job.’’
"Tomorrow morning okay?’’
"No problem,’’ he answers. "And Alex, you have to explain to me what
you’ve done to Johnny Jons. He goes around claiming that we can make a lot
of money if we sell below what it costs us to produce. That is pure baloney.’’
I laugh, "See you tomorrow.’’
Bill Peach abandoning his precious indicators? This is something I have
to tell everyone; they’ll never believe it. I go to Donovan’s office, but he’s
not there, nor is Stacey. They must be on the floor. I ask Fran to locate them.
In the meantime I’m going to Lou to tell him the news.
Stacey reaches me there. "Hey boss, we have some problems here. Can
we come in half an hour?’’
"No rush,’’ I say. "It’s not so important, take your time.’’
"I don’t agree,’’ she says. "I’m afraid that it is important.’’
"What are you talking about?’’
"It probably has started,’’ she answers. "Bob and I will be in your office in
half an hour. Okay?’’
"Okay,’’ I say, quite puzzled.

---

"Lou, do you know what’s going on?’’ I ask.
"No.’’ he says. "Unless of course, you’re referring to the fact that Stacey and
Bob have been busy for the last week, playing expeditors.’’
"They are?’’
"To make a long story short,’’ Bob concludes the briefing of the last hour,
"already twelve work centers are on unplanned overtime.’’
"The situation is out of control,’’ Stacey continues. "Yesterday one order
was not shipped on time, today three more will be delayed for sure.
According to Ralph, we’re going downhill from there. He claims that before
the end of the month we’ll miss the shipping dates on about twenty percent of
our orders, and not by just one or two days.’’
I’m looking at my phone. It won’t take more than a few days and this
monster will ring off the hook with furious complaints. It’s one thing to be
consistently bad; the clients are used to it and they protect themselves by
stocks or time buffers. But now we have spoiled them, they are already used
to our good performance.
This is much worse than I’ve imagined. It might ruin the plant.
How did it happen? Where did I go astray?
"How come?’’ I ask them.
"I told you,’’ Bob says. "Order no. 49318 is stuck because of...’’
"No Bob,’’ Stacey stops him. "It’s not the details that are important. We
should look for the core problem. Alex, I think that we simply accepted more
orders than we can process.’’
"That’s obvious,’’ I say. "But how come? I thought we checked that the
bottlenecks have enough capacity. We also checked your seven other
problematic work centers. Did we make a mistake in the calculations?’’

---

"Probably,’’ Bob answers.
"Not likely,’’ is Stacey’s response. "We checked and double checked it.’’
"So?’’
"So, I don’t know,’’ Bob says. "But it doesn’t matter. We have to do
something now, and fast.’’
"Yes, but what?’’ I’m a little impatient. "As long as we don’t know what
caused the situation, the best we can do is to throw punches in all directions.
That was our old mode of operation. I had hoped that we learned better.’’
I accept their lack of response as agreement and continue, "Let’s call Lou and
Ralph and move into the conference room. We must put our heads together to
figure out what is really going on.’’
"Let’s get the facts straight,’’ Lou says after less than fifteen minutes.
"Bob, are you convinced that you need to keep using so much overtime?’’
"The efforts of the last few days have convinced me that even with
overtime we are going to miss due dates,’’ Bob answers.
"I see,’’ Lou doesn’t look too happy. "Ralph, are you convinced that at the
end of the month, in spite of the overtime, we are going to be late on many
orders?’’
"If we don’t find a smart way to solve this mess, without a doubt,’’ Ralph
answers confidently. "I can’t tell you the dollar amount, that depends on Bob
and Stacey’s decisions of how much overtime to use and which orders to
expedite. But it is in the neighborhood of over a million dollars.’’
"That’s bad,’’ Lou says. "I’ll have to redo my forecast.’’
I throw him a murderous look. That is the major damage that he sees? Redo
the forecast!

---

"Can we address the real issue?’’ I say in a freezing voice. They all turn to
me waiting.
"Listening again to what you’re saying, I don’t see a major problem,’’ I say.
"It is obvious that we tried to swallow more than we can chew. What we have
to do is to determine by how much and then compensate. It is as simple as
that.’’
Lou nods his head in approval. Bob, Ralph, and Stacey continue to look at me
with poker faces. They even look offended. There must be something wrong
in what I’ve said, but I can’t see what.
"Ralph, by how much are our bottlenecks overloaded?’’ I ask.
"They’re not overloaded,’’ he says flatly.
"No problem there,’’ I conclude. "So let . . .’’
"He didn’t say that,’’ Stacey cuts me off.
"I don’t understand,’’ I say. "If the bottlenecks are not overloaded then...’’
Maintaining an expressionless face she says, "From time to time the
bottlenecks are starved. Then the work comes to them in a big wave.’’
"And then,’’ Bob continues, "we don’t have a choice but to go into overtime.
That’s the case all over the plant. It looks like the bottlenecks are moving all
the time.’’
I sit quietly. What can we do now?
"If it were as easy as determining some overloads,’’ Stacey says, "don’t you
think we would easily solve it?’’
She is right. I should have more confidence in them.

---

"My apologies,’’ I mutter.
We sit quietly for a minute. Then Bob speaks up, "We can’t handle it by
shuffling priorities and going into overtime. We’ve already tried that for
several days. It might help save some specific orders but it throws the entire
plant into chaos and then many more orders are in trouble.’’
"Yes,’’ Stacey agrees. "Brute force seems to push us more and more into the
spiral. That’s why we asked for this meeting.’’
I accept their criticism.
“Okay, it’s obvious that we have to approach it systematically Anyone got an
idea where to begin?”
"Maybe we should start by examining a situation where we have one
bottleneck.’’ Ralph suggests hesitantly.
"What’s the point?’’ Bob objects. "We now have the opposite. We are facing
many, traveling bottlenecks.’’ It’s apparent that they’ve had that discussion
before.
I don’t have any other suggestion, nor does anybody else. I decide to gamble
on Ralph’s hunch. It worked in the past.
"Please proceed,’’ I say to Ralph.
He goes to the board and takes the eraser.
"At least don’t erase the five steps,’’ Bob protests.
"They don’t seem to help us much,’’ Ralph laughs nervously. "Identify the
system’s constraints,’’ he reads. "That is not the problem now. The problem
is that the bottlenecks are moving all over the place.’’
Nevertheless, he puts the eraser down and turns to the flip chart. He draws a
row of circles.

---

"Suppose that each circle represents a work center,’’ he starts to explain.
"The tasks are flowing from the left to the right. Now, let’s suppose that this
one is a bottleneck,’’ and he marks one of the middle circles with a big X.
"Very nice,’’ says Bob sarcastically. "Now what?’’
"Now let’s introduce Murphy into the picture,’’ Ralph responds calmly.
"Suppose that Murphy hits directly on the bottleneck.’’
"Then the only thing left to do is to curse wholeheartedly,’’ Bob spits.
"Throughput is lost.’’
"Correct,’’ Ralph says. "But what happens when Murphy hits anywhere
before the bottleneck? In such a case, the stream of tasks to the bottleneck is
temporarily stopped and the bottleneck is starved. Isn’t this our case?’’
"Not at all,’’ Bob brushes it away. "We never operated that way. We always
make sure that some inventory accumulates in front of the bottleneck, so
when an upstream resource goes down for some time, the bottleneck can
continue to work. As a matter of fact, Ralph, we had so much inventory there
that we had to choke the material release to the floor. Come on,’’ he says
impatiently, "that is exactly what you’re doing on your computers. Why do
we have to regurgitate what we all know by heart?’’
Ralph goes back to his seat. "I just wondered if we really know how much
inventory we should allow to accumulate in front of the bottlenecks?’’
"Bob, he has a point,’’ Stacey remarks.
"Of course I have,’’ Ralph is really annoyed. "We wanted three days’
inventory in front of each bottleneck. I started with releasing material two
weeks before it was due at the bottleneck. Then it turned out that that’s too
much, so I cut it to one week and everything was okay. Now it’s not okay.’’
"So increase it back,’’ Bob says.

---

"I can’t,’’ Ralph sounds desperate. "It will increase our lead time beyond
what we currently promise.’’
"What’s the difference?’’ Bob roars. "In any event we’re sliding on our
promises.’’
"Wait, wait,’’ I cut into their quarrel. "Before we do anything drastic, I want
to understand better. Ralph, let’s go back to your picture. As Bob pointed out,
we do hold some stock in front of the bottleneck. Now let’s suppose that
Murphy hits somewhere before the bottleneck, then what?’’
"Then,’’ Ralph says patiently, "the flow of parts to the bottleneck stops, but
the bottleneck, using the stock that accumulated right in front of it, continues
to work. Of course that eats into the stock and so, if we don’t build enough
stock to start with, the bottleneck might go down.’’
"Something doesn’t match.’’ Stacey says. "According to what you just said,
we have to guarantee the uninterrupted work of the bottleneck by building
stock that will last more than the time to overcome Murphy on the upstream
resource.’’
"Correct,’’ says Ralph.
"Don’t you see that it can’t be the explanation?’’ Stacey says.
"Why?’’ Ralph doesn’t get it, and neither do I.
"Because the time to overcome a problem upstream did not change, we
haven’t faced any major catastrophies lately. So if the stock was sufficient to
protect the bottlenecks before, it must be sufficient now as well. No Ralph,
it’s not a matter of insufficient stocks, it’s simply new wandering
bottlenecks.’’
"I guess you’re right.’’
Maybe Ralph is convinced by Stacey’s argument, but I’m not.

---

"I think that Ralph might be right after all,’’ I say. "We just have to carry his
line of thought a little further. We said that when one of the upstream
resources goes down, the bottleneck starts to eat into its stock. Once the
problem is corrected, what do all the upstream resources have to do?
Remember, if there is one thing that we can be sure of, it’s that Murphy will
strike again.’’
"All upstream resources,’’ Stacey answers, "now have to rebuild the
inventory in front of the bottleneck, before Murphy hits again. But what’s the
problem? We released enough material for them.’’
"It’s not the material that concerns me,’’ I say. "It’s the capacity. You see,
when the problem that caused the stoppage is overcome, the upstream
resources not only have to supply the current consumption of the bottleneck,
at the same time they have to rebuild the inventory.’’
"That’s right,’’ Bob beams. "That means that there are times when the non-
bottlenecks must have more capacity than the bottlenecks. 
Now
I understand.
The fact that we have bottlenecks and non-bottlenecks is not because we
designed the plant very poorly. It’s a must. If the upstream resources don’t
have spare capacity, we won’t be able to utilize even one single resource to
the maximum; starvation will preclude it.’’
"Yes,’’ Ralph says. "But now the question is, how much spare capacity do we
need?’’
"No, that is not the question,’’ I gently correct him. "Just as your previous
question, ‘how much inventory do we need?’ is not the real question either.’’
"I see,’’ Stacey says thoughtfully. "It’s a trade-off. The more inventory we
allow before the bottleneck, the more time is available for upstream resources
to catch up, and so, on average, they need less spare capacity. The more
inventory the less spare capacity and vice versa.’’
"Now it’s clear what’s happening,’’ Bob continues. "The new orders have
changed the balance. We took more orders, which by themselves didn’t turn
any resource into a new bottleneck, but they did drastically reduce the

---

amount of spare capacity on the non-bottlenecks, and we didn’t compensate
with increased inventory in front of the bottleneck.’’
Everybody agrees. As usual, when the answer finally emerges it’s plain
common sense.
"Okay Bob,’’ I say. "What do you think you should do now?’’
He takes his time. We wait.
Finally he turns to Ralph and says, "We have outstanding promises for very
short delivery times on only a small percent of our order intake. Can you
identify those orders on an on-going basis?’’
"No problem,’’ answers Ralph.
"Okay,’’ Bob continues. "For those orders, continue to release material one
week in advance. For all others, increase it to two weeks. Let’s hope that that
will be enough. Now, we have to rebuild the inventory in front of the
bottlenecks and in front of assembly. Stacey, take all the necessary steps to
put the plant, and I mean all the non-bottlenecks, to work throughout the
weekend. Don’t accept any excuses, it’s an emergency. I’ll notify sales that
until further notice they should not promise any delivery in less than four
weeks from receipt of the order. It will jeopardize their new campaign, but
that’s life.’’
Right in front of our eyes the baton has been passed. It’s obvious who is the
boss now. I feel proud and jealous at the same time.
"Bob has taken over very nicely,’’ Lou says as we enter my office. At
least this front is covered.’’
"Yes,’’ I agree. "But I hate to put him in a position where his first
independent actions are so negative.’’
"Negative?’’ Lou asks. "What do you mean by negative?’’

---

"All the actions he is forced to take are leading in the wrong direction.’’ I
answer. "Of course, he doesn’t have any choice, the alternative is much
worse, but still. . . .’’
"Alex, I’m probably thicker than usual today, but I really don’t understand.
What do you mean by ‘leading in the wrong direction?’’’
"Don’t you see?’’ I’m irritated by the whole situation. "What is the
unavoidable result of telling sales that they should quote four weeks’
delivery? Remember, just two weeks ago we went out of our way to persuade
them to quote two weeks. They didn’t have much confidence then. Now, it
will cause them to drop the entire sales campaign.’’
"What else can we do?’’
"Probably nothing. But this doesn’t change the end result; future throughput
is down.’’
"I see,’’ says Lou. "On top of it, overtime is up significantly; putting the plant
to work on the weekend will consume the entire overtime budget for the
quarter.’’
"Forget the budget,’’ I say. "When Bob has to report it, I’ll be the divisional
president. The increased overtime is increasing operating expense. The point
is that throughput will be down, operating expense will be up and increasing
the buffers means that inventory will be up. Everything is moving in the
opposite direction of what it should.’’
"Yup,’’ he agrees.
"Somewhere, I’ve made a mistake,’’ I say. "A mistake that now is causing us
to pull back. You know Lou, we still don’t know what we’re doing. Our
ability to see what’s in front of us resembles that of moles. We’re reacting
rather than planning.’’
"But you’ve got to agree that we are reacting much better than before.’’

---

"That’s not a real comfort Lou, we’re also moving much faster than before. I
feel as if I’m driving looking only in the rear view mirror, and then, when it’s
almost too late, we make last minute course corrections. It’s not good
enough. It is definitely not good enough.’’

---

40
I’m driving back from headquarters with Lou. We’ve been doing this
every day for the last two weeks. We are not in what one might call a
cheerful mood. Now we know every little detail of what’s going on in the
division, and the picture doesn’t look good at all. The only bright spot is my
plant. No, I should get used to the fact that it’s Donovan’s plant. And it’s not
a bright spot, that’s a gross understatement. It’s the real savior.
Donovan succeeded getting everything under control before the clients
had any reason to complain. It will take him some time to regain the
confidence of our sales people, but with me pressing from the other side it
will not take long before it will be okay.
This plant is so good that Lou and I were led astray for some time. The
reports on the division gave us the impression that the situation is quite good.
Only when we went through the elaborate work of separating out Donovan’s
plant was the real picture exposed. And it’s not pretty. It’s actually quite
disastrous.
"Lou, I think we did the exact thing that we knew we shouldn’t do.’’
"What are you talking about?’’ he says. "We haven’t done anything yet.’’
"We have gathered data, tons of data.’’
"Yes, and there’s a problem with the data,’’ he says. "Frankly, I’ve never
seen such a sloppy place. Every report is missing at least back-up details.
You know what I found today? They don’t even have a report on late
receivables. The information is there but—can you believe—it’s scattered in
at least three different places. How can they operate this way?’’
"Lou, you’re missing the point.’’

---

"Am I? Do you know that with proper attention we can reduce the open
receivables by at least four days?’’
"And that will save the division,’’ I say sarcastically.
"No,’’ he grins. "But it will help.’’
"Will it?’’
When Lou doesn’t answer I continue, "Do you really believe it will help?
Look Lou, what have we learned? What did you yourself say when you asked
for the job? Do you still remember?’’
Irritated he says, "I don’t know what you’re talking about. Don’t you want
me to correct things which are obviously wrong?’’
How am I going to explain it to him? I try again.
"Lou, suppose that you do succeed in collecting four days out of the open
receivables. By how much will throughput, inventory, and operating expense
be improved?’’
"They’ll all be slightly improved,’’ he says. "But the major impact will be on
cash. You shouldn’t sneeze at four days’ cash. Besides, improving the
division requires many small steps. If everyone does his share, together we
can lift it.’’
I drive silently. What Lou said makes sense, but somehow I know that he is
wrong. Deadly wrong.
"Lou, help me here. I know that improving the division will require many
small improvements, but . . .’’
"But what?’’ he says. "Alex, you are too impatient. You know what they say,
Rome was not built in a day.’’

---

"We don’t have hundreds of years.’’
Lou is right, I am impatient. But shouldn’t I be? Did we save our plant by
being patient? And then I see it. Yes, many small actions are needed, but that
doesn’t mean that we can afford to be satisfied with actions that improve the
situation. We must carefully choose which ones to concentrate on, otherwise.
. . .
"Lou, let me ask you. How much time will it take you to change, for internal
purposes only, the way that we evaluate inventory?’’
"The mechanical work is not a real problem, that won’t take more than a few
days. But if you’re referring to the work it’ll take to explain the ramifications,
to explain to managers how this affects their day-to-day decisions, that’s a
different story. With concentrated effort, I’d say it’ll take weeks.’’
Now I’m on solid ground.
"What, do you think, is the impact of the way we currently evaluate inventory
on the levels of finished stocks that the division currently holds.’’
"Significant,’’ he says.
"How significant,’’ I press. "Can you give me a number?’’
"I’m afraid not. Not even a meaningful evaluation.’’
"Let’s try to do it together,’’ I say. "Have you noticed the increase in finished
goods that the division is holding?’’
"Yes, I have,’’ he answers. "But why are you surprised? It’s exactly what
should be expected. Sales are down and the pressure to show profits is up, so
they build finished goods inventory to generate fictitious inventory profits. I
see what you mean. We can take the increase in finished goods as an
indicator of the impact of the way we value inventory. Wow, it’s about
seventy days!’’

---

"Lovely,’’ I say. "Compare it to your four days of receivables. On what
should you work? Moreover,’’ I keep on hammering, "what is the impact on
throughput?’’
"I don’t see any,’’ he answers. "I see very clearly the impact on cash, on
inventory, and on operating expense, but not on throughput.’’
"Don’t you?’’ I say mercilessly. "What was the reason that they gave us for
not introducing the new models? Can you recall?’’
"Yes,’’ he says slowly. "They are convinced that introducing the new models
will force them to declare all the old ones they’re holding in stock as
obsolete. That would cause a major blow to the bottom line.’’
"So, we continue to offer the old stuff rather than the new. We continue to
lose market share, but it’s better than to bite the bullet of write-offs. Do you
understand now the impact it has on throughput?’’
"Yes, I do. You are right. But Alex, you know what? With some extra effort I
think that I can handle them both. I can work on the problem of the way we
value inventory and at the same time arrange for more attention to the
receivables.’’ He still doesn’t get it but now I think I know how to handle it.
"What about the plant indicators?’’ I ask him.
"That’s a real Pandora’s box,’’ he sighs.
"What is the damage there? Slightly bigger than four days? And what about
the fact that sales continue to judge opportunities according to the formal
‘product cost’ and desirable margins. Or even worse, that they will look for
anything they can sell above variable cost. What’s the damage there? And
what about the transfer prices between us and the other divisions; that’s a real
killer. Do you want more?’’
"Stop, stop,’’ he raised his hands. "You made your point. I guess I was
inclined to deal with the open receivables issue just because there I know
what to do, while in all the others . . .’’ "Afraid?’’ I ask.

---

"Frankly, yes.’’
"So am I, so am I.’’ I mutter. "Where do we start? Where do we continue? On
what should we concentrate first, on what second? It’s overwhelming.’’
"We need a process,’’ he says. "That’s obvious. It’s too bad that the five-step
process that we developed turned out to be false. No ...Wait a minute Alex,
that’s not the case. At the end, the problem was not wandering bottlenecks. It
was insufficient protection for the existing bottlenecks. Maybe we can use
that five-step process?’’
"I don’t see how, but it’s worthwhile to check it. Should we head to the plant
and give it a try?’’
"Certainly. I’ll have to make some phone calls, but it’s no problem.’’
"No,’’ I say. "I have some commitments for tonight.’’
"You’re right,’’ he says. "It’s very important but not urgent. It can wait for
tomorrow.’’
"Identify the system’s constraint(s),’’ Lou reads from the board. "Do we
accept it as the first step?’’
"I don’t know,’’ I say. "Let’s examine the logic that brought us to write it. Do
you remember what it was?’’
"Roughly,’’ he says. "It was something about the fact that we adopted
throughput as the number-one measurement.’’
"I’m afraid that roughly is not good enough,’’ I say. "At least not at such an
early stage in our analysis. Let’s try again, from first principles.’’
"I’m all for it,’’ he groans, "But what do you call first principles?’’
"I don’t know. Something basic that we accept without hesitation.’’

---

"Fine. I have one for you. Every organization was built for a purpose. We
haven’t built any organization just for the sake of its mere existence.’’
"Correct,’’ I laugh. "Even though I know some people in some organizations
who seem to forget it.’’
"Washington, you mean?’’
"That too. I thought about our corporation, but who cares. Let’s keep going.
Another basic fact is that any organization is comprised of more than one
person, otherwise it’s not an organization.’’
"Correct,’’ says Lou. "But I don’t see the point in all this. I can give you
many more correct statements about organizations in general.’’
"Yes, you probably can, but look at the conclusion that we can derive
already. If any organization was built for a purpose and any organization is
composed of more than one person, then we must conclude that the purpose
of the organization requires the synchronized efforts of more than one
person.’’
"That makes sense,’’ he says. "Otherwise we wouldn’t need to create an
organization; the efforts of individuals would suffice. So?’’
"If we need synchronized efforts,’’ I continue, "Then the contribution of any
single person to the organization’s purpose is strongly dependent upon the
performance of others.’’
"Yes, that’s obvious.’’ With a bitter smile he adds, "Obvious to everybody
except for our measurement system.’’
Even though I wholeheartedly agree, I ignore his last comment. "If
synchronized efforts are required and the contribution of one link is strongly
dependent on the performance of the other links, we cannot ignore the fact
that organizations are not just a pile of different links, they should be
regarded as chains.’’

---

"Or at least a grid,’’ he corrects me.
"Yes, but you see, every grid can be viewed as composed of several
independent chains. The more complex the organization —the more
interdependencies between the various links—the smaller number of
independent chains it’s composed of.’’
Lou doesn’t want to spend too much time on that point. "If you say so. But
that’s not so important. The important thing is you’ve just proven that any
organization should be viewed as a chain. I can take it from here. Since the
strength of the chain is determined by the weakest link, then the first step to
improve an organization must be to identify the weakest link.’’
"Or links,’’ I correct. "Remember, an organization may be comprised of
several independent chains.’’
"Yes,’’ he agrees impatiently. "But as you said, the complexity of our
organizations almost guarantees that there are not many of them. In any
event, it is taken care of by the S in parenthesis that we put at the end of the
word ‘constraint’. Fine, Alex, what do we do about the measurements?’’
"Measurements?,’’ I say in surprise. "Where did they come from?’’
"Didn’t we agree yesterday that the distorted measurements are the biggest
constraint of the division?’’
Bob Donovan is right. Lou certainly has a fixation on measurements. "They
are definitely a big problem,’’ I say carefully. "But I’m not convinced that
they are the constraint.’’
"You’re not?’’ Lou is astonished.
"No I’m not,’’ I say firmly. "Do you think that the fact that most of our
products are already outdated in comparison to what the competition is
offering is not a major problem? Don’t you realize that the attitude in
engineering, claiming that the basic rule of nature is that a project never

---

finishes on time, is an even bigger problem. And what about marketing, have
you seen any marketing plan that has any chance of turning the situation
around?’’
"No,’’ he grins. "As a matter of fact everything that I’ve seen of long term
planning should be more appropriately categorized under ‘long term
bullshitting.’’’
I’m on a roll. Today asking me about problems is like opening a dam. "Wait
Lou, I haven’t finished. What about the mentality that is so prevalent in
headquarters, the mentality of 
covering
your ass. Haven’t you noticed that
whenever we asked about something that doesn’t go so well, everyone almost
automatically started to blame everybody else?’’
"How could I not notice. Okay, Alex, I get your point. There are major
problems all over. It seems that in our division there is a whole herd of
constraints, not just a few.’’
"I still claim that there are only few constraints. Our division is too complex
to have more than a very few independent chains. Lou, don’t you realize that
everything we mentioned so far is closely connected? The lack of sensible
long-term strategy, the measurement issues, the lag in product design, the
long lead times in production, the general attitude of passing the ball, of
apathy, are all connected. We must put our finger on the core problem, on the
root that causes them all. That is what actually is meant by identify the
constraint. It’s not prioritizing the bad effects, it’s identifying what causes
them all.’’
"How are we going to do that? How are we going to identify the divisional
constraints?’’
"I don’t know,’’ I say. "But if we succeeded in doing it here, in our plant, it
must be possible to do in the division.’’
He thinks about it for a minute and then says, "I don’t think so. Here we were
lucky. We were dealing with physical constraints, with bottlenecks, that’s
easy. But at the divisional level we’ll have to deal with measurements, with

---

policies, with procedures. Many of them are cast already into behavioral
patterns.’’
"I don’t see the difference,’’ I disagree. "Here we had to deal with all of the
above. Come to think about it, even here the constraints were never the
machines. Yes, we called and still call the oven and the NCX10 bottlenecks,
but if they were true bottlenecks how come we succeeded to squeeze almost
twice as much out of them as before? How come we increased throughput so
much without buying more capacity?’’
"But we changed almost every aspect of how we operate them, and how we
operate everything around them.’’
"That is exactly my point,’’ I say. "What aspect of operation did we
change?’’ Mimicking his voice I answer, "The measurements, the policies,
the procedures. Many of them were cast into behavioral patterns. Lou, don’t
you see? The real constraints, even in our plant, were not the machines, they
were the policies.’’
"Yes, I do see. But still there are differences,’’ he says stubbornly.
"What differences? Name one.’’
"Alex, what’s the use of pushing me to the corner? Don’t you see that there
must be major differences? If there weren’t, how come we don’t even have a
clue of what the nature of the divisional constraint is?’’
That stops me dead.
"Sorry. You’re right. You know, Lou, maybe we were lucky here. We had
physical constraints that helped us to focus our attention, to zoom in on the
real policy constraint. That isn’t the case in the division. Over there we have
excess capacity going through our ears. We have excess engineering
resources that we succeed so brilliantly in wasting. I’m sure that there is no
lack of markets. We simply don’t know how to put our act together to
capitalize on what we have.’’

---

Pacified he says, "That brings us to the real question, how does one go about
identifying the system’s constraint? How can we zoom in on the most
devastating erroneous policies. Or, to use your term, how does one go about
identifying the core problem, the one that is responsible for the existence of
so many undesirable effects?’’
"Yes,’’ I agree, "That’s the question, no doubt.’’
Looking at the board I add, "What’s written here is still valid. Identifying the
system’s constraint is the first step. What we now understand is that it also
translates into a mandatory demand for a technique by which to do it. Lou,
that’s it. We found it.’’
The excitement causes me to stand up. "Here it is,’’ I announce, "here is the
answer to Jonah’s question. I’m going to call him right now. You can
imagine my first sentence: Jonah, I want you to teach me how to identify the
core problem.’’
As I turn to leave I hear Lou, "Alex, I think that it might be a little
premature.’’
"Why?’’ I ask, my hand on the doorknob. "Do you have any doubt that that is
what I must learn first?’’
"No,’’ he says. "On that I’m quite convinced. I just think that maybe you
should ask for more. Knowing the core problem exactly might be far from
sufficient.’’
"You are right again,’’ I calm down. "It’s just that I was looking for the
answer for so long.’’
"I understand, believe me, I understand,’’ he smiles.
"Okay Lou.’’ I sit down. "What else do you think I should ask Jonah to teach
me?’’
"I don’t know,’’ he answers. "But if the five steps are valid, maybe what you

---

should ask for are the techniques required to enable us to carry those steps
out. We already found the need for one technique, why don’t we continue to
examine the other four steps?’’
"Good idea,’’ I say enthusiastically. "Let’s proceed. The second step is,’’ I
read from the board, "decide how to exploit the system’s constraints. That
doesn’t make any sense to me. What is the point in trying to exploit an
erroneous policy?’’
"It makes sense only if the constraint is physical, but since we do deal with
policy constraints, I guess we’d better move to the next one,’’ Lou agrees
with me.
"Subordinate everything else to the above decision,’’ I read. "Same
reservation. If the constraint is not physical this step is meaningless. The
fourth step is, ‘Elevate the system’s constraint(s).’ Hmm, what are we going
to do with this one?’’
"What’s the problem?’’ Lou asks. "If we identify an erroneous policy we
should elevate it, we should change the policy.’’
"How lovely. You make it sound so simple,’’ I say sarcastically. "Change the
policy! To what? Is it so simple to find a suitable replacement? Maybe for
you, Lou, not for me.’’ "For me neither,’’ he grins. "I know that cost
accounting is erroneous, but that doesn’t mean I’ve completely figured out
what to replace it with. Alex, how does one go about correcting an erroneous
measurement or any other policy?’’
"First, I think that you need the light-bulb idea, the breakthrough. The
management techniques that Jonah talks about must include the ability to
trigger such ideas, otherwise those techniques can’t be used by mere mortals.
You know, Lou, Julie predicted that as I come to it I’ll recognize that we are
not dealing just with techniques but actually with thinking processes.’’ "It
started to look like it,’’ Lou agrees. "But triggering breakthrough ideas by
itself is not enough. An even bigger obstacle is to verify that this idea really
solves all the resulting bad effects.’’ "Without creating new ones,’’ I add.

---

"Is it possible at all?’’ Lou sounds very skeptical. "It must be, if we want to
plan rather than just react.’’ As I talk I find a much better answer. "Yes, Lou,
it must be possible. Look what happened to us with our solution of getting
more sales. As a direct result of the French order we threw the plant into a
very unpleasant two weeks and we killed or at least delayed a good marketing
campaign. If we just thought systematically before we implemented it, rather
than after the fact, we could have prevented many problems. Don’t tell me
that it was impossible. All the facts were known to us, we simply didn’t have
a thinking process that would force and guide us to examine it early in the
game.’’
"What do we change to?’’ Lou says.
That throws me off balance. "Pardon me?’’
"If the first thinking process should lead us to answer the question ‘what to
change?’ the second thinking process should lead us to answer the question
‘what to change to?’ I can already see the need for a third thinking process.’’
"Yes, so can I. ‘How to cause the change.’’’ Pointing to the fifth step I add,
"with the amount of inertia that we can expect in the division, the last one is
probably the most important.’’ "So it seems,’’ Lou says.
I stand up and start to pace. "Do you understand what we are asking for?’’ I
cannot contain my feelings. "We are asking for the most fundamental things
and at the same time we are asking for the world.’’
"I’ve lost you,’’ Lou says quietly.
I stop and look at him. "What are we asking for? For the ability to answer
three simple questions: ‘what to change?’, ‘what to change to?’, and ‘how to
cause the change?’ Basically what we are asking for is the most fundamental
abilities one would expect from a manager. Think about it. If a manager
doesn’t know how to answer those three questions, is he or she entitled to be
called manager?’’
Throughout Lou signals that he is following me.

---

"At the same time,’’ I continue, "can you imagine what the meaning is to
being able to hone in on the core problem even in a very complex
environment? To be able to construct and check solutions that really solve all
negative effects without creating new ones? And above all to cause such a
major change smoothly, without creating resistance but the opposite,
enthusiasm? Can you imagine having such abilities?’’
"Alex, that is what you have done. That’s exactly what you have done in our
plant.’’
"Yes and no,’’ I answer. "Yes, that’s what we have done. No Lou, without
Jonah’s guidance all of us would be looking for new jobs today. Now I
understand why he refused to continue advising us. Jonah said it to me in the
clearest way. We should learn to be able to do it without any external help. I
must learn these thinking processes, only then will I know that I’m doing my
job.’’
"We should and can be our own Jonahs,’’ Lou says and stands up. Then this
reserved person surprises me. He puts his arm around my shoulder and says,
"I’m proud to work for you.’’

---