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December 6, 2011 Goldratt Consulting-1-

ManagementManagement

AttentionAttentionRamiRamiGoldratt,Goldratt,

CEO Goldratt ConsultingCEO Goldratt Consulting

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Management Attention

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Launcha

new

product

Delay

introductio

n.


Our management attention is constantly being consumedby challenges across functions, across strategic layers

Reduce

Price

Protectmargin

Buildupstock

ControlCapital

Introducenewsystem

Staywithcurrent

Makechangesinproject

Protectduedates/budget

Reduce

OE

Protect

loyalty

Increase

capacity

Reduce

investments

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4

Successful

company

A

Ensure

smooth current

performance

B

Focus on

current

operations

D

Focus on

long term

health

D

Ensure

long term

prosperity

C

Cut back on cost / investments

Maximizing efficiency's (get the maximum of current resources)

Focus on short term profit (and cash)

Make investments

Allow protective capacity

Focus on long term profit

A core conflict

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GrowthGrowth StabilityStability

One is a condition to the other. But..

Actions for one are in conflict with actions to the other

WHY OUR SYSTEMS BEHAVE THIS WAY?WHY OUR SYSTEMS BEHAVE THIS WAY?

Ensuresmoothcurrentperformance

B

Ensure

longterm

prosperity

C

A root conflict

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Dr. Goldratts on the Science ofManagement
http://clip%201%20toc.avi/

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The real constraint: management attention.

The 3 fundamental mechanisms wasting anddistorting management attention:

q The fear of Complexity -> driving to dissect the systemto sub-systems and bringing damaging local optima.

q The fear of Unknown-> driving to finer and finer detailresolution trying to impose certainty on uncertainty.

q The fear of tug of war -> struggling with unacceptablecompromises.

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GrowthGrowth StabilityStability

The common way tomanage conflicts is to

struggle withcompromise.

The common way tomanage uncertainty is to

bring it to higherresolutions of detail.

The common way tomanage complex

systems is to manageits sub systems.

Management Attention is distorted

Conflictsbetween sub

sections

Local optimaconflict with

global optimum

Driving local optimathroughout the system

Accept conflictsas given.

Oscillatingbetween theconflict sides

Dealing withsymptoms otherthan core conflict

Imposing certaintyon uncertainty

Ineffectivereaction to

noise

Sticking torules when

not applicable

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Step 1:Step 1: Identify the systemIdentify the systemss constraint(sconstraint(s))

Step 2:Step 2: Decide how to exploit the systemDecide how to exploit the systemss constraint(sconstraint(s))

Step 3:Step 3: Subordinate everything else to the above decisionSubordinate everything else to the above decision

Step 4:Step 4: Elevate the systemElevate the systemss constraint(sconstraint(s))

Step 5:Step 5: If in the previous steps a constraint has been broken,If in the previous steps a constraint has been broken,

go back to step 1. Warning: Dongo back to step 1. Warning: Dont allow inertia tot allow inertia to

cause a systemcause a system constraint(sconstraint(s)!!!!)!!!!

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Step 1:Step 1: Identify the systemIdentify the systemss constraint(sconstraint(s))

Step 2:Step 2: Decide how to exploit the systemDecide how to exploit the systemss constraint(sconstraint(s))

Management AttentionManagement Attention

Focus on bringing ongoingFocus on bringing ongoing StabilityStability andand GrowthGrowth::

-- Build the competitive edgeBuild the competitive edge

-- Capitalize on the competitive edgeCapitalize on the competitive edge

-- Sustain the competitive edgeSustain the competitive edge

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Step 3:Step 3: Subordinate everything else to the above decisionSubordinate everything else to the above decision

Remove the mechanisms blocking management attention fromRemove the mechanisms blocking management attention from

building, capitalizing and sustaining a competitive edge:building, capitalizing and sustaining a competitive edge:

1.1. Align local optima to global optimum.Align local optima to global optimum.

2.2. Manage buffersManage buffers dondont force certainty on uncertainty.t force certainty on uncertainty.

3.3. Solve root conflicts without a compromise.Solve root conflicts without a compromise.

Step 4: Elevate the systemStep 4: Elevate the systemss constraint(sconstraint(s))

Step 5: If in the previous steps a constraint has been broken,Step 5: If in the previous steps a constraint has been broken,go back to step 1. Warning: Dongo back to step 1. Warning: Dont allow inertia tot allow inertia to

cause a systemcause a system constraint(sconstraint(s)!!!!)!!!!

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This is very nice. But HOW???

Producers

to resellers

Producers to

manufacturer/ user

Producers of

Equipment/

machinery

Retailers

Wholesalers

Multi project

business

TOC Flowapplications

ViableVision

Templates


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MTO/MTS selling to

distributors or retailers

MTO/MTS selling to

manufacturers or users

Producers of

Equipment/ machinery

Retailers

Wholesalers / Distributors

Multi project business


Viable VisionViable VisionTemplatesTemplates

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RetailRetail

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The only organized national jewelry retailer in India

Two Brands

1B$ in Sales (PBT~10%)

150 retail stores across India

Titans Jewelry Division

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Need to operate with wide assortments

Need to introduce new assortments frequently

High priced products

High investment stock

Most items have relatively low sales rate

The Environment


What conflicts do they face?

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Some insights Some fast moving items are not available in the

store for about 15-20 weeks a year (on average)

Much of the products in the universe do not get the

chance to develop significant sales level (90% ofSKUs contributes 35% sales).

There is a long and fat tail by nature (20% ofstock is over a year old).


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Increasing Turns

The more effective the inventory, the less inventoryis needed to support the current level of sales.

Increasing Sales

The more effective the inventory the better we canexploit the current traffic.


HOW?

Improve MerchandiseImprove MerchandiseEffectivenessEffectiveness

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Percentage

Sold

Time

A

B

More SKUsare selling

faster

Tail is getting shorter andleaner, and has very little

effect on sales


Head Belly Tail

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InventoryInventory

Con

sumption

S

upply

Order L.T. Production L.T. Transport L.T.

TimeTime

Min.Min.

Replenishment timeReplenishment time

MoreInventory

LessInventory

ProtectAvailability

ControlCost

EffectiveMerchandize

Management

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1. Replenishment of Best Sellers (Head)- Identify best sellers and replenish from stock.- Inventory should be held based on consumption within the replenishmenttime factored for variability dont try to be accurate with a forecast!- Frequent replenishment of each SKU remove any artificial batch- Dynamic buffer management remove dependency on forecast

CentralWH

Store

Store

Store

Consumptionreport

Replenishment

Replenishment

ProductionFactory

Vendor1

Vendor2


Ordering

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2. Daily Indenting Process (Belly)

- Use live real data to shift the mix within categories to faster movers.

- Make it fast and frequent.

-The process is performed at the store every morning consideringyesterdays sales as an input:

- For each sold variant the best alternative is presented as thedefault indent

- The best alternative is the same variant - if sold fast, otherwise itis the best selling variant on the same category and price band

- The store can change the default by selecting an alternative item

from a closed list of alternates which are national best sellingvariants

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3. Rotation of Aged Inventory (Tail)Channel the aged inventory to stores that have demand forthese items. Aged inventory is recalled and is redistributed tothe stores that ordered it. The stores that have to give back

aged items, indent fresh items for replacement

Salesvolume

# of tailvariants

~1/6 of thetail are items

that are infact bestsellers in

other stores

Only 1/3 of the tail are items sellingless than 5 pieces per annum

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Plain GoldSales Vs. Stock


Some quantitative Benefits

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Conventional View


TOC view

Strategy

Tactic

S

T

ST

ST

ST

ST

ST

ST

ST

Strategy

Tactic

Strategy

TacticTacticTacticTacticTacticTacticTacticTacticTacticTactic

How are they connected?

Strategy

Tactic

Parallel Assumptions

Necessary Assumptions

Sufficiency Assumptions

Explains why the tacticachieves the strategy

Explains the needfor the step

Explains the needfor more details

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ST

S

T

S

T

S

T

S

T

S

T

ST

S

T

S

T

ST

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

What for?

How?

What for?

How?

What for?

How?

Viable VisionViable Vision


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ST

S

T

S

T

ST

ST

ST

ST

ST

ST

ST

ST

ST

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

S

T

What for?

How?

What for?

How?

What for?

How?

Viable VisionViable Vision

Decisive Competitive EdgeDecisive Competitive Edge

BuildBuild CapitalizeCapitalize SustainSustain BuildBuild CapitalizeCapitalize SustainSustain


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Strategy and Tactic Tree
http://omron.tocxml/

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Manufacturer selling to resellersManufacturer selling to resellers

(Distributors, Retail, Brand owner)(Distributors, Retail, Brand owner)

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Sales URO (UnRefusable Offer Workshop)

Low-frequency therapyequipment

Blood pressureMonitor

Digital

thermometers

Pedometers

Omron Health Care is a $800M Japanese conglomerate.

Main product lines are home healthcare electronic devices.

They are a major player in most developed countries.

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(34/48)


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(35/48)

Example of inventory reduction of

one of the largest drug chain store

Average stock MAX stock MIN stock

Before POC

(11/1-1/16)2,001 3,647 491

After POC

(1/17-2/21)865 1,328 190

POC

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Sales increased by demand drivenreplenishment production

Sales in 2009 Sales in 2010 Sales in 2009 Sales in 2010Sales after

TOC

Sales after

TOC

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Step 1: Identify the systemStep 1: Identify the systems constraint(s)s constraint(s)

Step 2: Decide how to exploit the systemStep 2: Decide how to exploit the systems constraint(s)s constraint(s)

Step 3: Subordinate everything else to the above decisionStep 3: Subordinate everything else to the above decision

Step 4:Step 4: Elevate the systemElevate the systems constraint(s)s constraint(s)

Step 5:Step 5: If in the previous steps a constraint has been broken,If in the previous steps a constraint has been broken,

go back to step 1. Warning: Dongo back to step 1. Warning: Dont allow inertia tot allow inertia to

cause a system constraint(s)!!!!cause a system constraint(s)!!!!

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