TOA: Hi everyone, we’re here again with The Business Bro, he’s got ice on his pulled hamstring and a beer in hand, not sure about that combination, but he looks ready to go again with more Q and A about The Goal. But first, BB, how are you feeling?
BB: I’m good, thanks for asking.
TOA: Before we start today, any thoughts from last time?
BB: Yes, one thing, I think the comparison of my commute to an organization’s production process reveals something Goldratt doesn't really discuss in his book – morale. If you think about my commute, it’s an example of a lot of components working above and beyond to accomplish a goal – the extra spending on the cab ride, the quick transition at the subway, and the infamous sprint here on the last leg.
TOA: Literally.
BB: Quiet. In a real organization, all the workers who made that level of effort would want some kind of recognition or reward. But we see in the example that although everyone truly gave it their best, the organization still fell short of its goal, and therefore probably doesn’t have the resources required to give out extra rewards in recognition of uncommonly good work.
TOA: Because the equivalent of arriving five minutes late for an organization is a loss of revenue or profit?
BB: Right, something like that. Ultimately, the lesson from my commute invokes an idea I read once in The Hard Thing About Hard Things – a good organization is a place where people working hard know that their efforts mean good things for them and for the organization. If an organization is so poorly run that a delay or setback in one part of the process negates all the hard work from the rest of the team, it probably isn’t the sort of place that meets the definition of a good organization. There just would be no way for anyone to know that good work would lead to good results.
TOA: OK, so I guess the logical question is, how does an organization set itself up so that a negative fluctuation in one part of the process can be overcome without extraordinary effort elsewhere in the team?
BB: Well, let’s break the problem down. What is the result of a negative fluctuation on the bottleneck?
TOA: I guess it means the bottleneck works below capacity?
BB: Right. And what would allow the bottleneck to work at capacity after a negative fluctuation?
TOA: Let’s see, if it was somehow still able to access the raw material it needed. So maybe with inventory?
BB: Exactly.
TOA: But I thought you said before that inventory is a negative?
BB: It isn’t really a negative. I just said ignoring the cost of inventory is a dishonest way to calculate the cost of production. The reality is that without those excess reserves, you are almost certainly dooming the bottleneck resource to idle periods, and that means you reduce the overall productive potential of your organization.
TOA: OK, then what’s the way to hold inventory?
BB: The best way is to store it at the lowest cost stage in the process. Of course, to understand this, you’ll need to accept that holding excess reserves of raw material is OK, but if you understand that negative fluctuations are inevitable then this conclusion should follow easily.
TOA: Right.
BB: The problem is a really easy one to solve if the lowest cost stage is directly before the bottleneck resource. However, it does become more challenging the further away you get from the bottleneck. If there are four process steps between your inventory and your bottleneck, for example, then you need to forecast four steps ahead of time in order to anticipate shortages and keep the flow balanced as it moves through the bottleneck.
TOA: And each step involved is subject to its own fluctuations, I assume?
BB: Without question.
TOA: So how do you account for all of that?
BB: Well, in order to balance the unpredictable nature of converting inventory into the material a bottleneck resource requires, you need to have excess capacity in your organization. There’s no other way, really, because if the problem is not having enough of the right material then the solution is finding a way to produce the right material. And if time is a factor, then the solution is finding a way to produce the right material on demand.
TOA: So in other words, you balance between inventory and excess capacity, then use the combination of those to prepare enough material so that you can balance flow through the bottleneck, even during a negative fluctuation?
BB: Hmmm, you know, I’m surprised that you seem to understand this, but yes, that’s a good way to distill the inventory question into a simplified formula of sorts. Really, I suppose it’s also a question of whether it’s more costly to hold inventory or retain excess production capacity, but I don’t think we need to dig too far into that element of the equation.
TOA: I might need to think this through more thoroughly myself.
BB: OK, so break here? There isn’t much left to discuss, I’m afraid, but maybe one more Q and A will be appropriate.
TOA: Yes, if you are up for it, one final chat would be excellent.
BB: OK, same time next week?
TOA: Yup, see you then.
