Radical Business Performance Improvement 13

Radical Business Performance
Improvement
Sub Code 332
Developed by
Prof. Rajeev Athavale
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research

 
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe 2. Dr. B.P. Sabale 3. Prof. Dr. Vijay Khole 4. Prof. Anuradha Deshmukh
Group Director Chancellor, D.Y. Patil University, Former Vice-Chancellor Former Director
Welingkar Institute of Navi Mumbai (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
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Welingkar Institute of Management, Mumbai Founder of EVALUENZ
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Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
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Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
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Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
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Welingkar Institute of Management, Mumbai
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Welingkar Institute of Management, Mumbai
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1st Edition Jan 2014 2nd Edition, July 2021

 

IMPROVEMENT
IMPROVEMENT
Today, almost every company has embarked on some sort of improvement
program – often emphasizing the adoption of world-class methods. But
after achieving early success, many such programs run into a brick wall of
stagnation.
When attempting to improve an organization, one should embrace a

holistic approach. Why? Because changing part of a system may have
significant implications (positive or negative). Therefore, one must have a
full view of the system when launching an improvement initiative. (Note
that an improvement is always a change, but a change may not necessarily
be an improvement).
There are endless places that can be improved. Many local improvements
do not always improve the performance of the system as a whole.
Therefore, one must identify the elements in the system on which
improvement efforts should be focused. Such identification requires holistic
understanding.
To ensure a holistic view, one should consider Undesirable Effects (UDEs)

from various aspects of the system.
Here is an example from Steel industry.
Aspect Undesirable Effect

Logistics Inventories are too high
Service Too many customer complaints
Finance Too long payback period
People Bad internal relationships
IMPROVEMENT
Look at the organization that you are working for and write here the
Undesirable effects.
Since it is not clear how to proceed holistically, almost always, each

Undesirable Effect (UDE) is dealt with on its own merit – without
considering the other UDEs.
In our example of Steel industry above, the UDEs are generally dealt with
the following initiatives:
Common Improvement
Initiative
Logistics Inventories are too high Implement a computer system
Rearrange the customer service

Service Too many customer complaints
department
Finance Too long payback period Mergers, downsize…
People Bad internal relationships Hire organizational psychologist
These improvement initiatives have very little to do with each other – they
are local and not holistic.
Is it effective to deal with each problem in isolation? Let us see what Steel
industry achieved by doing it this way.
IMPROVEMENT
Average Performance Average Performance in

Aspect
in the Year 1900 the Year 2000
Finished Goods
~ 250 thousand tons ~ 250 thousand tons
Inventory
Lead time (plates) ~ Six weeks ~ Six weeks
Due date performance ~ Sixty per cent ~ Sixty per cent
Payback period ~ Seven years ~ Seven years
Write the improvement initiatives undertaken in your organization to

overcome the Undesirable Effects:
Aspect Undesirable Effect Common Improvement Initiative
How much do these initiatives have to do with other?
Improvement programs based on the problems is one side of the coin. The
other side points us to the fact that a company must have a strategy in
place and it should strive to follow it.
But what is a strategy?
Strategy is a direction in which you want your company to move now as

well as in the future so that it moves towards its goal.
What is a good strategy? How do we judge whether a strategy of a
company is good or bad?
IMPROVEMENT
Every company was built for a purpose; it was built to achieve something.
There is a goal. The strategy must show us how to reach the goal of the
company. If it does not show us how to achieve more of goal units, we can
safely conclude that it is a bad strategy; it could, at best, can be called
day-dreaming. The strategy must guarantee that there is no external limit
to Throughput so that the company can grow almost infinitely. It means
that the strategy should consider the changes that may happen in the
external world that may influence the success of the company and it should
show the way to rise above that.
Showing the direction to achieve more and more of its goal is the
necessary condition of a good strategy.
This suggests that it is necessary to put your company on a process of

ongoing improvement. The initiative should follow the strategy and while
doing so, it should resolve the issues that may arise on the way.
The competition is increasing year by year. You cannot survive unless you
improve continuously. This must be at the base of a strategy.
But, what do we mean by the “Process of Ongoing Improvement”? As the

time goes by, the performance becomes better and better. That is the
meaning of ongoing improvement.
It is necessary to improve the performance of your company radically.

What is the meaning of the term “Radical”? It is the rate at which you
improve your company’s performance which should be much faster than
your competitors – it should even beat your own previous performance.
If your rate of improvement is slower than the competition, soon you will
find yourself out of business. The things that you do to improve the
business performance must create a decisive competitive edge which no
other competitor can copy in the short run and you keep getting benefit
out of it for a long time. In order to survive in business, you must improve
at much faster rate. This is represented by the green curve in the figure
below:
6
 

IMPROVEMENT
In the figure above, “Time” is represented on X-axis and “Business

Performance” is represented on Y-axis. The green curve represents a
radical improvement in performance. As the time goes by, the performance
becomes better and better. However, though the green curve represents
sudden, dramatic improvement in business performance, it also shows that
it may flatten out as the momentum is lost. This may result in stagnation.
Yes, it is at much higher level, but it is stagnation. If you reach stagnation
and if management does not act correctly, most probably, it will lead to
collapse of the business – a disaster.
In contrast, the red curve, which is a parabolic one, indicates an initial

slower growth as compared to the green curve and then picks up the
momentum, sustains it and leads to next higher jump – a quantum leap –
the real ongoing improvement and continuing success.
Beware of the green curve; get on to red curve, as fast as possible.
It is just not enough to have fast growth. If we talk only about growth, we
are missing something important. There is another version of the above
figure. In the diagram shown below, you will observe that the red curve
represents growth and the green curve represents stability. Business needs
both – high growth rate in their profits and at the same time stability in
their processes. This is important.
IMPROVEMENT
People need stability. If we are making changes in our policies every now
and then, there will be a huge amount of confusion amongst people. In
order to make it sure that people understand the business well and they
are clear about the expectations from them and they know how the top
management works – i.e., what type of management philosophy they
follow — it is essential that there is absolute clarity about how the
company intends to grow. If people are aware of the strategy of the
company and they see the logic and continuity of the policies, they will
have stability.
The need is for a reliable and robust process, that organizations could
count on, to bring them to be “ever flourishing.”
What is meant by “ever flourishing?”
The red curve represents the profitable growth that nearly all top
managers and owners desire. The green curve represents the stability –
the strength of a company that is secure and sustainable. An “ever
flourishing” company is a company that achieves both the ongoing growth
in profits indicated by the red curve, while at the same time strengthening
its stability, as represented by the green curve.
Stability in processes is, no doubt, necessary. However, there is one more

aspect that goes with stability. After all, stability is needed for whom? – Of
course, for people. For people, stability of processes is not enough. What
more is needed is harmony. Harmony means communication, collaboration
and people’s personal and professional growth.
IMPROVEMENT
There is yet another version of the Green and Red Curve as depicted in the
figure below:
You need a bigger and stronger base for a higher jump in performance.
Stability, as represented by the green curve, provides provide it. However,
you also need harmony along with stability. So, the stability of processes
along with harmony with people provides much bigger and stronger base
for the business. The bigger and stronger base enables higher and higher
jumps in their performance, i.e., Radical Business Performance
Improvement.
The level of improvement we need is not 10% or 20%. Not even 100%. We
need an order of magnitude; say 10 times. Is it easy? Of course, not. Can
it be done? The typical answer is “Impossible”!
Japan has showed us this in the area of quality. Earlier, the quality
improvement was measured in terms of percentage, i.e., how many parts
are scrapped per hundred parts. Japan brought about so much
improvement in quality that now the measurement has changed. It is no
more “parts per hundred”. It has changed to “parts per million”. Such an
order of magnitude!
Factor of 10 requires enormous break of many things that we take for

granted today. If you are able to break all those things in sync, only then
you can talk about, not 10% improvement, but 1000% improvement. Is it
possible? Of course, yes. Is it easy? Of course, not.
Is there a good solution to help businesses to bring about a Radical

Business Performance Improvement which once built can be capitalized on
IMPROVEMENT
and then sustained? Can we really have waves after waves of Radical
Business Performance Improvement?
Is there such a good solution?
Before answering this question, let us understand what is really meant by

“good solution”.
A solution is a “Good Solution” if it meets all of the following criteria:
• Results in excellent benefits.

• Win-Win-Win for all whose collaboration is needed.
• Risk (multiplied by damage) is small relative to the benefits.
• Simpler than what we do now.
• The sequence enables people to come on board – any cluster of actions
brings immediate significant results.
• Does not self-destruct.
If any solution, that does not meet these criteria, is not a good solution.
Theory of Constraints (TOC) is the new management philosophy that

enables us to have a quantum jump in the performance of the company
within a short time. It also enables us to carry out improvement
continuously and bring stability in processes. TOC also shows us the way to
ensure harmony within organizations on a continuous basis.
TOC Results in Excellent Benefits
One of the most comprehensive studies on TOC was done by Professor

Victoria Mabin and Steven Balderstone, based on an analysis of published
case studies of TOC implementations. The findings of the analysis showed
mean improvements as follows:
• Lead Times: Mean Reduction 70%

• Cycle Times: Mean Reduction 65%
• Due Date-Performance: Mean Improvement 44%
• Inventory Levels: Mean Reduction 49%
• Revenue: Mean Increase 83%
• Throughput: Mean Increase 65%
• Profitability: Mean Increase 116%
10

IMPROVEMENT
Win-Win-Win for all whose collaboration is needed

TOC believes that any business that thrives on win-lose deals may succeed
only for a short while, but cannot survive for long.
TOC considers that in order to succeed in business, one must ensure that
not only there is a win for the company; but there is a win for its
employees and its customers/suppliers also.
TOC considers that the risk (multiplied by damage) involved in its

implementation is small relative to the benefits
There are several risks in a business. Any new initiative has some risks and
one needs to consider the impact of such risks before embarking on it.
TOC solutions are based on “Cause and Effect”. They make it sure
beforehand that the desired effect is achieved by analyzing the current
situation in a systematic way and then finding and applying the solution.
It is said that our today’s problems arise from our yesterday’s solutions.
TOC takes cognizance of that and provides ways to identify the possible
negative effects of the new solution and paves the way to take suitable
actions in order to prevent them.
This way, TOC minimizes the risks while maximizing the gains.
TOC solutions are simpler than what we do currently
Dr. Goldratt believed, the more complex the business is, the simpler must
be the solution.
Human mind tends to make things complex. TOC believes that every
system has an inherent simplicity and TOC strives to identify it and then
apply its solutions.
TOC is easy to understand; it is a common sense; not a rocket science.

After getting a fair understanding of TOC, many people felt “Oh! It’s so
simple and logical; why did I not think of it before?”!
So, the solutions suggested by TOC are far simpler than the ones we
typically do today.
11

IMPROVEMENT
TOC gives immediate significant results
When implementing TOC, it is important for the business and for the
people to see some significant improvements quickly. Typically, improved
results are seen in a few months, if not in a few weeks.
This helps the management and the people to come on board and start
following TOC more rigorously and in order to gain better and better
results.
It would be difficult to sustain any initiative that takes years to show some
benefits. By nature, TOC is able to show significant improvement in profits
in the short run as well as in the long run.
TOC does not self-destruct
It does happen that by applying TOC your business starts growing rapidly.
You reduce your inventory and lead time and start to win more customer
orders. This may cause a chaos on the shop floor because you may
suddenly find lots of work. This could start deteriorating customer service,
quality and degrade due date performance. Eventually, you may lose your
customers and your business may ruin.
TOC protects us against such situations. TOC provides a mechanism – a

signaling system – that guides us to take the necessary actions and helps
us to sustain the gains and build on top of them.
TOC’s process of ongoing improvement
This is the key for radical and sustained business performance

improvement. This process takes us to continually improve our
performance.
It has certain steps, that when followed give tremendous results. They give
a major leap in the performance by removing the obstacles.
TOC and Strategy
TOC provides a systematic way to build a lasting business strategy that

takes the business performance to a much higher level.
12
IMPROVEMENT
TOC, when followed correctly, meets all the above-mentioned criteria and
is a great tool to bring about radical improvement in business performance.
TOC paves the way for an excellent business strategy and focused
improvements that lead to radical business process improvement.
In this book, let us unleash the basic concepts of this theory and judge it
for ourselves.
13
 

PREFACE
PREFACE
I am very happy to present this book to the students of Welingkar Institute
of Management Development and Research. I am hopeful that this book
will open up a new way of running organizations for you. I do not know
whether any of you is a CEO; but I assume that I am sharing this
knowledge with a fairly young and bright people who have the potential of
being CEOs. While wishing you good luck in your career, I would like to
contribute it in a small way by presenting this book.
In the previous pages, I have established a link between Radical Business

Performance Improvement and Theory of Constraints (TOC). Perhaps, it is
appropriate to share with you how I went about writing this book.
Let me be honest. I did not write this book during last few months. I have
been writing this book over a decade! No, I did not thought of it then. I
have been studying TOC for so many years. During this period, I read
several books, articles, papers etc. I visited several websites and gained
knowledge about TOC. There are some discussion groups on LinkedIn and
Yahoo TOC group that helped me to understand it better.
During this period, I had developed a habit of taking notes and since I had
a computer, I wrote the notes on computer and saved them in various files.
These notes were not summaries, but were something that I wanted to
revisit, remember and imbibe on my mind. I felt that it may not be feasible
to read these books again and again (though I did read many of these
books several times later), so I thought it prudent to save my take-away
from these books. TOC was something new to me and the thoughts
presented were counter-intuitive though very logical. It was possible that
due to my day-to-day chores, I could forget the principles. So, these
thoughts prompted me to write notes. Unfortunately, there was no
discipline that I followed in writing those notes. I created several folders
and several files and noted what I liked from time to time. I also created
some training material and conducted training programs. I collocated and
organized these notes for this as well as for the books that I have already
published. I am thankful to Welingkar Institute of Management
Development and Research for causing me to look through my notes and
various resources I had and produce this book.
14

PREFACE
By sheer accident, I came across the famous book “The Goal” written by
Dr. Goldratt and that changed my life. I went on reading Dr. Goldratt’s next
book “It’s Not Luck” and thereafter I read all his books. I also read the TOC
related books written by authors like Eli Schragenheim, William Dettmer,
Oded Cohen, Thomas Corbett, Eric Noreen, Debra Smith, James T. Mackey,
Gerald Kendall, John Ricketts… These books have influenced my thinking. I
am thankful to these authors.
I am thankful to Goldratt Group for giving me an opportunity to work on

their Viable Vision project in India and providing me training through their
people like Oded Cohen, Mickey Granot, Philip Viljoen, Eli Schragenheim,
Humberto Baptista, Martin Powell, and Kiran Kothekar. I am thankful to
them.
Apart from the training and on-the-job experience, study of Goldratt’s

webcast, Strategy and Tactics Trees, TOC SLPs, TOC Insights, TOC
Simulators (GSIM, MICSS, PM SIM, and Distribution) and TOC Games have
helped me to enrich my TOC related knowledge.
I am also thankful to Andrew Kay, Bob Sproull, Chad Smith, Clarke Ching,
Danilo Serias, Dr. Alan Barnard, Dr. James Holt, Dr. Kelvyn Youngman, Dr.
Lisa Lang, Etienne Du Plooy, Henry Camp, Jack Vinson, Jim Bowles, John
Loucks, John Sambrook, Justin Roff-Marsh, Larry Leach, Manoj Agarwal,
Mark Woeppel, Philip Marris, Ravi Gilani, Rob Newbold, Rudy Burkhard,
Sanjay Ghoshal, Steven Balderstone, Ted Hutchin, Tim Sullivan, Tony
Rizzo, Todd Williams, Vicky Mabin and several others (pardon me, if I have
missed some names). Most of them are my contacts on LinkedIn or
members of TOC Yahoo groups. Various posts by these people, the
documents shared by them and their websites have inspired and enabled
me to learn more.
I am tempted to mention and be thankful to some other books also that

have taught me a lot and perhaps have something in common with TOC
knowledge. These books are “Build to Last”, “Good to Great”, “One Minute
Manager Series”, “Blue Ocean Strategy”, “Seven Habits of Highly Effective
People”, “I am Ok, You are Ok”, “Who Moved my Cheese”, “You Can Win”,
“The Secret”, “Seven Day Weekend”…etc.
Apart from his books, I must mention that, Dr. Goldratt’s creations “TOC
15
PREFACE
Self Learning Program (SLP)” and “TOC Insights” have taught me the most
and have greatest influence on me and I referred to these resources
several times and almost every time I learned something.
So, coming back to the writing of this book too, these resources were very
useful. I had created several notes while studying TOC using all these
resources. That helped me to write the book.
I am an ardent fan of TOC. Reading about TOC has moved me from “I am

impressed” to “I like it” to “I want to know more…”. I did not realize when it
became a passion for me. Now, I eat, sleep, breath and walk TOC.
My passion for learning, experimenting, sharing knowledge and achieving

results continues…
If you get passionate about TOC, all credit should go to Dr. Goldratt. If,
however, you do not understand it well by reading this book, please don’t
blame the theory, assume that it’s my failure.
Last but not the least, I am thankful to Luís Cristóvão from Portugal who
helped me by reviewing this book. Luís meticulously went through the
whole book, read everything line by line very patiently and proposed very
useful corrections. And he did this within the time I needed. I have no
words to express my sense of gratitude. Thank you Luís.
Rajeev Athavale
16

Dr. Eliyahu M. Goldratt
Eli Goldratt is known by millions of readers worldwide as a scientist,

educator, and business guru. His Theory of Constraints (TOC) is taught at
business schools and MBA programs around the globe. Government
agencies and businesses, large and small, have adopted his methodologies.
TOC has been successfully applied in almost every area of human
endeavor, from industry to healthcare to education. And while Eli Goldratt
is indeed a scientist, an educator, and a business leader, he is first and
foremost a philosopher; some say a genius. He is a thinker who provokes
others to do the same. Often characterized as unconventional and always
stimulating — a slayer of sacred cows — Dr. Goldratt exhorts his readers to
examine and reassess their lives and business practices by cultivating a
different perspective and a clear new vision.
Dr. Goldratt is an internationally recognized leader in the development of

new business management philosophies and systems.
He has become a sought-after educator by many of the world's largest

corporations, including General Motors, Procter & Gamble, AT&T, NV Philips
and Boeing.
He is the author of some underground best seller books that utilize a non-
traditional approach to convey important business information.
The ideas illustrated in his books underscore Theory of Constraints, an

overall framework for helping businesses determine:
• What to change – What is the leverage point
17

• What to change to – What are the simple, practical solutions
• How to cause the change – Overcoming the inherent resistance to

change.
He obtained his Bachelor of Science degree from Tel Aviv University and his
Masters of Science, and Doctorate of Philosophy from Bar-Ilan University.
In addition to his pioneering work in Business Management and Education,
he holds patents in a number of areas ranging from medical devices to drip
irrigation to temperature sensors.
18
CONTENTS
Contents
Chapter No. Chapter Name Page No.
1 What is Theory of Constraints (TOC)? 19-50
2 Five Focusing Steps 51-75
3 Using TOC for Judging Various Actions and Decisions 76-120
4 Applying TOC to Operations/Manufacturing 121-172
5 Using TOC to Improve Distribution System 173-219
6 Critical Chain Project Management 220-291
7 Using TOC to Improve Marketing 292-340
8 Using TOC to Improve Sales 341-361
Radical Business Performance Improvement – 362-366

Revisited
Books by the Author 367-369
References and Bibliography 370-371
19

WHAT IS THEORY OF CONSTRAINTS (TOC)?
Chapter 1
Objectives
After completing this chapter, you will be able to understand:
• To get an overview of Theory of Constraints.
Structure
1.1 Introduction
1.2 Evolution of TOC
1.3 Typical TOC Results
1.4 TOC’s Assumptions
1.5 TOC is about Paradigm Shift
1.6 TOC is about Focusing
1.7 TOC is about Improving the Flow
1.8 TOC is about Managing the Weakest Link
1.9 What is the Goal?
1.10 The Goal Measurements
1.11 Three Questions that TOC Helps to Address
1.12 Summary
1.13 Self Assessment Questions
20

1.1 INTRODUCTION
Theory of Constraints (TOC) is a new Management Philosophy usually

applied to running and improving organizations created by Dr. Eliyahu M.
Goldratt.
It is a body of knowledge about systems and the interaction of their

component parts and so is a “Systems Philosophy”. Organizations of any
kind whether Manufacturing or Service or Government or Charitable or
Education etc. and whether for profit or not, function as systems, not as a
collection of separate processes. A system is a group of related
interconnected functions created for a purpose and the components of the
system must interact cooperatively in order to move towards their common
goal.
TOC gets its name from the fact that all organizations are constrained by
something. If they weren’t, they would grow infinitely. But that’s not the
reality and thus gets its name from the central role that constraints play in
determining the achievement of what the organizations desire.
TOC is composed of a collection of principles, a set of generic tools and the

specific applications of those principles and tools.
TOC provides a set of holistic processes and rules, all based on systems
approach that exploits the inherent simplicity within complex systems,
through focusing on the Leverage Points, as a way to synchronize the parts
to achieve ongoing improvement in the performance of the system as a
whole.
With the aid of TOC, management is able to identify the few significant
factors that limit the performance of their organization. Addressing these
limiting factors in a systematic manner will yield significant improvements
in profitability.
If the essence of TOC is to be summarized in one word, it would be

“FOCUS”. Here, what we mean by “Focus” is “Doing what should be done”.
However, we need to understand that focusing on everything is like not
focusing on anything.
21

In simple language, TOC is about putting more money in your pocket now
and even more money in your pockets in the future (we assume, of course,
an ethical behaviour).
How can we do it?
• By exploring the idea that every business system has a weakest link.
• By turning the weakest link into a leverage point for increased
throughput by applying a rigorous "cause and effect" approach.
Breakthrough solutions come from:
• Understanding those limiting factors and

• Learning how to deal with them.
And TOC teaches precisely that.
There is and always will be limiting factors that work to prevent the
achievement of success. If you don’t manage these limiting factors, they
will most definitely manage you.
If you don’t learn to manage them, some limiting factors also have the
ability to bring you to your knees.
In summary, we can say that TOC is a new management philosophy that

helps us to achieve Radical Business Performance Improvement by
applying its sound and time-tested principles, tools and applications.
1.2 EVOLUTION OF TOC
After more than 30 years of development and evolution, TOC has grown
into the following areas:
• Five Focusing Steps.

• Thinking Processes.
• Throughput Accounting.
• TOC Generic Solutions.
• Six Necessary and Sufficient Questions on Technology.
See Figure 1.1 below:
22

Figure 1.1: Evolution of TOC – Over 30 years
TOC knowledge has been developed for the following business areas:
• Operation
• Project management
• Distribution and Supply Chain
• Finance and Measurements
• Sales
• Marketing
• Managing People
1.3 TYPICAL TOC RESULTS
One of the most comprehensive studies on TOC was done by Professor

Victoria Mabin and Steven Balderstone, based on an analysis of published
case studies of TOC implementations. The findings of the analysis showed
mean improvements as follows:
• Lead Times: Mean Reduction 70%.

• Cycle Times: Mean Reductions 65%.
• Due Date Performance: Mean Improvement 44%.
23

• Inventory Levels: Mean Reduction 49%.

• Revenue: Mean Increase 83%.
• Throughput: Mean Increase 65%.
• Profitability: Mean Increase 116%.
Thinking Processes
1.4 TOC’S ASSUMPTIONS
TOC is based on three basic assumptions.
Assumption #1
Everything within a system is connected by cause and effect relationships.
Identification of the causes leads us to converge onto an apparent core
problem/contradiction/conflict/ dilemma.
Assumption #2
All contradictions can be resolved without compromise – our level of
understanding and our assumptions hold the contradiction in place. A
compromise is not usually a win-win solution.
Assumption #3
There is no resistance to improvement – people do not embrace change
because we have not brought them to see how they can win.
1.5 TOC IS ABOUT PARADIGM SHIFT
What is Paradigm?
“We don’t believe what we see, we see what we believe” – that’s what the
paradigms are about. Paradigms are sets of concepts, beliefs, patterns or
assumptions which form the basis of all the decisions. It is the way we look
at the things.
Paradigms are frame of references we use to “see” the world and make
decisions. Paradigms let through data that match our “expectations” and
block data that don’t. What may be impossible to do with one paradigm
may be easy to do with another.
24

In TOC, we define “Paradigms” simply as sets of assumptions we believe

are valid. We go through a ‘paradigm shift’ when we realize one or more of
our assumptions are no longer valid.
There are good as well as bad things about paradigms.
Paradigms are necessary for helping us to achieve both survival and growth
but they have the potential of limiting our performance and creating
conflicts too. Let’s have look at them:
Paradigm Problem 1 – Limiting Paradigms

Sometimes “Paradigms” (the rules in our Rule Book) can blind us from
seeing and solving the right problems. They do come in the way of solving
them in the best way. Some paradigms can cause “Bad” decisions when we
don’t take the time to think it through or think beyond our existing
paradigms.
Paradigm Problem 2 – Conflicting Paradigms

We have multiple paradigms and some of them could be in conflict or they
are not very consistent with other paradigms. So at times, we are under
influence of one paradigm and we behave in accordance with that, while at
some other times, we look at the things from some other paradigms. This
can result in others seeing us as unpredictable or even irrational (making
decisions depend more on where we open our “rule book” than on situation
itself…).
Let us identify several paradigms in the context of “Limiting” and

“Enabling” paradigms:
• Constraints
❖ Limiting Paradigm – Many times, we believe that most of the constraints

that we see are out of our control. We take is as “given” or even as our
luck or destiny. We even blame them for gaps and focus on the things
that we believe are in our control.
❖ Enabling Paradigm – This paradigm makes us believe that most of the

constraints are within our control or at least under our influence and then
we find ways to make the best out of them.
25
• Complexity
❖ Limiting Paradigm – Human mind likes to believe that things are

complex. So, we try to simplify them by breaking them up into simpler
parts and optimize each part.
❖ Enabling Paradigm – This paradigm assumes that there is an inherent

simplicity in all the systems and then we strive to find it. We then focus
all our efforts on finding it and capitalizing on it.
• Conflicts
❖ Limiting Paradigm – We find most conflicts lead to win-lose or lose-win

solutions and therefore, we seek the “best” compromise which can
actually be lose-lose solution.
❖ Enabling Paradigm – This paradigm makes us to think that win-win

solution is always possible. And then we strive to find it.
• Uncertainty
❖ Limiting Paradigm – Certain paradigms looks for certainty; they rather

make us to assume inherent certainty. So, we look for “Formulas” to
calculate Optima.
❖ Enabling Paradigm – Find “Good Enough” degree of certainty and use

feedback to improve and sustain.
• Bad Behavior
❖ Limiting Paradigm – This paradigm tells us that some people are just bad
by nature and we must get rid of them.
❖ Enabling Paradigm – This paradigm makes us believe that people are

inherently good; we seek to get rid of bad assumptions.
TOC causes a major paradigm shift – from viewing organizations as

systems of independent variables to viewing them as systems of
dependent variables.
26
Humans have been running organizations for thousands of years. In the

main, we have been successful, and when we failed we learnt from the
failure and improved. This eventually leads to success more and more
often as the limits of the paradigm are probed more and more.
The essence of what TOC provides is the same essence as the scientific
method provides. It enables the identification of the failure and the
establishment of a new paradigm. Unfortunately, this could be a slow and
painful process for those who are entrenched in the abilities of the old
paradigm and have too much to lose to give it up.
1.6 TOC IS ABOUT FOCUSING
TOC guides to identify the area where one needs to focus. There are
several challenges that businesses face every day. Trying to deal with all of
them is an exhausting, time- consuming and futile exercise. TOC helps to
identify and prioritize the actions that are needed so as to get maximum
benefit to the business quickly.
1.7 TOC IS ABOUT IMPROVING THE FLOW
There are many interruptions in operations that cause delays and other
problems. Generally, there are long queues and work-in-progress
accumulates at various points and waits for the machine or material or
some processed material to be available etc. This interrupts the flow. It is
observed that the touch time in manufacturing environment is about 10%.
It means about 90% time is spent on wait and queue.
TOC provides a systematic way to identify and prioritize the causes of such
delays and helps in streamlining and improving the flow substantially.
1.8 TOC IS ABOUT MANAGING THE WEAKEST LINK
Organizations are Systems

Organizations are systems consisting of a group of related functions that
interact cooperatively so as to achieve their common goal. Because of the
interdependent nature of the components, any efforts to improve the
system’s output must consider the effects of these efforts on the whole
27

system. Consequently, the system’s output must be optimal and not that of
individual processes.
We, traditionally, organize and manage the components individually. The

breaking down of the organization into components such as Production,
Sales, and Finance etc. creates invisible barriers since their performance is
measured locally and therefore can inhibit the achievement of the overall
goal.
Let’s look at the components of a typical organization. Sales and Marketing

department attempts to maximize the orders. Production department tries
to produce the products as fast as they can. Purchasing and Stores
managers strive to make the materials available when needed. Distribution
tries to ship finished goods wherever required and so on.
Since it is difficult to monitor and coordinate the efforts of these diverse

functions, we tend to manage them in isolation. There is nothing wrong
with it; but this very act causes enhancing one part of the system at the
expense of the other part since managers tend to worry about the success
of their part without much regard for the success of the other components
of the system. It is often believed that if every component of an
organization maximizes their output, the output of the system as a whole
will go up. The common belief is that the maximum performance of the
system as a whole is a simple sum of all the local performances.
But this is not true. Any one part of the system depends on the
performance of one or more parts of the rest of the system. Also, there is a
statistical variation that affects each part of the system independently.
These variations get compounded at organization level.
Synergy amongst the various parts of a system can be achieved not by

maximizing the performance of each component, but by coordinating and
synchronizing the efforts of all parts of the system. This means that some
parts of the system might have to operate at less than their full capacity
for the whole system to benefit the most. It is not only okay for some parts
of a system not to be fully efficient; but it is necessary for the success of
the system as a whole.
Therefore, system optimum is not the sum of the local optima.
28
Chain Analogy
As Dr. Goldratt said, system is like a chain or network of chains. A system

is only as strong as its weakest link. The weakest link is the system’s
constraint – the factor that limits the system from achieving its goal.
This means that strengthening any link in the chain except the weakest link
does nothing to improve the strength of the whole chain. Strengthening
the weakest link causes an immediate increase in the strength of the whole
chain.
Similarly, in business systems, it is the capacity of one element that

determines the maximum possible performance of the whole business.
Improving any other part of the business system does nothing good for the
system as a whole.
Organization system is like a chain. We are dealing here with “chains” of

actions. What determines the performance of a chain? The strength of the
chain is determined by the strength of its weakest link. How many weakest
links exist in a chain? As long as statistical fluctuations prevent the links
from being totally identical, there is only one link in a chain that is the
weakest.
There are as many constraints in a system as there are truly independent

chains. Realistically, in most systems, there aren’t very many truly
independent chains.
The underlying theme of the components of a system is their

interrelatedness, their interdependency. By definition, then, a “system”
can’t have too many truly independent chains. So, if there aren’t too many
independent chains in a particular system – whether a manufacturing,
service, or any other type – at any given time, only a very few variables
truly determine the performance of the system.
This idea has very deep implications for managers. If only a very few
variables determine system performance, the complexity of managers’ jobs
is reduced substantially. Pareto rule suggests that only 20 per cent of a
system accounts for 80 per cent of the problems within it. If this is a valid
conclusion, managers should be able to concentrate most of their attention
on that critical 20 per cent. But even this could be too large!
29
Dr. Goldratt’s concept of chains and “weakest links” takes the Pareto
concept a step further, rather much further: the weakest link accounts for
99 per cent of the success or failure of a system to progress toward its
goal.
It is a common observation that most departments behave as if they are in

a “silo” by themselves. They pay lip service to the idea of “Internal
Customer”, but for a variety of reasons they don’t practice it very well.
Their focus remains on individual measures of performance and efficiency.

Most efforts are spent improving the links of the supply chain, with little
effort devoted to the linkages, or interfaces between links, and the
operation of the chain as a whole.
What these companies do not appreciate is that a higher level of thinking

was needed. Once the quality of individual processes managed reasonably
well, other factors emerge to warrant attention.
Any organization succeeds or fails as a complete system, not as a

collection of isolated, independent parts or processes. Maximizing local
efficiencies everywhere in a system is not necessarily a good thing to do.
Should we ignore process improvement since we are now thinking at a

higher level? No, process improvement is still important since they are the
building blocks upon which system performance is based. Once the major
processes are in place and functioning well, you need to deal with a new
challenge: You need to coordinate and synchronize the efforts of every
component in the system to produce the best possible result for the system
as a whole. Once the troops are standing in line, the next task is to make
them march in step together.
Any organization has a set of departments that need to work for the overall
objective of the organization as a whole. However, at any given point of
time, only a very few variables truly determine the performance of the
organization as a whole.
Conventional Wisdom
This is analogous to saying the primary measurement of success in

managing the chain is the weight of the chain, i.e., cost.
30
An improvement to any link in the chain is considered to be an

improvement to the chain.
System wide or "global" improvement is believed to be the sum of all the

"local" improvements made within each link.
This is perhaps… the only Management Philosophy that we follow!
TOC Wisdom
“Cent, plus a cent, plus…” Dr. Goldratt once said, “You can accumulate
huge wealth. But there is another way. Archimedes was the first to
articulate it”.
Dr. Goldratt continued, “He said, give me a leverage point and I will move
the earth!”
Similarly, rather than reducing cost everywhere, the wise thing would be to
find a leverage point in an organization that will take it to much higher
level of performance.
Most improvements to most links do NOT improve the chain. System wide,
or "global" improvement, then is NOT the sum of the local improvements.
The way to improve the organization is definitely not through inducing
many local improvements. Thus, a company should focus on "chain
strength" (not link weight) by working to strengthen the weakest link – the
constraint!
Different link capabilities, normal variation and changing workload make it

impossible to balance everything. One element of the system is more
limited than another.
When the whole system is dependent upon the cooperation of all elements,
the weakest link determines the strength of the chain.
The excess capacity at some links is of little value since there is usually
some other factor that prevents links from functioning at maximum
capacity.
31
Look at the figure 1.2 below. The size of the links shows the relative
strength. The smallest one in the diagram is the one that can be identified
as the weakest link and hence as the constraint.
Figure 1.2: The Weakest Link
“It is not enough to do your best; you must know what to do, and THEN do
your best.”
— Deming.
TOC shows us the way to identify the weakest link so that we can focus on
improving it to get the maximum benefit out of the system – the place
where to do our best.
Conclusion
In order to improve any organization’s performance, it is important to

identify the vital few variables and focus on them. Most functions of an
organization are interdependent. Therefore, there are very few, perhaps
only one function that can be called as the weakest link.
Focused efforts on improving the weakest link give maximum benefits to

the organization. Improving any other link/department will not result in
improving the organization as a whole.
32

1.9 WHAT IS THE GOAL?
A goal implies referencing the current state against a desired future state,
and taking deliberate action to move in the direction of the goal.
When this question is asked to any group of executives, typically, we get

one of the following answers as shown in Figure 1.3 below:
Figure 1.3: Typical answers to the question “What is the Goal?”
Dr. Goldratt has beautifully explained this as follows:
Organizations are not built for the sake of it; they are built for a purpose.
Thus, whenever we debate any action in any section of any organization,
the only way to hold a logical discussion is by judging the impact of the
action on the overall purpose.
Before we talk about the goal of an organization, it is essential to identify

who has the right to define it. It is very logical to say that only the owners
of the organization have such right. It is only the owners who have a say in
determining the goal of an organization.
33

If we are talking about companies, it is the shareholders who are the

owners. So, the question “What is the goal of the company?” is exactly
equivalent to the question “Why did the shareholders invest their money in
the enterprise?” In order to achieve what?
In light of this, think of the statement: “Our goal is to provide the best
quality products coupled with the best customer service”. Such a company
probably has very unique shareholders. The shareholders have apparently
invested their money in the company so that they can brag at a cocktail
party that their company provides the best customer service. Actually, you
need to ask the next question: “What is the purpose that you will achieve
by giving the best customer service?” then probably you will get the
correct answer.
The shareholders would appear to be power maniacs if they say that their
goal is to become number one; they are going to capture the largest
market share.
It could be a ridiculous statement that the company’s goal is to survive.
If a company has even one share traded in stock market, the goal is loud
and clear. We invest our money in order to make more money now as well
as in the future. Then what is the goal?
Of course, the goal of a for-profit organization is “to make more money

now as well as in the future”.
It is just not enough to define the goal. The goal needs to be achieved
under certain well accepted necessary conditions.
There are certain entities around that have the power to ruin or severely
damage the organization. They can do that if they dislike some aspects of
the organization’s behavior.
It looks as if we have to give those entities or power groups a say. But

giving them a say will immediately mean that the owners do not have the
SOLE right to determine the goal.
The way out of this situation is to distinguish clearly between the goal and
the necessary conditions. The organization should strive to meet its goal
34

within the boundaries imposed by the power groups, striving to fulfill its
purpose without violating any of the externally imposed necessary
conditions.
For a for-profit organization, customers are definitely a power group. They

do impose necessary conditions, like a minimum level of customer service
and a minimum level of product quality. If these minimum conditions are
not met, the customers will simply stop purchasing from the organization,
and it will face extinction.
But certainly, customers do not have the right to dictate or even interfere
in what should be our organization’s goal.
The organization’s employees are a power group. They impose necessary

conditions like minimum job security and minimum wages. If the
organization violates these necessary conditions, it faces the risk of a
strike. But this does not mean that employees – as employees – have the
right to determine the organization’s goal.
Necessary conditions differ from the goal. Generally, the goal is worded as
something infinite. It usually has no limit; it’s normally worded in such a
way that it’s not likely ever to be fully realized.
However, the necessary conditions are more finite. For example, a for-
profit organization might want to make as much money as it can without
setting any limit. But employee security and satisfaction, as necessary
conditions, should be established at a well-defined minimum level. A for-
profit company’s goal can’t expect to satisfy its employees without limit,
but the organization needs to recognize the necessity of achieving a certain
level of employee security and satisfaction as one minimum requirement
for achieving the goal.
Similarly, customer satisfaction can be increased, and doing so can be

expected to improve progress toward the goal. But even such variable
necessary conditions have practical limits.
The importance of identifying a system’s (organization’s) goal and

necessary conditions is that they become the standard by which all results
are judged and all contemplated decisions are evaluated. One can evaluate
whether certain actions have satisfied a necessary condition in a better
35

way (and thereby indirectly contributed towards the goal) or have

contributed to realizing the goal directly?
People often confuse among necessary conditions, the means and the goal.
Such confusion often leads to misdirection and long-term destruction of the
company. Customer service, product quality, good human relationships etc.
are definitely necessary conditions, sometimes even means. But they are
not the goal. The employees of the company should serve the shareholders
– that’s what they are getting paid for. Serving clients is just a means to
the real task, serving company’s shareholders.
Some would argue that the goal of their company is to…
• Satisfy customers now and in the future!

Or to..
• Provide secure and satisfying jobs for employees now and in the future!
TOC recognizes that only the “owners” of a company can choose the goal.
However, once chosen, the other two become necessary conditions to
achieving the goal.
That is…
• If your goal is to satisfy customers, it is absolutely necessary that you

make money and that you provide security and satisfaction to
employees...
• Likewise, if your goal is to provide secure and satisfying jobs, you also
have to make money and satisfy your customers... or you won’t be in
business in the future!
The owners have the choice to choose any of the three as the goal of their
organization.
So, the goal of a typical for-profit organization is “to make more money
now as well as in the future” and the necessary conditions are:
1. To provide satisfaction to the market now as well as in the future and

2. To provide secure and satisfying environment to employees now as well
as in the future.
36

1.10 THE GOAL MEASUREMENTS
Once the goal is identified, the next crucial need for success in achieving
the goal is to identify which measurements will be used to judge success.
Here is what Dr. Goldratt said about measurements:
“Tell me how you measure me and I’ll tell you how I’ll behave!”
“Tell me how you'll measure me, and I'll tell you what damned stupid
things I'll do to make the measurement look good”
“If the measurements are absurd, my behavior will also be absurd!”
“If my Performance Measurements are not clear, even I will not know how I
will behave!”
So much is the importance of the measurements!
Let’s understand them.
Measurements are a direct result of the chosen goal. There is no way that
we can define measurements before the goal is defined. For commercial
organizations, we judge the performance by the financial statement. Net
profit is an absolute measurement. But is this measurement by itself
sufficient? If a company made $10 million net profit, is that good or bad? If
they had invested $20 million, it’s quite good. But if the investment were
$200 million, it’s lousy.
We need additional measurement that shows how much money we made

relative to the money we invested in the business, a measure like Return
on Investment. These two measurements seem sufficient, but many a
company has been rudely reminded by the threat of bankruptcy, that there
is also a survival measurement, like cash flow. When we don’t have enough
cash, nothing else is important. See the Figure 1.4 below:
37

Figure 1.4: Measurements
It is very important to note that these bottom-line measurements are not

the measurements that we are after. The goal is to increase net profit while
simultaneously increasing both ROI and Cash Flow, and that’s the
equivalent of saying the goal is to make money. These measurements are
capable of measuring the goal.
However, we need the measurements that will tell us the impact of the
local decisions on the goal. We need measurements which express the goal
of making money perfectly well, but which also permit us to develop
operational rules to carry out our day-to-day work.
While these three bottom-line measures are sufficient to determine

whether the business is making money, they are woefully inadequate to
judge the impact of specific actions on our goal. For example, in what
batch sizes should we process material through our plants? Five? Fifty?
May be five hundred? How will these batch sizes impact the bottom line of
the entire company? Or, should we buy a new robot? It certainly is going to
be more efficient, but it is also expensive. What will be the resulting impact
on our financial measures? Or should we accept an order for a product
when the selling price is substantially below our standard price? We clearly
need some type of a bridge, as shown in Figure 1.5 below, between the
specific operational decisions we must make and the bottom-line
measurements of the entire company.
38

Figure 1.5: The Bridge

Today, our bridge is based on the cost concept. We have developed a host
of procedures and systems based on the idea of cost. We employ the
technique of Economic Order Quantity (EOQ) to help determine batch
sizes. We determine investment opportunities based on cost reduction to
determine where to employ our capital. We calculate product costs and
margins to help understand which products we should push in the market
and which we should discontinue.
The cost concepts and cost procedures are the current bridge between our
actions and the bottom-line measurements, but is this bridge taking us in
the right direction?
Let’s look at an example. We say quality is highly important. Today, we are

talking defect free parts in terms of “Parts Per Million (PPM)”. Now, study
the following Table 1.1:
39

Table 1.1: The Cost Judgment

Reducing Scrap Annual Cost Investment The Cost
From To Savings Needed Judgment
5% 2% $30,000 $20,000 Do
2% 1% $10,000 $20,000 Indifferent
1% 0.5% $5,000 $20,000 Do Not Do
How can we hope to reach a quality level of parts per million scrap when
the cost bridge already blocks us around 1% level? We know that when we
produce defective parts we don’t just scrap material and labor, we are also
scrapping our market.
It is obvious that we must look for a better bridge rather than “cost
savings” to guide us in our efforts to catch up.
“Enterprises are paid to create wealth, not control costs. But that obvious
fact is not reflected in traditional measurement.”
– Peter Drucker.
What answers should we seek from measurements?
• How much money is generated by our company?

• How much money is captured by our company?
• How much money do we have to spend to operate it?
Fortunately, there is a widely used set of three measurements that are not
bottom-line measurements and not cost measurements but do help in
answering those questions.
40

Here they are in Figure 1.6:
THROUGHPUT INVESTMENT OPERATING EXPENSES
All the money the All the money the

The rate at which the
system invests in system spends in
system generates
purchasing things the turning inventory into
money through sales
system intends to sell throughput
Figure 1.6: TOC Measurements

Throughput (T)
Throughput is the rate at which the system generates money through

sales. Production people believe that it is production. Even Finance people
believe it!
It is money entering from outside rather reallocation of money within the

system –Income produced through sales per unit time.
For example, if a company sells a product for $100. Can we say that the
company generated $100? No. It might be that in the product sold there
are materials that were purchased from vendors for $30. This $30 was not
the money generated by our company but by vendors; this money just flew
through our system.
Throughput (T) = Sales Price – TVC, i.e., Truly Variable Costs such as Raw
Material Price, Subcontracting, Sales Commission, Custom Duties etc.
In the example above, it is the sales price, i.e., $100 minus the money
paid to the vendors $30 which generates T of $70.
Only the money generated by your system gets counted; i.e., raw
materials and purchased services (like heat treating) don’t count. Building
to stock does not generate throughput.
In many consumer goods industries, products are sold through distribution

chain. In most cases, the distribution channels reserve the right to return
41

the goods. Here, it is inappropriate to record a sale when the transaction is

certainly reversible.
The dealers in most American and European companies hold about 90-day
supply of cars. These cars have been reported as sales by the car
companies. The dealers have actually purchased them.
The amazing fact is that, in most cases, the dealer has purchased the car
by borrowing the money from the car company and the collateral is just
the car itself!
When the dealer is stuck with a large stock when the model year changes,
who do you think gives the rebates? – Not the dealer!
This problem is not confined to car industry only but it is a widespread

problem and this kind of sale does not generate any throughput.
As Dr. Goldratt said, “In a supply chain, nobody has sold anything until the
end consumer has bought it!”
Example – Turning Around a Threatened Business
Company ABC Corporation has $140 million sales, the majority coming
from its major product line P where they sell 10 million units per annum at
$10. Gross Earning for product P is 30%, material and purchases account
for 40% of sales. Installed line capacity for product line P is loaded to 75%
of max capacity. It is an automatic assembly line requiring no direct labor
— just operators to maintain the equipments.
Overall, ABC Corp is making a loss of 3.6 million per annum. The General
Manager has asked his first line managers to come up with ideas to turn
around the business or they will have to close the plant.
The Operations Manager committed his organization to deliver 8% cost

reductions instead of the budgeted 4%. This does not bring them out of
the sink, however, because 8% of (100% – 30% – 40%)=30% = 2.4 % of
sales. This cost reduction of 2.4% of 140 million is 3.36 million cost
reductions. This is not enough, as these reductions are not bound to
materialize in the current fiscal period.
42

The Sales Director turns up with a business opportunity to sell 2 million per
annum more of product P (which is well within the available capacity). The
downside is that the price would be 40% below the going price – in other
words $6. As it is a segmented market, there is no fear that the price in
the main market will be affected.
Summary
Annual Sales $140M

Material Cost 40%
Overheads 30%
Gross Earnings 30%
Capacity Utilization 75%
Loss incurred 3.6M
Product Price $10
New order details:
Order quantity 2M
Price demanded $6 per unit
What should ABC Inc. do? Write your thoughts here.
Now check the answer
The conventional approach will say, “Decline the additional business!”
Current rules forbid accepting a business at negative margin – (30% Gross

Earnings 40% price decrease = –10% Gross Earnings).
Common business sense clearly says that we have to decline that business,
as it will drive us deeper into the losses.
Consequently, ABC Corp will go bankrupt, all jobs will be terminated and
the plant will be closed.
TOC Approach
If we take the business, we will have additional sales of $12 million (2

million units * $6).
43

Material cost continues to be at $4 per unit. So, this additional business

consumes $8 million but gives us an additional throughput of $4 million.
What about the rest of the operational cost?
We have enough capacity. If we keep it running, the only additional cost

will be energy and consumables such as oil, compressed air and some such
type of cost.
Usually, this does not account for much and so we assume that 0.1 million
are sufficient to cover all our additional operating expenses.
Now here is what we get:
12.0 million sales
-08.0 million material and purchases
-00.1 million additional operating expenses
------------------------------------------
+ 3.9 million additional profit (bottom-line!)
There is no question! We have to take the business and ABC Inc. will be
out of the red immediately.
Investment (I)
Investment is all the money the system invests in purchasing things the
system intends to sell. It is the money tied up in the organization.
Investment has two types:
• Inventory in the form of raw materials, work-in-process (WIP), and

finished goods (FG) and
• Investment in machinery, buildings, etc. (if owned).
It is the things we buy with the intent to sell.
44

Operating Expenses (OE)
All the money the system spends to turn inventory into throughput is
Operating Expense. All expenses are lumped together and usually
considered as one big expense, e.g., all employee labor expenses are
almost always Operating Expense (direct, indirect, sick, operating, etc.).
This definition of OE does not distinguish between the expense of the

salary of a direct worker and that of the Chief Engineer. Both are
conceptually doing the same task. They assist in converting inventory into
throughput.
OE is not just the money that we pay for direct labor.
What is a job of a sales person if not to turn inventory into throughput?

What is the job of a foreman? What are the jobs of managers or their
secretaries?
Why do we differentiate people who are doing exactly the same task –
converting inventory into throughput, just because some of them happen
to touch the product?
Notice the different words chose –
INVESTED in Inventory and
SPENT for Operating Expense (OE)
When we purchase oil for lubricating machines, it is inventory. But when a

portion of it is used, it is moved from inventory and recategorized as OE.
When we purchase raw material, it is not OE, but it is inventory. In the

process of converting it into throughput, if some of the material is
scrapped, it is moved out from inventory and categorized as OE.
The reverse definition of OE provides us with an excellent definition for

“waste”. Any expense that does not contribute to converting Inventory into
Throughput is a waste and as such should be trimmed. (Don’t be too short-
sighted in using this definition).
45

“For-profit” organizations where Throughput and OE are both money, we

can define:
• Net Profit (NP) = T – OE

• Return on Investment (ROI) = (T – OE) / I
• Productivity = T / OE
• Investment Turns = T / I
It is convenient to think of a business as a Throughput pump. The business

consumes raw materials (investment), adds value using some kind of
machinery (maintained by operating expenses) and outputs throughput.
When a business pumps Throughput faster than it consumes operating
expenses, then it is profitable.
1.11 THREE QUESTIONS THAT TOC HELPS TO ADDRESS
What to Change?
It is situation assessment, description of "current reality," and identification
of the core problem or conflict and assumptions that sustain it – diagnosis.
If you ask this question to the people working in any organization, you will
get a long list of problems, only to realize that people are experts in
bitching and moaning! They are not wrong though, since most of them are
working in a department, they have the local view of the problems. Now, if
you have a long list of problems, you cannot possibly solve all of them
together, if you try using the conventional approach of addressing each
problem separately. Obviously, you need a mechanism to prioritize them
and then solve them in that sequence. However, what could be that
mechanism? TOC precisely provides such mechanism to determine what is
important for the organization and lets you to prioritize and focus on the
problems that are critical for the achievement of the goal of the
organization. TOC treats these problems as symptoms and gives the
necessary tools to identify the root cause.
Some examples of the symptoms are:
• Frequently shipping orders late

• Lost Sales
• Excessive amounts of inventory
• Lead times that are increasing
• Poor human relations within the organization
46

Dr. Goldratt calls these "Undesirable Effects" or UDEs. The key is to realize
that the UDEs are not the "real" problem – they are only the visible effects
of the real or "core" problem. The challenge is to map out the interrelated
net of cause-and-effect that links the undesirable effects together. Once
completed, one is generally able to identify the "core problem".
From a list of observable symptoms, cause-and-effect is used to identify

the underlying common cause for them all, the core problem. In
organizations, however, the core problem is inevitably an unresolved
conflict that keeps the organization trapped and/or distracted in a constant
tug-of-war. This conflict is called a Core Conflict. Due to the devastating
effects caused by Core Conflicts, it is common for organizations to create
policies, measurements and behaviors in attempts to treat those negative
effects (often band-aids) that, when treating the Core Conflict, must be
removed, modified or replaced.
What to Change to?

It is the verbalization of vision/solution and description of strategy to attain
the desired state – prescription, decision-making, and solution
development. By challenging the logical assumptions behind the Core
Problem/Conflict, a solution to the Core Conflict is identified. This is only
the starting point for the development of a complete solution – a strategy –
for resolving all of the initial symptoms, and many others, once and for all.
The strategy must also include the changes that must be made alongside
the solution to the Core Problem/ Conflict to ensure that the solution works
and that the organization is restored to its "best possible health." These
are often the changes to the policies, measurements and behaviors
identified in What to Change?, as well as the organization’s strategic
objectives.
Beware of the fact that our today’s problems have arisen out of our
yesterday’s solutions. So, it is possible that whatever solution that we may
implement today, may cause some problems in future. Fortunately, TOC
provides a way to identify such future problems and to amend solution to
ensure that they don’t arise.
The strategy is not complete until its all potential negative side-effects
have been identified and a means for preventing or mitigating each is
determined, becoming key elements of the strategy. Trimming these
negative side-effects allows an organization to intentionally and
47

systematically create winning strategies for all those affected by the

strategy.
How to Cause a Change?

It is the development of detailed plans and tactics that will clarify what
needs to happen and synchronize the efforts of the group in the
implementation of the strategy – planning and team-building.
Taking into consideration the unique culture which exists in every

organization, a plan is developed to transition an organization from where
it is today to realizing the strategy. In other words, a plan for successfully
implementing the strategy is created, including what actions must be
taken, by whom and when. Because resistance to change can block even
the most perfectly laid strategies and plans, crucial to such a plan is
building active consensus and collaboration, or buy-in. TOC has developed
a process based on the psychology of change that acknowledges and
systematically addresses the questions people intuitively ask when
evaluating a change:
• Is the right problem being addressed?

• Does the general direction that the solution is heading make sense?
• Will the solution really solve the problems and what’s in it for me?
• What could go wrong? Will anyone be hurt?
• How are we going to implement this solution?
• As an organization, are we really up to this? Do we have the leadership
and the commitment to pull this change off successfully?
If these questions aren’t answered frankly and effectively with the people
who must implement the change, and those who will be affected by it, the
proposed change will not have the buy-in and support to succeed, and like
most changes, will fall by the wayside and fail before it begins.
TOC Tools to answer these three questions are discussed separately in this
book.
48
1.12 SUMMARY
TOC – A holistic management philosophy developed by Dr. Eliyahu M.

Goldratt that is based on the principle that complex systems exhibit
inherent simplicity, i.e., even a very complex system made up of thousands
of people and pieces of equipment can have any given time only a very,
very small number of variables – perhaps only one (known as a constraint)
– that actually limits the ability to generate more of the system's goal.
1.13 SELF ASSESSMENT QUESTIONS
1. Define “Theory of Constraints” in your own words.
2. What are the basic assumptions of TOC?
3. Who defines the goal of an organization?
4. What is the typical goal of a for-profit organization and what are the
necessary conditions?
5. Define the term “System”.
6. Define the term “Weakest Link”. Explain Chain analogy.
7. Why improving links other than the weakest link is futile?
8. Explain “Give me a leverage point and I will move the earth” in terms of
organization’s performance.
9. Define TOC Measurements.
10.Tick the correct option:
i. Throughput refers to
a. Sales value less direct materials and direct labor costs.
b. Sales value less direct materials costs.
c. Sales value less variable cost of goods sold.
d. The cost of total production output.
e. The cost of good production output.
49

ii. Throughput is
a. The money flowing into the system.
b. The money flowing out of the system.
c. The money in the system.
d. Sales value.
e. None of these.
iii. Throughput is
a. Sales value less direct materials related to the units sold.
b. Money flowing into the system.
c. All the money in the system.
d. a. and b.
e. a. and c.
iv. Throughput is
a. Money generated by the company.
b. Sales.
c. Sales minus operating expense.
d. Sales minus inventory.
e. None of these.
v. Operating Expense excludes

a. Direct labor cost.
b. Direct material cost.
c. Variable factory overhead cost.
d. Fixed factory overhead cost.
e. Selling and administrative cost.
vi. Operating expense excludes

a. Direct labor cost.
b. Variable factory overhead cost.
c. Fixed factory overhead cost.
d. Selling and administrative cost.
e. None of these.
Answers: (i) b, (ii) a, (iii) d, (iv) a, (v) b, (vi) e.
50
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
51
 

FIVE FOCUSING STEPS
Chapter 2
FIVE FOCUSING STEPS
Objectives
• To understand the core of Theory of Constraints (TOC).
Structure
2.1 Introduction
2.2 What is Constraint?
2.3 Types of Constraints
2.4 Step 1: Identify the System’s Constraint
2.5 Step 2: Decide How to Exploit the System’s Constraint
2.6 Step 3: Subordinate Everything Else (to the Above Decision)
2.7 Step 4: (Evaluate Various Alternatives to) Elevate The System’s

Constraint
2.8 Step 5: If in the Previous Steps, a Constraint Has Been Broken Go

Back to Step 1 (Do Not Let the Inertia to Set in).
2.9 How Do You Know that You are Managing the Constraint?
2.10 Summary
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FIVE FOCUSING STEPS
2.1 INTRODUCTION
Once the goal and the necessary conditions are established, TOC prescribes
applying five “focusing steps” in order to continuously proceed inexorably
towards satisfying those necessary conditions. Dr. Goldratt created the five
focusing steps as a way of making sure the management “keeps its eye on
the ball” – what’s really important to success: the system constraint.
2.2 WHAT IS CONSTRAINT?
The Constraint is the weakest link in an organization. View the organization

as a chain - a chain of related and dependent parts. Out of these parts, the
weakest part limits the performance of the system.
Constraint is the factor that limits a company’s ability to achieve more of

its goal. It is the operation that is limiting the productivity of the system.
The thing, that we don’t have enough of, to the extent that it limits the
overall performance of the entire system, is the constraint.
Constraint dictates the current level of performance. Either you manage

constraints or they manage you. Sometimes, they bring you on your
knees.
2.3 TYPES OF CONSTRAINTS
• Market: Market is said to be the Constraint when you do not have

enough demand for a product or service. It means you have more
capacity than what the market is currently demanding from you. When
you observe that the occupancy in holiday resorts at most of the hill
stations drops to say 30% during off season, it is the case of Market
Constraint.
• Resource: A resource or a type of resource is said to be the Constraint

when you do not have enough of it – people, equipment, or facilities - to
satisfy the demand for products or services. It means the market
demand for your products or services is more than what you can really
meet.
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FIVE FOCUSING STEPS
• Material: A material or a type of material is said to be a Constraint when

you are unable to obtain required materials in the quantity or quality
needed to satisfy the demand for products or services. It is external
material shortage.
• Supplier/vendor: A supplier/vendor or a type of suppliers/vendors is

said to be the Constraint when you have a supplier/vendor or a set/type
of suppliers/vendors who are unreliable. The unreliability (inconsistency)
of a supplier/vendor is in terms of timeliness, quality and quantity, or
excessive lead time in responding to orders. The ramification is that you
are unable to meet the market demand.
• Financial: A financial constraint occurs when a company does not have

financial resources to meet its obligations – a cash flow problem. For
example, a company that can’t produce more until payment has been
received for work previously completed, because they might need that
revenue to purchase materials for a firm order that’s waiting.
• Knowledge/Competence: This is similar to Resource Constraint.
❖ Knowledge: Information or knowledge to improve business

performance is not available within the organization. A knowledge
constraint occurs when the organization doesn’t know how to do what
needs to be done to succeed.
❖ Competence: People don’t have the skills (or skill levels) necessary to
perform at higher levels required to remain competitive. A competence
constraint occurs when an existing competence is used to its limit and
any improvement in that particular competence will result in more
profit.
• Policy: Any rule or business practice that inhibits progress toward the
system’s goal. Policy constraints are the most insidious of all because
almost every other type of constraint is the result of some policy.
NOTE: In most cases, a policy is most likely behind a constraint from any
of the above mentioned types.
All these types do not really apply to all types of systems. For example,
Material and supplier/vendor constraints might not apply to service
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FIVE FOCUSING STEPS
organizations. Market constraints are generally not relevant in not-for-

profit systems like government agencies. However, Resource, Financial,
Knowledge/Competence, and Policy constraints can potentially affect all
types of organizations.
Five Focusing Steps are at the heart of TOC and the various applications
are derived from them.
The Five Focusing Steps are:
STEP 1: Identify the System’s Constraint
STEP 2: Decide how to exploit the System’s Constraint
STEP 3: Subordinate everything else to the above decision
STEP 4: (Evaluate various alternatives to) elevate the system’s Constraint
STEP 5: If in the previous steps, a Constraint has been broken go back to

Step 1 (Do not let the inertia to set in).
Here is the detailed explanation
2.4 STEP 1: IDENTIFY THE SYSTEM’s CONSTRAINT
How Do You Find the Constraint?
There are number of ways to identify the constraint:
• You could compute the capacities of every machine and compare it with
the demand.
• You could just LOOK and see where the blockages are.
• You could ASK those smart ones who do the work. They have been there
for long and they know it.
• Another way is to ask the expeditor.
• To start, one can ask the following questions:
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FIVE FOCUSING STEPS
❖ Where is there a work backlog?
❖ Where do most problems occur?
❖ At what resource do the expeditors or managers spend most of their

time when chasing orders?
❖ Which work centers have high utilization?
❖ What happens to throughput when the supposed constraint capacity

changes?
• Choose a resource that should be an internal constraint at peak time.
• It should be either expensive or difficult to get.
• The work done by such constraint cannot be outsourced easily.
• The predicted market demand is more than what the chosen constraint
can produce.
• Ask “What is the utilization level of each of the machines?”
❖ If none of them have utilization levels even remotely close to 100%,

then this would indicate that the constraint is not internal but is
external.
❖ Only one of them seems to be overloaded, indicating a clear constraint

which is internal.
❖ You may find that a number of machines seem to be overloaded with

inventories everywhere. People may point out to multiple constraints.
This can indicate that you are affected by the efficiency syndrome
where you are trying to squeeze the maximum out of individual
machines by overloading them.
Once the system Constraint is identified and if it can be broken without

much investment of money, time etc., do it immediately, and revert to the
first step again.
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FIVE FOCUSING STEPS
If it can’t be easily broken, proceed to the second step. What should be our
next step? We have just identified the constraint. How should we manage
them? The intuitive response is to get rid of them.
But to get rid of a Constraint may take a lot of time. For example, if the
Constraint is in the market, to break this Constraint might take many
months, or years. Or, if the Constraint is a machine, and we have decided
to buy another one, the delivery time might be over six months.
What are we going to do meantime? Sit around and do nothing? That does
not seem like a good advice for a second step.
2.5 STEP 2: DECIDE HOW TO EXPLOIT THE CONSTRAINT
“Exploit” means to “get the most” out of the constraining element without
additional investment. In other words, change the way you operate so that
the maximum financial benefit is achieved from the constraining element.
For example, if the system Constraint is market demand (not enough
sales), it means catering to the market so as to win more sales. On the
other hand, if the Constraint is an internal resource, it means using that
resource in the best way to maximize its marginal contribution to profit.
This might mean process quality improvement, re-engineering the
workflow through the process, or changing the product mix.
Dr. Goldratt has carefully chosen the term “Exploit” which sounds
somewhat negative. Perhaps he chose such a harsh term just to convey
that we really need to extract maximum possible benefit out of the
constraint.
How should we manage the constraints, the things that we do not have
enough of? At least, let’s not waste them. Let’s squeeze the maximum out
of them. For example, let’s suppose that the Constraint is in the market
meaning there is enough capacity, but the market is not placing enough
orders with you. Then exploit the Constraint means delivering all orders –
100% on-time. Not 99%, one hundred per cent! If the market is the
constraint, let’s not waste anything.
If the Constraint is a specific raw material, it means ensuring that there is

no waste of that material. If it is oil, every drop counts. If the Constraint is
57

FIVE FOCUSING STEPS
a specific internal resource, it means ensuring that it is productive all of the

time.
EXPLOIT, no matter what it takes. No mercy, squeeze the maximum out of

them. Determine how to work with the system's Constraint so as to
maximize throughput.
“Exploit” means
• Achieve the best possible output from the constraint.
• Remove limitations that constrain the flow, and reduce non-productive

time, so that the Constraint is used in the most effective way possible.
• Keep the Constraint busy all the time.
• Don’t spend Constraint time on things that will just be sent to the
warehouse.
• Don’t spend Constraint time on things that will be scraped (Do quality
checks before the constraint).
• Improve utilization and efficiency to maximum in the constraint.
How Should We Manage Non-constraints?

Okay, we have now decided how we are going to manage the constraints.
What about managing the vast majority of the company’s resources which
are by definition, non-constraints? Should we leave them alone?
If we leave them alone, within a very short period of time they will stop
working properly, and their actual availability will shrink to the extent that
they will become constraints!
So, how should we manage them?
The answer is intuitively obvious.
Should we encourage non-constraints to supply more than the Constraint

can absorb? This will not help anyone. On the contrary, it will hurt. Thus,
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FIVE FOCUSING STEPS
the non-constraints should supply everything the Constraint needs to

consume, but not more.
This is the means by which the rest of the organization is synchronized

with the capabilities of the Constraint and the decisions made regarding
how to best utilize it.
This does not happen on its own. We need to make it happen. Therefore,
the third step is: Subordinate everything else to the Constraint.
2.6 STEP 3: SUBORDINATE EVERYTHING ELSE (TO THE

ABOVE DECISION)
What is Subordination?
Subordination means:
• Treating the Constraint as a KING.
• Avoiding the Constraint waiting for work. Making sure that the
Constraint’s time is protected with enough work. It does not starve or sit
idle for want of work.
• Making sure that the Constraint is busy all the time.
• Helping the Constraint to be faster by some means, if feasible.
• Offloading work from the Constraint. Often there is some work that can
be done by non-constraints. If you are able to identify such work and use
the Non-constraints (who by definition have more capacity) to do that, it
will free up some of the Constraint’s capacity which can be used to
produce more.
• Linking the output of other operations to suit the Constraint. Non-

constraints should produce only what is needed and avoid creating work
to keep their resources busy or to show high utilization of their
resources.
• Ensuring smooth work flow into the Constraint and avoiding unnecessary
build-up of work-in-process inventory.
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FIVE FOCUSING STEPS
• It may need to upgrade a few Non-constraints.
Subordinate all other decisions to the necessity to exploit the Constraint

means:
• The focus is on being a high quality, reliable supplier to, or customer of

the Constraint.
• Utilization and efficiency are not factors to emphasize at the Non-

constraint resources.
This step is often skipped, and thereby the majority of financial benefit of
TOC is lost!
The Constraint is more critical to the organization because of its relative

weakness in terms of capacity. What distinguishes a Non-constraint is its
relative strength in terms of capacity, which enables it to be more flexible.
So, the current performance of the organization really hinges on the weak
point, i.e., the Constraint. While the other parts of the system could do
more, because of the existence of the Constraint, there is no point in doing
more. Because it will only reside in the warehouses and may never go to
the market. Instead, the key to better performance is wisely subordinating
the stronger points so that the weak point can be exploited in full.
Every process has its objectives and Subordination actually redefines those
objectives so as to meet the overall goal of the organization. A process
exists not for itself but for the ultimate goal of the organization. Each
process is supposed to accomplish a mission that’s necessary for the
ultimate achievement of the goal. But among processes, there may be
conflicting priorities, such as competition for the same resources.
Subordinating Non-constraints actually focuses the efforts of every process
on truly supporting the goal of organization. It allows the Constraint to be
exploited in the best possible way.
Consider a raw material warehouse. What is its objective? The objective is

to make the material available whenever needed by the shop floor and for
that purpose it translates into storing and releasing of material whenever
needed. Thus, it acts as a “bridge” between the time materials arrived from
the vendors and the time the same materials are needed on the shop floor.
When a specific work center is the Constraint, any materials needed by
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FIVE FOCUSING STEPS
that particular work center should be released precisely at the required

time. If market demand is the Constraint, any order coming in should
trigger material release.
However, even if no new orders enter the system, various production

departments often like to continue working, so as to keep their efficiency
high. But if the non-constraints in a production system are properly
subordinated, material should not be released. The material release
process must be subordinated to the needs of the system constraint, not to
arbitrary efficiency measurements. After all, efficiency is not so important
for non-constraints. Maintaining the order in the warehouse is part of the
subordination process. Release of materials not immediately needed for a
firm order should be treated as a lower priority than the quick release of
materials the Constraint will soon need to fulfill a definite customer
requirement.
Subordination serves to focus the efforts of the system on the things that
help it to maximize its current performance. Actions that contradict the
subordination rationale should be prevented.
It’s possible that, after completing the third step, the system constraint
might be broken. If so, it should be fairly obvious. Output at the system
level will usually take a positive jump, and some other part of the system
might start to look like a “bottleneck.” If this is the case, go back to the
first step and begin the Five Focusing Steps again. Identify which new
factor has become the system constraint, determine how best to exploit it
and subordinate everything else.
This is the toughest step because you must change your measurements/
culture.
How Easy or Difficult is to Subordinate?
This is the most important and the most difficult of the five focusing steps
to accomplish. Why is it so difficult?
Because -
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FIVE FOCUSING STEPS
• It requires everyone and every part of the system not directly involved
with the Constraint to subordinate, or “put in second place,” their own
cherished success measures, efficiencies, and egos.
• It requires everyone, starting from top management going down to all

levels, to accept the idea that excess capacity in the system at most
locations is not just acceptable— it’s actually a good and necessary thing!
• Subordination formally relegates all parts of the system that are not
Constraint to the role of supporters of the Constraint. This can create
behavioral problems at almost all levels of the company.
• It is very difficult for most people to accept that they and their part of
the organization aren’t just as critical to the success of the system as any
other. Consequently, most people at non-constraints will resist doing the
things necessary to subordinate the rest of the system to the constraint.
This is what makes the third step so difficult to accomplish.
What Does Subordination Practically Mean?
Subordination simply means that every decision made and every action
taken by the entire organization must be done so based on its impact on
the constraining resource.
So what should the different parts of the organization do?
Examples:
• Accounting must
❖ Provide data for real time decision-making.
❖ Not hold on to financial measures that are based on what happened

last month.
❖ Eliminate outdated performance metrics like utilization and efficiency in

non-constraint operations.
• Purchasing must
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FIVE FOCUSING STEPS

❖ Order parts and materials based upon the rate of consumption at the
Constraint.
❖ Stop ordering in large quantities only to get lower price.
❖ Or only on the basis of lowest cost to satisfy another outdated

performance metric, purchase price variance.
• Sales and Marketing must understand that unless and until the current
Constraint is broken, they must not make hollow promises on delivery
dates in order to obtain more orders to supplement their sales
commissions.
• Engineering must respond quickly to the needs of production to assure

timely delivery and updates to designs and specifications.
• Maintenance must always prioritize their work based upon the needs of
the constraining operation including preventive and reactive maintenance
activities.
• If there is an inspection station that impacts the Constraint throughput,

they must always provide timely and accurate inspections so as to never
cause delays that negatively impact the flow of materials into and out of
the constraint.
• Production Control must stop scheduling the plant on forecasts. Schedule

actual customer orders rather than dummy orders.
Warning: It would be a grave mistake to equate Non-constraints with

non-important. On the contrary, neglecting a Non-constraint could lead to
the Non-constraint becoming the new Constraint!
2.7 STEP 4 (EVALUATE VARIOUS ALTERNATIVES TO)

ELEVATE THE SYSTEM’s CONSTRAINT
So many times, we have witnessed a situation where everybody was

complaining about a huge constraint. So let’s not hastily run to approve
subcontracting, or launch a fancy advertising campaign, etc. Because when
they exercised the second step of exploitation, of just not wasting what is
available, it turned out that there was more than enough.
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FIVE FOCUSING STEPS
Often times, Exploitation and Subordination are sufficient to reach the

needed output; do not increase investment too soon!
When the 2nd and 3rd steps are complete and we still have a constraint;
that is the time to move to the fourth step.
However, if, after completing Step 3, the original constraint is still the
System constraint, at this point the best you can be assured of is that
you’re wringing as much productivity out of it as possible – it’s not possible
for the system to perform any better than it is without additional
management action.
In taking this action, it’s necessary to proceed to the fourth step to obtain
better performance from the system.
In previous steps, you ensure that the organization is optimized via

nothing more than policy changes. In this step, you are actually altering
the Constraint. Constraints are not an act of God; we can certainly do
something about them. The next step is intuitively obvious. If we do not
have enough, it does not mean that we cannot add. For instance, when the
Constraint has been a machine in the plant, this is the step in which you
will add physical capacity.
This is the fourth step, not the second step.
Elevate means to “Increase Capacity”, “Lift Restrictions”. If the Constraint

is an internal resource, this means obtaining more time for that resource to
do productive work.
Some typical alternatives for doing this might be to acquire more machines
or people, or to add overtime or shifts until all 24 hours of the day are
used.
If the Constraint is market demand (i.e., lack of sales), elevation might

mean investing in advertising or new product introduction, to boost sales.
Increase the capacity of the Constraint by:
• Doing overtime or hiring more staff.
• Reducing setup time in the constraint.
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FIVE FOCUSING STEPS
• Investing in process improvements for the constraint.
• Buying more capacity.
• Moving work away from the Constraint (work done by others,

subordination, outsource).
• Redesigning the process (eliminate the need).
• Resequencing for improved processing.
• Checking Quality BEFORE the Constraint.
• Improving Quality after the Constraint so that the parts processed by the
Constraint are not scrapped.
• Advertising campaign or introducing new products.
• Any other action that removes the Constraint.
Elevating invariably means “spend more money to make more money”.

Notice the use of the word “evaluate” in this step. This word is emphasized
for a good reason.
Remember, there is more than one way to elevate the Constraint. Some
alternatives are less expensive than others. Some alternatives are more
attractive for reasons that can’t be measured directly in financial terms
(easier to manage, for example).
In any case, a choice on the means to elevate will usually be required, so

jumping on the first option that you think of might not necessarily be a
good idea.
Be careful, there are risks!
• When you add capacity, a new Constraint may emerge!
• Typically, when you elevate the Constraint and you do not intend to move
it to some other resource, you need to increase the protective capacity of
other resources.
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FIVE FOCUSING STEPS
• This is the time when you may decide to choose some other resource as
constraint.
One of the reasons to favor one elevation alternative over another is the
identity of the next potential constraint. Constraints don’t “go away,” per
se.
When a Constraint is broken, some other factor, either internal or external

to the system, becomes the new system constraint – albeit at a higher
level of overall system performance, but a Constraint nonetheless. It’s
possible that the next potential constraint might be more difficult to
manage than the one we currently have – it might reduce the margin of
control we have over our system.
It’s also possible that different alternatives might drive the system
constraint to different locations – one of which might be preferable to the
other. Or it could be that dealing with the potential new constraint might
require a much longer lead time than breaking the current constraint. In
this case, if we decide to break the current constraint, we would want to
get a “head start” on the tasks needed to exercise some control over the
new constraint.
Another important factor to consider is return on investment. As long as

the next Constraint poses a substantially higher limit than the existing one,
it’s probably safe to say that the company did the right thing. Assessing
the real return on investment (ROI) from an elevation action requires an
understanding of TOC, where the next Constraint will be, and how much
Throughput will increase before hitting the next constraint. So, the
“evaluate” part of the elevation step can be extremely important. It’s
important to know where the new Constraint will occur, because it could
affect our decision on how to elevate.
How to Determine Where the Next Constraint Will Be?

The easiest way to do this is to apply the first three of the five focusing
steps “in our heads,” before actually elevating for the first time. In other
words, do the following:
• After you have elevated the current Constraint, determine where the
next Constraint would be.
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FIVE FOCUSING STEPS
• Then determine what actions will be necessary to exploit that new

Constraint in the future, and how the rest of the system will have to act
to subordinate itself to the exploitation of the new constraint.
Do these steps for all the available alternatives. Once this is done, the
ramifications of each alternative to elevate should be obvious, and a
better-informed decision is possible about which alternative to choose.
2.8 STEP 5: IF IN THE PREVIOUS STEPS, A CONSTRAINT

HAS BEEN BROKEN GO BACK TO STEP 1 (DO NOT LET
THE INERTIA TO SET IN)
By the fourth step, we have helped the company to move forward. Can we
stop here or must we add a fifth step?
The answer is once again intuitively obvious. If we elevate the Constraint,

if we add more and more to the things that we didn’t have enough, there
must come a time when we do have enough.
The Constraint is broken. The performance of the company will rise, but
will it jump to infinity? Obviously not.
The performance of the entire company will be restricted by something

else. The Constraint has moved.
The fifth step is: If, in the previous step, a Constraint has been broken, Go
Back to step one. Do not let inertia to set – Don’t become complacent. Do
not let the policy to be the constraint.
What happens if you make the weakest link stronger and stronger? – Once
you solve your number one problem, number two gets promoted. The five
step focus is really the process of ongoing, continuous improvement.
Be careful of what you wish for. By applying these steps, you might get it,
too much, too soon. Surprisingly, companies that implement these steps
become complacent with the rapid and substantial results that they get and
let the inertia set in and do not go back to step one, thereby, miss on
further growth.
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FIVE FOCUSING STEPS
Even if the exploit and subordinate steps don’t break the system
constraint, the elevate step very likely will, unless a conscious decision is
made to curtail elevation actions short of that point. In either case, after
the subordinate or elevate steps it’s important to go back to the first step
(identify) to verify where the new system constraint is, or to determine
that is has not migrated away from the original location.
Sometimes, a Constraint moves, not as a result of intentional actions, but

as a result of a change in the environment. For instance, a change in
preferences of the market might drive a company to change its product
mix to such an extent that the Constraint moves elsewhere. While such
external changes don’t happen very frequently, it’s worth the effort to go
back to the first step from time to time, just to verify that what we believe
to be the Constraint still is, in fact, the system’s limiting factor.
The warning about inertia says “Don’t become complacent.” There are two
reasons for this. First, when the Constraint moves, the actions or policies
we put into place to exploit and subordinate to the “old” constraint may no
longer be the best things to do for the benefit of the whole system. If we
don’t reevaluate where the new system constraint is, this deficiency would
never be noticed. Second, there is often a tendency to say, “Well, we’ve
solved that problem. There’s no need to revisit it again.” But today’s
solution eventually becomes tomorrow’s historical curiosity. An organization
that’s too lazy (or distracted by other demands for its attention) to revisit
old solutions can be sure that eventually – probably sooner, rather than
later – it won’t be getting the best possible performance from its system.
2.9 HOW DO YOU KNOW THAT YOU ARE MANAGING THE

CONSTRAINT?
Identifying the Constraint
If you are suffering from “efficiency syndrome”, i.e., still your organization
is chasing efficiency at some (if not all) non-constraints, you may find that
the Constraint is moving from one place to other every now and then.
However, for some time, if you find that the Constraint is at the same
place, it would mean that you have correctly identified the Constraint and
that other parts of the business are taking actions to support maximizing
its performance. The "subordination" is successful.
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FIVE FOCUSING STEPS
Time Management
• Typically, a lot of time is spent in extinguishing “fires” at many places

meaning there are emergencies to be handled in various departments
very frequently. You are managing your Constraint well if you have few
fires to fight. Another way to look at it is that you have few customer
orders to chase up and the departments are not resorting to finger
pointing.
• Do you feel that employees have control of their time or are they are
only reacting in a crisis? If you are managing your Constraint well, you
will find that your employees have a good control over their time and are
in a position to spend the time the way it is planned. There will be few
crises here and there but employee will find that to be more of an
exception.
• Can the (working) owners take time off, or do they feel compelled to
stay? Many times, it is seen that things do not work well if the working
owners are not around. They are required to be there to take every
decision and fight every fire. If you are managing your Constraint well,
you will find that a proper system is in place and the working owners do
not need to look into everything and they can afford to take a vacation.
Customer Service Level
• One immediate benefit of managing the Constraint well is that your

deliveries start going on time. Is delivery reliability, such as DIFOT
(Delivered In Full and On Time), close to 100%? At least 99%? If the
answer is “Yes”, then you are managing the Constraint well.
• Are employees busy, but not rushed?
Utilization
• Is Constraint utilization high (or whatever is needed to meet customer

orders) and is non-constraints utilization not so high?
• Is the Constraint running during morning, lunch, afternoon or any other

breaks? (Assuming this is safe and technically possible).
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FIVE FOCUSING STEPS
Improvement
• Do you have a process of ongoing improvement that controls the location

of the constraint?
Inventory
• Are inventories low? Do you rarely run out of stock, but come close to it?
Cash flow
• Is Cash flow excellent?
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FIVE FOCUSING STEPS
2.10 SUMMARY
The Five Focusing Steps and their iterations set the business performance
rolling (see the Figure 2.1 below).
Figure 2.1: Five Focusing Steps
It is much faster to identify and exploit the constraint. You get a

substantial jump in performance immediately after you follow the first two
steps. The third step, which is difficult to implement, gives another
substantial jump in performance. The step four leads you to handle much
more business than what you could do with the current capacity and the
fifth step guarantees that you will continue to grow.
The five focusing steps constitute a valid approach to effectively manage

business systems and there are some conclusions that can be drawn and
they are:
• There are only few key points, in any system that needs continual close
attention.
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FIVE FOCUSING STEPS
• Most of the data that we collect may not be critical and could only be
“noise” rather than “signal”.
• Most of the parts of the system have significant excess capacity (and that
is not a bad thing! In fact, it is necessary to have it).
• Improving local efficiency everywhere except in the Constraint could be

counter-productive and will lead to significant waste.
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FIVE FOCUSING STEPS
1. Define the term Constraint.
2. How do you identify the Constraint?
3. What are the various types of constraints?
4. Which of the Five Focusing Steps is the most difficult? Why?
5. Give examples of “good subordination”.
6. Why “elevate the Constraint” is the fourth step and not the second?
7. What happens when you manage your Constraint well?
8. Mark the following statements as True or False:
a. There are many Constraints that critically impact the business

performance at any given point of time.
b. “More is better” is correct only for the Constraint.
c. After correct subordination, you may find that the Non-constraints

have some idle time.
d. Money is always the only real Constraint.
e. “Subordination” is the most difficult step.
f. Each department needs to produce to their capacity to maximize the

profits.
g. Constraint is something that can be broken.
h. Subordinating to Constraint means producing less than the capacity

of the Non-constraints.
9. Choose the correct option:
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FIVE FOCUSING STEPS
i. Constraint is
a. A policy that limits throughput.

b. An activity or operation that limits throughput.
c. A scarce resource that limits throughput.
d. (a) and (b).
e. (a) (b) and (c).
ii. A Constraint is where
a. The demand on a resource is greater than the capacity of the

resource.
b. The demand on a resource is equal to the capacity of the resource.
c. Buffer inventory should be avoided.
d. (a) and (b).
e. (a) (b) and (c).
iii. A non-constraint is utilized when
a. It is producing at capacity.
b. When it is activated.
c. When it is producing throughput.
d. (a) and (b).
e. (a) and (c).
iv. Balancing the flow of work requires
a. Breaking the Constraint.

b. Working at the pace set by the Constraint.
c. balancing the plant.
d. (a) and (b).
e. (a) (b) and (c).
v. The goal of any for-profit organization is
a. To maximize throughput.
b. To balance the flow of work.
c. To make money now and in the future.
d. To minimize inventory and operating expense.
e. None of the above.
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FIVE FOCUSING STEPS
vi. A non-bottleneck operation producing at its own pace would
a. Always be activated and always be utilized.

b. Always be activated, but not always utilized.
c. Always be utilized, but not always activated.
d. Always be producing throughput.
Answers: (i) e, (ii) d, (iii) c, (iv) b, (v) c, (vi) b.
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FIVE FOCUSING STEPS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
76
 

USING TOC FOR JUDGING VARIOUS ACTIONS AND DECISIONS
Chapter 3
USING TOC FOR JUDGING VARIOUS
ACTIONS AND DECISIONS
Objectives
• To understand the TOC way of judging various actions and decision-

making.
Structure
3.1 Introduction
3.2 Measurements Drive Behavior
3.3 What Measurements Should Do?
3.4 Typical Judgments Provided by Finance
3.5 Judgment of the Performance of the System as a Whole
3.6 Judgment on Investment in Equipment
3.7 Make or Buy Judgment
3.8 Judgment of Sub-systems
3.9 Judgment of Product/Service Viability
3.10 Decision-making
3.11 Control Measurements
3.12 Summary
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3.1 INTRODUCTION
How do we judge any action or decision? The only way to call a judgment
good or bad is by measuring their impact on the organization and then
deciding whether it is good or bad.
Every organization has a goal. An organization is built from various

functions where decisions/actions are taken every day.
In order to achieve as much of the goal, the actions have to be

synchronized to the organizational goal.
In order to make sure every decision and action truly contributes to the
goal of the organization we must have goal measurements as guidelines
judging the impact of a local decision on the organization as a whole.
3.2 MEASUREMENTS DRIVE BEHAVIOR
This is how Dr. Goldratt stressed the importance of measurements:
• Tell me how you measure me and I’ll tell you how I’ll behave!
• Tell me how you'll measure me, and I'll tell you what damned stupid
things I'll do to make the measurement look good!
• If the measurements are absurd, my behavior will also be absurd!
• If my Performance Measurements are not clear, even I will not know how
I will behave!
3.3 WHAT MEASUREMENTS SHOULD DO?
A good measurement should drive a person in any function to do what is

good for the organization as a whole.
While this may sound obvious, in many organizations, people in functional

areas are actively encouraged to do the opposite!
This is done by using (wrong) measurements.
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Examples:
Example 1: A sergeant noticed that one of the missiles in not functioning.

Further diagnosis found a part that was bad. The sergeant called up the
parts manager who said he has the part but he cannot issue. The sergeant
asked “Why?” The answer was “I have only one part left and if I ship it to
you, the system will report stockout which will give me a bad rating. I will
order more parts and then will ship one to you”!
The parts manager was measured on stockouts, though the measurement

cannot be said to be wrong, it led to a wrong behavior.
Example 2: A Procurement Manager was primarily measured on the cost

of purchases. So, he took steps to reduce the cost of purchase and saved
$1.3 million by changing vendors.
It was revealed later that due to the problems caused by the new material,
the company lost $25 million!
One of the most important characteristics of a good measurement system

is it should reflect the impact on the entire system, not on one isolated
part.
3.4 TYPICAL JUDGMENTS PROVIDED BY FINANCE
What are the responsibilities of a typical Finance function?
One is monitoring the money which includes, managing Payroll, Account

Receivables and Payables, relationship with banks etc.
And two is, judging major decisions and actions. These judgments are very
important since the actions based on these judgments can change the
future of the company. Also, the measurements set in determine the
behavior of the organization and therefore Dr. Goldratt said, “Tell me how
you measure me, and I’ll tell you how I will behave”.
Let’s explore the different kind of judgments that Finance provides to

organizations.
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1. Judgment of the performance of the system as a whole – Finance

provides this judgment by way of annual/quarterly Balance Sheet, Profit
& Loss A/c, Cash Statements etc.
2. Judgment on investment in equipment – Finance calculates Return on

Investment (ROI), compares the price of the equipment with the
expected cost saving and helps in decision-making on buying of an
equipment.
3. Make or Buy judgment – Finance provides the judgment of Make or Buy

by comparing the price with the cost to produce internally.
4. Judgment of sub-systems – Almost all systems are comprised of sub-

systems and Finance provides the judgment of these sub-systems by
declaring them as profit-centers and by providing the Profit & Loss A/c
of each profit center.
5. Judgment of Product/Service viability – Finance provides “Product Cost”

for each product/service so as to enable taking related decisions.
Typically, the above-mentioned information is provided late and is not

accurate. Therefore, organizations spend huge amount of money on
installing a computerized system with the hope of getting them early and
accurately.
Dr. Goldratt believed that the major problem is not the timeliness or
accuracy; the major problem is that these judgments are based on wrong
measurements that lead to enormous distortions.
Let us understand how the current measurements cause distortions.
3.5 JUDGMENT OF THE PERFORMANCE OF THE SYSTEM AS

A WHOLE
The main distortion that the financial measures cause in judging the
performance of the system as a whole is the way it treats inventory. Today,
it is very well known that inventory is a liability.
Why? Because it drastically reduces the company’s ability to compete.
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How? Here are the ways:
• Inventory jeopardizes quality.
• Inventory hides the process related problems.
• It becomes a major hurdle while coping with changing demand.
• It injects unreliability in meeting the promised due dates.
• It increases the lead time.
(These ways are explained in this book elsewhere).
Despite all these, the Balance Sheet regards inventory as an asset.

Anybody who has a brief understanding of how Balance Sheet is prepared
would know it.
The bigger distortion happens in Profit & Loss Statement. In P & L

statement, there is an item called “Cost of Goods Sold”. It is calculated as
the cost of the materials plus a proportionate share of overheads.
With this, if you have more inventories, the overheads get distributed over
a bigger base causing less amount of apportionment to the Cost of Goods
Sold. When that happens, less amount of money is charged to P&L and the
net profit appears to be higher.
Conversely, if you reduce the inventory, it will provide a smaller base for
absorbing the overheads. In that case, the Cost of Goods Sold will have a
higher share of the overheads.
If you are incharge of a company, you will be facing a conflict. On one

hand, you are convinced that in order to maintain and enhance company’s
ability to compete, you need to reduce the inventory. However, on the
other hand, in order to protect company’s profitability, you need to
increase the inventory. “Reducing inventory” and “Increasing inventory” are
exactly opposite of each other and therefore cannot coexist.
This is the conflict that you need to face because of the way Finance treats
inventory. Either way, you stand to lose.
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Let’s see the example given by Dr. Goldratt. Suppose you are incharge of a
company which makes a net profit $3 million. You have an inventory worth
$30 million in finished goods. The added value/cost allocations are worth
50% of the finished goods value.
Now, you decide to reduce the finished goods inventory. You reduce it to
say 50% and are still able to service your customer well. Your sales are
stable. In fact, you achieved the finished goods inventory reduction by
streamlining your operations to be more in line with sales.
What will be the impact on your financial statement? You have reduced the
inventory by $15 million. So, the cost of added value or cost allocations
which was accounted in this inventory will go to P & L A/c i.e., 50% of the
inventory value amounting to $7.5 million will be reduced from your
profits. So, your company which was making profit of $3 million will now
make a loss of $4.5 million!
The reality is that you have actually made the same amount of profit but
the way Finance treats inventory causes this distortion.
3.6 JUDGMENT ON INVESTMENT IN EQUIPMENT
How investment in equipment is judged by Finance? Here is an example

given by Dr. Goldratt. Suppose you want to buy equipment that costs
$100,000 and it produces double number of parts in the same amount of
time. How do we evaluate if the investment is justified?
We calculate the time saved per part. If the machine produces different
parts and takes different amount of time, we take an average. So, let’s
assume that the average time saved per part is five minutes.
The next step that we follow is we calculate the annual saving in time. If
we are producing say 30,000 parts in a year, we will save 150,000 minutes
(30,000 parts * five minutes saved per part), i.e., 2500 hours in a year.
Then we translate the time saved per year into the money saved per year.
In our case, let’s say that the direct labor is $8 per hour and the overhead
factor is 4, then we calculate the cost per hour as $8 + ($8 * 4) = $40 per
hour.
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Then we apply it to the annual time saved as calculated above, i.e., 2500
hours multiplied by $40 = $100,000 per year.
It means your Return on Investment = 1 year.
Even if we discount it assuming that the numbers are not correct and say
that the Return of Investment is 2 years, the investment is justified.
This is a standard process; but has some ramifications.
Let us consider the following scenarios: There are only two scenarios –
either the equipment that we intend to buy is the Constraint or is a Non-
constraint.
Scenario 1
To begin with, let us take the most common scenario. Let us assume that
the equipment that we intend to buy is a non-constraint (since most
machines are non-constraints anyway).
The standard process followed with our example leads to the conclusion
that our Return on Investment is one year. Really?
No way!
Because the predicted saving will not materialize. Since it is a non-

constraint, it already had an excess capacity as compared to the
Constraint. So adding more capacity to such a process is fruitless.
Because inventory will increase. In order to justify the equipment, we will

keep it busy all the time. It will produce double the quantity than what
non-constraint was able to produce earlier. So keeping it busy all the time
will unavoidably increase the inventory.
Because Throughput might be jeopardized. Due to the new faster

machine, the standard time to produce parts is shortened. A foreman who
uses the old machine will be condemned on his variance measurements
(e.g., he invested 10 minutes instead of 5 minutes for producing a part). If
the total capacity of the old machines is much bigger than the new
machine, the new machine will become the Constraint and Throughput may
be jeopardized.
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Scenario 2
The equipment we are considering to buy is the Constraint. We often avoid
purchasing equipment that will increase the capacity of the Constraint
because the investment seems unjustified.
Dr. Goldratt explained: Let’s assume that the equipment that we are
considering to buy is not twice as fast, but it is only faster by 10%. When it
was 100% faster, the Return on Investment as calculated by the standard
process was one year. Now the ROI will be ten years. The common process
of justifying investment will condemn such an investment.
Since the purchase will add capacity to the Constraint, the justification
should not be done by calculating the cost saving. It should be done by
looking at the additional sales.
Suppose the total sales of the company is $10 million and the raw material
cost is about 50% of the sales value, Even if the new equipment adds only
5% capacity to the Constraint it will add $500,000 per year to sales and
$250,000 to profit (5% 0f $10 million is $500,000 million and the variable
cost of 50% of the sales value, i.e., $250,000).
The ROI is just a few months. Isn’t it?
3.7 MAKE OR BUY JUDGMENT
When considering outsourcing an item, the cost of producing the material

internally is calculated.
Let’s take an example. Consider the following example given by Dr.

Goldratt:
Raw material price is $5 per unit. Direct labor cost $10 per hour and the
time needed to produce one unit is 15 minutes. Hence, the direct labor
cost per unit is $2.5 per unit. Overhead factor is 4.
The internal cost to produce one unit is calculated as:
Cost of raw material + Cost of direct labor + overhead, i.e.,
5 + 2.5 + (4*2.5) = $17.50.
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The internal cost is then compared with the external vendor’s price and the
decision is taken.
There are negative ramifications of following this standard process.
Scenario 1
The part that we are considering to outsource is processed by a non-
constraint.
In our example, the standard financial process leads to the conclusion that
our internal cost to produce the part is $17.50 per unit.
Therefore, if a vendor asks for $10 per part, most likely the decision will be
to buy the part, rather than making it internally, so that we save $7.50 per
unit.
Really? Will the predicted savings materialize? No way!
Let us clearly understand that outsourcing a part will not reduce the
overheads in any way. On the contrary, it may even increase it.
It does not even reduce the direct labor (unless we fire them). Transferring
people from one department to another does not reduce the labor cost.
Yes, we will save on raw material price which is $5.
So, if we outsource it, what will be the consequence?
Rather than saving $7.50 per unit, we will increase our cost by $5 per unit!
Scenario 2
The part being considered for outsourcing is processed by the Constraint.
The existing make or buy judgment process often prevents outsourcing a
part even though it will significantly increase the profitability of the
company.
When the Constraint is involved, the justification should not be based on

cost saving; but it should be based on the additional sales that you might
be able to service.
85
Look at the following example.
Let say that your company’s sale per year is $10 million. The raw material
content is about 50% of the sales price.
Suppose the part under consideration uses 3% of the capacity of the

Constraint and we produce about 1000 parts in a year.
By outsourcing the part, we will be freeing 3% of the Constraint’s capacity.

What will be the impact?
Since Constraint is the resource that limits the sales, freeing 3% capacity
of the Constraint will help us have 3% more sales, i.e., 3% of $10 million
will be $300,000 per year.
Since the raw material cost is about 50%, this will enable us to add
$150,000 per year to the bottom-line.
Such a number can justify even a very high price for outsourcing.
Let’s say that the vendor charges $30 per unit. See the following
calculations:
Cost of outsourcing = 1000 units * $30 = $30,000.
Savings due to outsourcing = 1000 units * $5 (the price of the raw

material) = $5000.
So, the net cost of outsourcing = $30,000 - $5000 = $25,000.
The annual impact on the profit due this outsourcing is:
[Additional Sales $300,000] minus [Additional raw material cost $150,000]

minus [Cost of outsourcing $25,000] = $125,000 per year to the net profit!
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3.8 JUDGMENT OF SUB-SYSTEMS
Judgment of profit centers is done today by applying Profit & Loss

mechanism to sub-systems. A profit-center is a sub-system which also
buys and/or sells internally to other sub-systems.
Once the Finance starts viewing a department as a profit center, it changes

their behavior. They start optimizing their part. If each part of a system
optimizes itself, it is almost certain that the organization as a whole will be
sub-optimized. They start striving for being more “profitable” by buying
and selling internally. When they buy or sell from or to other departments,
they do it at a price; this is called transfer price. This price is calculated as:
Raw Material Price + (Direct Labor * Overhead factor) + % margin
This procedure has severe ramifications. It is only the transfer of money

from one pocket to another – no real profit. There is no subordination
whatsoever. The system as a whole is ignored and each part of the chain
tries to improve its own operations. If they decrease the cost, the profit
center’s transfer price decreases and thereby their profitability also
decreases. The converse is also true, i.e., if they increase the cost, their
transfer price increases and thereby their profitability increases.
3.9 JUDGMENT OF PRODUCT/SERVICE VIABILITY
According to Dr. Goldratt, “Product Cost” is the most damaging concept.

The theme behind the concept is that if your selling price is higher than the
Product Cost, the company is making money by producing and selling such
products. Sounds logical; but not really.
Let’s see how.
Despite the fact that even if the price is higher than the Product Cost,
many companies are losing money. The typical way to respond to this is to
say that the data used to calculate the Product Cost was not accurate. The
reality is that the problem is not in the data; the problem is in the concept
itself!
Do products or services have their own profit? Not really. Only an
organization has profit. We should never talk about product profit. What we
should examine is the impact of promoting a product/service on the
87

profitability of the organization. Since the Throughput of an organization is

determined by its Constraint, what needs to be examined is the impact of
promoting a product or service has on the exploiting the constraint.
Exploiting the Constraint means getting the maximum Throughput. We

decide which product to promote by calculating how much Throughput will
be generated per Constraint unit of each product. The higher the
Throughput gained per Constraint unit, the more Throughput the
organization will gain by promoting such product and thereby the
organization will gain more profit.
The calculation of Throughput per Constraint unit has nothing to do with

the cost. It is not another method to calculate the cost of a product or to
do some cost allocations.
Let’s see a detailed example created by Dr. Goldratt.
Let’s assume that we are running a company and our Plant produces two
products – Product P and Product Q.
Selling price for P is $90 and the selling price for Q is $100.
The market demand for P is 100 units per week and 50 units per week for
Q.
Product P
As shown in the Figure 3.1 below, Product P is made by assembling one

part that we purchase and two parts that we manufacture in-house. Each
of the parts that we manufacture is processed from purchased material
through two distinct processes.
The price we pay for the purchased part is $5 per unit, while the price we
pay for the raw material is, in each case, $20 per unit.
The first material starts its journey through worker A and it takes 15
minutes to process one unit.
The first process of the second material is done by another type of worker
with skill B and it takes 15 minutes per unit for processing.
88
The second processing stage for both the parts is done by a third type of
worker, a worker with skill C. It takes him 10 minutes per unit to do the
first part, but only 5 minutes per unit for the second part.
Assembly is done by assembly worker D. It takes him 15 minutes to

assemble one unit.
Figure 3.1: Product P and Q Assembly

Product Q
Product Q is assembled from only two parts. As shown in the above

diagram, Product Q is assembled from the second part of P and another
part processed in our plant in two distinct steps. This makes the middle
part a common part for two different products.
In order to deliver one P and one Q, two units of the middle part are
necessary.
The purchase price of the raw material of the third part is $20 per unit.
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Its first stage of processing is done by the same worker A, who does the
first part. It takes 10 minutes to process one unit of the third part. The
second process is done by worker B, the same worker B who did the first
stage on the second part and it takes him 15 minutes per unit.
The assembly is done by the same assembly worker D and he takes 5

minutes to assemble one unit.
In our plant, there are four different skills of workers/resources, A, B, C

and D. They cannot do each other’s work. We have only one worker of each
type.
Each one of the workers is available 5 days a week, 8 hours a day, 60

minutes an hour. This is 2400 minutes per week. There is no absenteeism,
no breaks.
The Operating Expenses are $6000 per week and it includes the salaries of
these workers, their fringe benefits, the salaries of foremen, the company’s
sales people, management, and the money that we pay to the utilities for
energy and to the banks for interest. All of it is included in the $6000. But
what is not included?
What is not included is the money that we pay to our vendors for materials
and purchased parts. This money is not operating expense, it is inventory.
There is no second shift, there is no overtime and there are no breaks.

Everything is fixed and there is no variation whatsoever.
Now answer the following question:
“What is the maximum profit (minimum loss) this company is capable of

earning per week?”
Here are some numbers for your consideration:
90
Take the time now to try and solve the quiz on your own, before continuing
to read.
Many people decide to make everything required to meet market demand.

So let’s work through that first.
If we work through this step by step, then the first step is to determine the
contribution, or margin, or as we have called it here – throughput. See
Table 3.1 below.
This is sales price less material costs and for P this is $90 minus $45 =
$45. For Q, it is $100 minus $40 = $60.
Thereafter, it is simply a matter of multiplying out the margin by the

number of units produced to the weekly throughput. The weekly
throughput less the weekly operating expense gives us a weekly net profit
of $1500. Not bad at all.
91
Table 3.1: Net Profit Calculation

Product P Q
Weekly Demand 100 50
Selling Price 90 100
Materials 45 40
Throughput 45 60
Units Supplied 100 50
Weekly Throughput 4500 3000
Weekly Operating Expense 6000
Weekly Net Profit 1500
But let’s check things first. Let’s check that we have enough capacity to
undertake the supply that we committed to.
In order to do this, we must check that the total amount of time required
for each resource does not exceed the total amount of time available.
Let’s start with resource A.
In order to make 100 units of P, resource A needs 100 times 15 minutes

(raw material 1) and in order to make 50 units of Q, resource A needs 50
times 10 minutes (raw material 3). A total of 2000 minutes out of the
2400 available to resource A. So, from the perspective of resource A, we
can meet that commitment.
Let’s move to resource B.
In order to make 100 units of P, resource B needs 100 times 15 minutes

(raw material 2) and in order to make 50 units of Q, resource B needs 50
times 15 minutes (raw material 2) plus 50 times 15 minutes (raw material
3). A total of 3000 minutes out of the 2400 available to resource B. Oops.
It seems that we have insufficient capacity on resource B to meet our
commitment. Let’s check C and D.
Fortunately, C only requires 1750 minutes (100 by 10 + 100 by 5 + 50 by

5). D also only requires 1750 minutes (100 by 15 + 50 by 5).
92

Let’s tabulate that data as shown in Table 3.2 below, so that it is a little
clearer.
Table 3.2: Check the Calculation
Product P Q
Materials 45 40
Throughput 45 60
Units Supplied 100 50 Req. Avail.
Resource A 15 10 2000 2400
Resource B 15 30 3000 2400
Resource C 15 5 1750 2400
Resource D 15 5 1750 2400
Weekly Operating
6000
Expense
The right-hand-most column is the maximum available time and the

column to its left is the sum of the time required for each resource to
complete the commitment for units supplied of both P and Q.
The problem now seems to be one of how to best maximize the capacity of
resource B and still derive a good profit at the end of the week.
It is now obvious that we cannot meet the market demand with the
capacity that we have. So, we need to decide the product mix, i.e., which
product to produce to its full demand and which product to produce in the
remaining time. Which product really deserves priority?
Before answering that question, we need to decide the parameters to

decide the priority. How about: Price, Margin, Material Cost and Time to
Market?
93
Let’s apply these parameters to Product P and Product Q and see what
these parameters recommend. See the Figure 3.2 below:
Figure 3.2 Applying Parameters
Recommendation: It would seem then that Q is the product to favor and

any spare capacity left over after meeting market demand for Q can be
used to produce P.
We now want to produce 50 units of product Q. For resource B, this will

require 50 times 15 minutes (raw material 2) and 50 times 15 minutes
(raw material 3). A total of 1500 minutes is required for product Q. This
leaves 2400 – 1500 = 900 minutes for P. P takes 15 minutes for resource
B. Therefore, we can make 900/15 = 60 units of P. Let’s tabulate this new
condition in Table 3.3 below:
94

Table 3.3 Revised Calculations

Product P Q
Materials 45 40
Throughput 45 60
Resource A 15 10 1400 2400
Resource B 15 30 2400 2400
Resource C 15 5 1150 2400
Resource D 15 5 1150 2400
Weekly
2700 3000
Throughput
Weekly Operating
6000
Expense
Weekly Net Profit –300
Well if you look at the bottom, you will notice that we are incurring a loss
of $300 per week!
Why did that happen? We did exactly the way it is done by Finance.
We did everything that our experience told us would be useful. We chose

the lowest labor cost, the lowest material cost, the highest sales price, and
the highest margin. And yet based upon these rational decisions we seem
to have driven our bottom-line into the red.
A doubt comes to our mind: Is this business viable?
Before jumping to any conclusion, let’s try doing it the TOC way.
What is the first step?: Identify the Constraint.
So, where is the Constraint in this process? Which resource is limiting our
ability to do more?
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From the calculations that we made, it is clear that worker B is the

Constraint. We need 3000 minutes of worker B and we have only 2400
minutes available.
So, what is the next step? Decide how to exploit the Constraint.
We are keeping worker B busy. But that is not enough.
How much time the constraint (resource B) has to spend on each product?
Isn't the Throughput determined by resource B?
If yes, how much are we getting for every minute of resource B?
That's the deciding factor!
Product P needs only 15 minutes per unit of the Constrained Resource B

whereas Product Q needs 30 minutes per unit.
Consider the Constraint – B. The constraint is 100% busy no matter what

we choose. But…
• Throughput for P is $90 – 45 = $45

• Throughput for Q is $100 – 40 = $60
• Octane for P is T/time = $45/15 = $3/min
• Octane for Q is T/time = $60/30 = $2/min
The Octane tells us that for every minute that the worker B spends on
Product P, we earn $3 whereas for every minute that the worker B spends
on Product Q, we earn $2!
Let us understand that the above calculation has nothing to do with the
cost. It is not another way to calculate the cost of a product or to do some
cost allocation.
Using Throughput per Constraint unit is the right way to determine which
product to promote. It leads to the product-mix that maximizes profit. It is
much easier to calculate.
96

Product-mix Preferences
• What is the problem?
❖ We have multiple products using the same constraint.
❖ Each product uses different amount of constraint time.
❖ We need to decide giving more prominence to certain product/s on the

expense of having to reduce the market for other products.
❖ Also, we need to keep in mind the market demand, prices and

Throughput for each product.
❖ How do we determine the best product mix to maximize the

Throughput?
Inputs for the TOC decision process:
• Calculate the Throughput for each product unit.
• The time/capacity such a unit of product needs from the constraint.
• Calculate the ratio: T/CU – throughput by constraint unit.
• Do this calculation for all the products using the Constraint.
• Sort the list according to the T/CU on all products.
• The higher the T/CU the more profitable is the product.
• Choose the product mix on the basis of T/CU, demand and other
considerations.
Doing cost calculation is a time-consuming, exhausting and at times

frustrating job. Using common cost calculations in order to judge which
product to promote requires gathering production data from all work
centers and more detailed data to determine overhead factor.
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The calculations needed to determine Throughput per Constraint unit

require gathering production data only on the Constraint. It is the right
way and much easier to calculate.
Let’s come back to our P and Q example. We exploited the Constraint fully
by keeping it busy. However, we overlooked the fact that we need to make
it work on more profitable product first. Now it is clear that Product P is
more profitable.
Which would you now choose as the product to push ahead of the other, P
or Q? P of course. Let’s do the calculation.
100 units of product P require 100 times 15 minutes (raw material 1) or

1500 minute in total. Leaving 2400 less 1500 or 900 minutes for product
Q. One unit of product Q takes 30 minutes of resource B’s time (15
minutes for raw material 2 and 15 minutes for raw material 3), thus
900/30 = 30 units.
Let’s tabulate the result in Table 3.4 below, now fulfilling the market
demand for P of 100 units and then the remainder for product Q.
Table 3.4: Fulfilling the Market Demand for Product P

Product P Q
Materials 45 40
Throughput 45 60
Resource A 15 10 1800 2400
Resource B 15 30 2400 2400
Resource C 15 5 1650 2400
Resource D 15 5 1650 2400
Weekly Operating
6000
Expense
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Only by identifying and exploiting the constraint, see the big difference you
can make to your profits! From the loss of $300 per week, it is now profit
of $300 per week!!
What did we observe? Following “Product Cost” judgment, we incurred a

loss of $300 per week. Violating Product Cost judgment enabled us to
make a profit of $300 per week!
Conclusion: “Product Cost” judgment is arbitrary. It does not necessarily

direct us to promote the product that will increase the profitability of the
company. Actually, it might do otherwise.
Cost World Paradigm and Throughput World Paradigm
The above discussion has made it clear that the distortions in the Finance
judgments in all the five cases stem from the mechanism of cost
allocations used as part of each of the five judgments.
If this is so, why do we continue to follow these procedures? There must be

something that makes us to follow these distorting procedures.
Dr. Goldratt stated that there is an inherent conflict that causes people to
comply with such a distorting procedure.
The conflict stems from two fundamental needs that are essential for the
success of an organization.
There is a need to control costs (OE and I); otherwise the costs will go up
and soon it will go out of hands.
There is also a need to protect Throughput since the competition is fiercer

than ever, it makes it imperative.
Unfortunately, Throughput and Costs are two different paradigms and they
are in conflict.
Consider the Chain analogy discussed earlier. An organization is a cluster of

several functions that do not operate in isolation but are interdependent.
An organization can be considered as a chain consisting of many
interlocking links.
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The Cost follows additive rule, i.e., the cost of the organization is the
summation of the cost of all the sub-systems. Cost is drained at each
function.
In our Chain analogy, equivalent to cost is weight since it also obeys the
additive rule – the weight of the chain is equal to the weight of all its links.
Taking Weight as the prime measurement, improving the chain means

making it lighter. Making any link of a chain lighter say by 5 kg will make
the entire chain lighter by 5 kg.
According to the Cost World, local improvements are global improvements.

It means you improve any link, i.e., reduce its weight and the whole chain
is improved. So, if all the links reduce their weight, the whole chain will be
lighter exactly by the same amount that is equivalent to the summation of
weight reduction of every link.
Thus, the way to judge actions and decisions is according to their local
impact.
To enable quantifying local impact, it is imperative to use COST

ALLOCATION.
Thus, the “Cost World” paradigm dictates that in order to improve the
performance of a company (global optimum), we need to achieve local
improvements (local optima) everywhere.
Exactly opposite to the Cost World paradigm, “Throughput World” paradigm

does not obey the additive rule, i.e., Throughput of two departments – one
feeding the other – is not equal to the Throughput of one department
(viewed in isolation) plus the Throughput of the other department.
In our Chain analogy, the equivalent of Throughput is strength – the

strength of a chain is not equal to the strength of one link plus the strength
of the second link plus…
Taking strength as a prime measurement, improvement of the chain means

making it stronger. Making one link of a chain say five times stronger does
not necessarily mean that the chain becomes stronger.
100
According to “Throughput World” paradigm, local improvements are not

even an indication of global improvement.
Thus, the way to judge decisions and actions is not according to their local
impact.
“Throughput World” paradigm dictates that the way to improve company

performance (global optimum) is NOT through achieving local
improvements (local optima) everywhere.
In a physical chain, reducing the weight of one link does not reduce the
weight of other links. In organizations, many times, actions or decisions
that reduce cost in one department cause an increase in cost in other
departments.
Some examples:
1. Saving on setup time. Many times, it takes very long to change setups.
In order to maximize the efficiency, departments tend to process large
batches. This is a local improvement. It saves the cost for the
department where it is done. Now, consider its impact on the next
department. Since the batches are larger, they take more time to
process. During that time, it is possible that the next department may
have to wait keeping its machines and people idle – a downtime. And
then once the batch is processed by the first department, they suddenly
find a lot of work and may have to spend on overtime. It may so happen
that during the day machines and people are sitting idle and then do
overtime in the evening. Thus, saving in one department can cause an
increase in cost in other departments.
2. Many times, purchasing is a centralized function. They also try to reduce

their cost and try to get the material as cheaply as possible. This may
cause them to compromise on the quality of the material. This causes
rejections in manufacturing department and results in waste of time,
material and money.
Further, in order to get good discounts, Purchase Departments tend to buy

material in bulk quantity. This can cause obsolescence if there is a change
in market demand. So, the saving achieved by the Purchase Department
increases cost in other departments.
101
3. Those who are incharge of distribution, tend to reduce their cost by

filling the trucks fully and for that purpose they often wait to receive
enough material. No doubt, it saves their cost, but the ramification
could be severe. Due to this delay, there could be a shortage in the
market and the company may lose some sales and maybe some
customers. Further, in order to fill the truck fully, they are tempted to
“push” the products in the market which may cause obsolescence, if
there is no demand for them.
So, saving cost locally does not always translate to global improvement.
Every action and most decisions are local and we are warned not to judge
according to local impact. So, how should we judge an action or a decision?
What is the mechanism to judge local actions and decisions in line with
Throughput World paradigm?
The answer lies in the Throughput World paradigm that suggests striving to
make the chain stronger.
Five Focusing Steps
But what determines the strength of a chain? “The Weakest Link”.
All that we need is a mechanism that will guide us to strengthen the

weakest link and thereby improve the performance of the organization.
So, this takes us to the first step of the Five Focusing Steps: Identify the
System’s Constraint.
The strength of the chain is determined by the strength of its weakest link.
Therefore, the first step is always to find the weakest link.
The second step is Decide How to Exploit the System’s Constraint.
After we have identified the Weakest Link, we should make it stronger. This
could be done by providing more of what is lacking or by better using what
is available. Since providing more, usually involves increase in cost, we
should make sure that the Constraint is exploited.
The third step is Subordinate everything else to the above decision.
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Our decision to exploit the weakest link to its maximum capacity must be
backed up by the way we manage the other links. Otherwise we will not be
successful in implementing such decision.
“Subordinate” implies two different things:
One, we should manage all non-constraint resources in a way that ensures

we can follow our decision to exploit the Constraint. This is done in order to
protect the Throughput.
Two, we should manage all non-constraint resources in a way that ensures

that they do not produce more than what is required by the Constraint.
This is done in order to control costs.
Let’s go back to our example of product P and Q. What does it mean here?
Worker A seems to have lot of spare time; 600 minutes per week. Can we
utilize it to produce more? What will happen if we decide to do so?
We are not meeting the market demand for Product Q. So let’s our worker
A produce more. He takes 10 minutes each to process the first material for
products P and Q. If we use 600 minutes of worker A, he will process 30
units every week.
But what will happen? Because of our Constraint, these 30 units will never
be used and they will reside in our warehouse. The raw material for this
process costs us $20 per unit. It means it will lock $600 in inventory every
week! Very soon, we will have cash flow problem.
Should we really do that? If we are “Efficiency minded”, we will be tempted

to do that and our inventory will go through the roof of our warehouse very
soon. And finally, we will have to scrap it.
“Subordinate” here means, process only those parts needed by the

constraint as determined by the decision to exploit. Sit on your hands;
don’t process anything that is not needed by the Constraint.
Don’t stop here. Having followed the first three steps, go to the step 4, i.e.,
(Evaluate various alternatives to) elevate the System’s Constraint.
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Strengthening the weakest link can be done by increasing its capacity

(e.g., hiring more people, buying more machines etc.), thus elevating the
system’s performance to the higher level.
More Examples
Let us now consider some improvement proposals:
Three proposals were sought:
• Automate some processes

• Outsource some processes
• Introduce new product
Proposal 1 – Automate some processes
Let us install a new machine that works at both A locations. Suppose such
a machine is available on rent for $100 per week. Let us further suppose
that it will save 5 minutes at each A operation.
So, the calculations as per the conventional way are:
Rental cost only $100 per week.
It will saves (5 * 100 [time needed for P] + 5 * 30 [time needed for Q]) =
630 Minutes.
630 Minutes at $0.63 (labor cost per minute) = $400 saving in Operating
Expenses.
So, let us subtract the rental cost from the saving.
Wow! $400 – $100=Saved $300 Dollars!
Really?
What happened to the OE really?
Did it go down?
104
Or did it go up as we added equipment rental costs?
Write your conclusion here.

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Proposal 2 – Automate some processes
Let us add a machine for worker B, the Constraint. It only works at middle
B operation and costs $200 per week.
Suppose it saves only 2 minutes per part for worker B.
This is the calculation as per the conventional way:
The saved time (2 * 130 [100 P and 30 Q]) = 260 minutes. This will
reduce the labor cost: 260 Minutes @ $0.63 = $165 whereas the rental is
$200.
Looks pretty bad!
Really?
What happens when we reduce the time required on the Constraint?
How many components flow through that operation (100 P + 30 Q = 130)?
How much time is gained?
2 * 130 = 260 minutes.
How many more Qs can we make?
260/30 = 8 with T of $60 each = +$480!
105
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Proposal 3 – Outsource some process
Let us purchase a pre-processed raw material for the price $5 per part to
eliminate left side process A. As shown in the figure, explain the process
for producing products P and Q. It will save 15 minutes per part.
The left-side process contributes for Product P. We are producing a quantity

of 100 units for product P.
The cost is $5 * 100 = $500.
Savings 15 Minutes * 100 = 1500 Minutes for worker A.
Calculating in the conventional way, we will save $950 (1500 Minutes @

$0.63 = $950).
Looks Real Good!
Really?

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Proposal 4 – Introduce new product
Let’s add a new product O.
Product O doesn’t flow through the constraint. Just uses the left side of the
plant A and C. It also uses $5 purchased part.
This is how our plant will look as shown in Figure 3.3 below:
106
Diagram 3.2 Adding New Product O
What do you think? Is it good, bad or ugly?
Let us say that the product O Sells for $40. Raw Material cost is $25.
Overhead is $15.75.
Looks like a $0.75 Loss in Profit.
Really?
We can make lots of quantity of product O and sell them at anything above
$25.
Octane on product O is $15/0=$! We should definitely make product O.

We can make up to the point where A’s capacity is fully utilized but not
more.
107
When considering an investment, one should consider the change in

Throughput (∆T). Here are some quizzes based on P and Q Example to
check the understanding:
1. An investment provides 10% more capacity on resource B. What is the

∆T?
Hint: The capacity of resource B was 2400 minutes. In order to make all of
P and Q, we needed 3000 minutes from B. How many more units can we
produce and sell now?
Now try to calculate ∆T.
Answer: The capacity of resource B is increased by 10%. It means 240

additional minutes are available from resource B. We have already fulfilled
the demand for product P. We are meeting the demand for product Q
partially. We are supplying 30 units of product Q while the demand is 50
units per week. We can use this additional capacity available on resource B
to produce more units of product Q. Each unit of Q gives us $2 per minute
of resource B. Thus, Throughput will increase by 240 * 2 = $480. All
additional units of product Q can be sold since we will be producing 8
additional units whereas the unfulfilled demand is 20 units per week.
2. An investment increases the market demand for P by 10 units per week.

What is the ∆T?
Hint: Product P gives more Throughput per unit of Constraint time. We will
have to produce additional 10 units of product P at the expense of product
Q.
Answer: Each unit of product P requires 15 minutes of resource B. We will

exploit the Constraint by producing additional 10 units of product P. It will
take 150 minutes (10 units * 15 minutes) of the resource B. These minutes
are at the expense of product Q. For every unit of product P, we sell
instead of product Q, we gain $1 ($3 Throughput per minute of resource B
for product P minus $2 Throughput per minute of resource B for product
Q).
Thus, we will make $150 of ∆T.
108
Investment can increase Throughput NOT JUST by increasing the capacity

of the Constraint; but also by enabling better exploitation of the Constraint.
3. We add another resource B. What is the ∆T?
Hint: The capacity of resource B has doubled. Is B still the constraint?

What is the next Constraint?
Answer: All resources have enough capacity to meet the demand. We can
now meet the market demand for product Q also. We can now produce
additional 20 units of product Q. Product Q gives Throughput of $2 per
minute of resource B utilized for producing product Q. So, the ∆T =
20 units of product Q * ($2 Throughput per minute * 30 minutes per unit
needed by resource B) = $1200.
4. Investment enables us to use an alternative purchased part that costs

only $2.50 per unit. What is the ∆T?
Hint: By how much does the Throughput of product P increase?

Throughput = Sales price minus Truly Variable Cost (raw material etc.).
Answer: The Throughput gained for product P has increased by $2.50 per
unit. ∆T = 100 units * $2.50 = $250.
5. Investment increased the capacity of resource A by 20%. What is the

∆T?
Hint: Does the added capacity of resource A enables us to produce and sell
more? What is the Constraint?
Answer: Throughput is dictated by the capacity of the Constraint.

Increasing the capacity of other resources does not impact. ∆T = zero.
Don’t forget step 5: If in the previous steps, a Constraint has been broken
go back to Step 1 (Do not let the inertia to set in).
By strengthening the weakest link, we might reach a point where it is not
the weakest link any more. This does not mean that we now do not have
any weakest link. It only means that our location of the weakest link has
shifted.
109
It also means that we now need to identify the new weakest link and
repeat the process through step 1 to 5 again and again. Constraints/
weakest links don’t go away. If one is broken, the next gets promoted.
3.10 DECISION-MAKING
Decision-making is about finding answers to right questions.
Here are some right questions regarding Throughput:
Every decision is assessed based on expected changes in throughput – ΔT.
• Will the decision result in a better use of Constraint? (i.e., more units of
product available to sell in the same or less time)
• Will total sales revenue increase because of the decision?
• Will it speed up delivery to customers?
• Will it win repeat or new business for us?
• Will it reduce scrap or rework after the constraint?
• Will it reduce warranty or replacement costs?
• Will we be able to divert some people to do other work (work we couldn’t

do before) that we can charge customers for?
If it does any of these things, the decision will improve Throughput.
Here are some right questions regarding Investment:
Every decision is assessed based on expected changes in investment – ΔI.
• Will our inventories go up/down if…..?
• Will receivables/payables go up/down if…..?
• Will we need less raw material or purchased parts?
110

• Will we be able to keep less material on hand?
• Will it reduce work-in-process?
• Will we need less capital facilities or equipment to do the same work?
If the answer is “yes,” the decision will reduce Inventory/Investment.
Decisions are NOT made on the basis of costs.
Here are some right questions regarding OE:
Every decision is assessed based on expected changes in operating

expense – ΔOE.
• Will our staff levels go up/down if…..?
• Will we need more/less outside contractor support if……?
• Will overhead go down?
• Will payments to vendors decrease?
If so, the decision will decrease Operating Expense.
As long as (ΔT – ΔOE) is positive, the profit of your organization will

increase.
As long as (ΔT – ΔOE) ÷ ΔI is > 1, the return on investment (ROI) is

positive.
111
3.11 CONTROL MEASUREMENTS
T, I, OE and NP, ROI help us to judge the performance of the entire system,
no doubt.
We also need control measurements – Measurements that can be used to

monitor subsystems as well as complete systems.
First let us clarify what is meant by the word “control” – the word that may
be used differently. For instance, today when we refer to “inventory
control” we mean, assembling data that will tell us where inventory is
located and at what stage of processing it is.
Definition: Where things are versus where they were supposed to be.
What do they measure?
They measure the deviation from the plan.
Deviations
Things that were supposed to be done and nevertheless were not done.
Things that were not supposed to be done but nevertheless were done.
Measurements
• Throughput-Dollar-Days
• Inventory-Dollar-Days
• Local-Operating-Expense
Throughput-Dollar-Days (TDD)
It is a way to measure Due Date Performance (DDP), i.e., Are we able to

keep our delivery promises? Are we delivering in full and in time?
112
DDP is a very important non-financial measurement. This measurement

deals with quantifying the magnitude of the deviation of the company from
its promised commitments to clients.
How due date performance is measured?
• No. of orders missed in a period.
• No. of units that were not shipped on time.
Is this proper and adequate?
Suppose there are two managers and their Due Date performance is as
follows:
Manager A
He has delivered 20 orders during a month out of which one order was
late.
Manager B
He also delivered 20 orders during a month out of which four orders were
late.
How will you evaluate their performance? wait. Don’t give your answer
before asking for additional information.
Suppose the order delayed by Manager A was a big order in terms of value
and the orders delayed by Manager B were very small orders in terms of
value.
What will be your answer? Wait. Read on.
Suppose Manager A delayed the order by one day and this was acceptable
to the customer whereas Manager B delayed the orders by 20 days and the
customers were very unhappy about it.
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Suppose the order delayed by Manager A was a large quantity but low
value (and Throughput) order and the orders delayed by Manager B were
small quantity and their value (and Throughput) was much higher.
It will be difficult to judge. Also, there are qualitative parameters like

customer satisfaction. Suppose Manager B delayed 4 orders in order to
satisfy an urgent need of a very loyal customer whose plant was standstill
for want of the material and Manager B talked to the customers whose
orders were delayed and has taken their permission to do so.
So what will your answer be?
It will be futile to quantify the qualitative parameters. However, we can

certainly streamline the numbers by using the following quantitative data:
• Size of the order
• Selling price
• No. of days delayed
We calculate the Throughput-Dollar-Days (TDD) as Selling Price * No. of

days already late.
It is certainly a deviation of the first type – things that we were supposed

to do and haven’t done – and thus TDD should measure it at any point in
time.
It is a value equal to its selling price multiplied by the number of days

shipment is already late and a summation of all the missed orders will give
an objective measurement of its level of performance, at any given point of
time.
This measure forces us to concentrate on very late orders. Not just

because the level of complaints from the customers, but also because an
order which is late by ten days has a measurement impact that is 10 fold
larger than an order that is one day late (provided of course that both
orders have the same sales price).
114
Here is Table 3.5 showing the list of orders delayed for example:
Table 3.5: List of Orders Delayed

D
C E
A B No. of
Sales (TDD) =
Order No. Quantity Days
Value $ C*D
Delayed
1 100 1000 2 2,000
2 200 10000 5 50,000
3 500 5000 10 50,000
4 20 20000 1 20,000
Total 1,22,000
This value is used for comparing the Due Date Performance over a period
of time. It is not used to judge the performance of any individual. It is used
to evaluate:
• Whether the system is stable and
• Whether top management’s intervention is required.
If there are multiple items in an order that was delayed, we take all those
items that were delayed, multiply by their price and then multiply them by
number of days delayed.
It is theoretically possible to achieve a perfect score of zero Throughput-

Dollar-Days and organizations may strive for it.
TDD drives behavior. TDD says, “Don’t miss a delivery (avoid failure). And,
if you do, fix it fast!”
Inventory-Dollar-Days (IDD)
This is a measure of the second type - things that we should not do but
were done nevertheless.
IDD is a secondary measurement to TDD. Therefore, it is very important

that reduction in inventory should not cause an adverse impact on Due
Date Performance.
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How is it measured currently? It is measured either in terms of money or in

terms of time.
Inventory is expressed either by Dollar Value of inventory by saying 10
million or by time value by saying 4 weeks inventory.
Usually, it means that some products that are needed are totally missing
from finished goods inventory. In addition, out of the $10 million about $1
million is due to be shipped in next two days or so. Another $2 million is
due to be shipped during the next week and so on. It also means that we
have too much stock of some products. The last million are probably
obsolete.
If the focus of reduction of inventory is on the first 7 million, the customer

service may severely be endangered.
The focus should be on the last 3 million. Perhaps the last million should be
written off.
These inventories are mainly the result of things that should not have been
done but were done nevertheless (probably in the attempt to increase local
efficiencies, reduce variances or to cover up for a drop in sales in some
previous period).
We need to define Customer-Tolerance-Time for each product and then use

this information to arrive at the inventory that is needed to protect
customer service.
What is Customer-Tolerance-Time (CTT)?
The time from when a client places an order, until he expects delivery of
the order is CTT.
If CTT is longer than the Product-Lead-Time (i.e., the time it takes to

deliver from the point when order is received up to the point when it is
delivered) for all products, then we need not hold any finished goods
inventories.
If CTT is zero, i.e., when customers expect immediate delivery, we should

hold inventories somewhat more than Product-Lead-Time.
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CTT may be dramatically different from product to product, e.g., when the
product is a jumbo jet, the airlines have a CTT of more than 3 years. But
when the product is a piece of soap our CTT is not much longer than 2
minutes.
Inventories = Production Lead Time – CTT
How to calculate Inventory-Dollar-Days?
Here is an example:
Inventory-Dollar-Days (IDD) = (Quantity of Finished Products minus

quantity held to protect customer service)
* Sales Price
* Number of days residing as stock.
Let’s see an example shown in Table 3.6 below:
Table 3.6: Example of Calculating IDD

B
E
A Quantit C D F
No. of
Finished y in Sales Sales IDD =
Days in
Product Excess Price Value D*E
Stock
of CTT
ABC 100 2000 2,00,000 2 4,00,000
DEF 300 150 45,000 10 4,50,000
GHI 50 100 5,000 3 15,000
JKL 70 500 3,500 20 70,000
Total 9,35,000
This value is used for comparing and understanding the changes in level of
inventory, over a period of time. It is not used to judge the performance of
any individual. It is used to evaluate:
• Whether the system is stable and
• Whether top management’s intervention is required.
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It is theoretically possible to achieve a perfect score of zero and

organizations may strive for it. However, it is important to keep in mind
that inventory should not be reduced so as to degrade customer service.
CTT must always be kept in mind.
IDD drives behavior. IDD says, “Don’t let Inventory sit around idle in places
where it does no good. Quickly move it to where it protects TDD and then
reduce it both in quantity and in time held.”
TDD and IDD become a Drill Sargent Mentality:
MOVE IT! MOVE IT! MOVE IT!
Local-Operating-Expense
This is an expense over which the local area has full control. Do not
distinguish between direct workers, foreman and dedicated Process and
Maintenance engineers.
Do not allocate other costs where there is no “Local Control”.
This is very obvious to people and unfortunately, most of them focus on

reducing this expense that is under control. However, there is a theoretical
limit as to how much OE can be reduced. There is a risk that you may end
up in cutting in to the muscles.
Summary of TOC Measurements
• Throughput
• Inventory
• Investment
• Profit = T – OE
• Return on Investment (or Inventory) = (T – OE)/I
• Productivity = T/OE
• Investment Turns = T/I
• Octane = T/Unit of Constraint Time
• Throughput-Dollar-Days
• Inventory-Dollar-Days
• Local-Operating-Expense
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3.12 SUMMARY
The Five Focusing Steps not only give a mechanism to judge how local
actions and decisions impact the global performance of the company, but
also gives a process of ongoing improvement.
Understand and remember the steps:
Step 1: Identify the System’s Constraint
Step 2: Decide how to exploit the System’s Constraint
Step 3: Subordinate everything else to the above decision
Step 4: (Evaluate various alternatives to) elevate the System’s Constraint
Step 5: If in the previous steps, a Constraint has been broken go back to

Step 1 (Do not let the inertia to set in).
It is important to note that we need to strive to increase T while

simultaneously reducing I and OE.
However, the preference is:
• Make attempts to increase T first;
• Next, make attempts to reduce I; but be careful;
• After you have exhausted all the means to increase T and reduce I, then
look for reducing OE.
This method of “judging various actions and decisions” is called

“THROUGHPUT ACCOUNTING”. I have deliberately avoided using this term
for the following reasons:
• The term “Accounting” is a misnomer. This is not a new accounting

system. It uses the same data gathered by the current accounting
system and some other data.
119

• It drives away those who do not have accounting background because it

makes them to think that some accounting background is necessary.
After reading the chapter, you may have realized that no accounting
knowledge is really required to understand the concept and use it.
However, in TOC world, this is popularly known as “Throughput Accounting”

and is abbreviated as “TA”.
1. Compare:
i. How Finance and TOC judge the performance of the system as a

whole.
ii. How Finance and TOC judge investment in equipment.
iii. How Finance and TOC judge Make or Buy decision.
iv. How Finance and TOC judge the sub-systems in an organization.
v. How Finance and TOC judge the viability of a product or service
2. Define the term “Control Measures”.
3. Explain the concept of TDD.
4. Explain the concept of IDD.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
121
 

APPLYING TOC TO OPERATIONS/MANUFACTURING
Chapter 4
APPLYING TOC TO OPERATIONS/
MANUFACTURING
Objectives
• To understand how to use TOC to improve operations/manufacturing.
Structure
4.1 What is Synchronized Manufacturing?
4.2 What are the Basic Rules of Operations?
4.3 Types of Plants
4.4 The Common Undesirable Effects (UDEs)
4.5 The Work Ethics
4.6 Drum-Buffer-Rope (DBR)
4.7 Buffer Management
4.8 Simplified-Drum-Buffer-Rope (SDBR)
4.9 Measurements
4.10 Self-defeating Success
4.11 Impact of Inventory on Competitive Edge
4.12 Summary
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4.1 WHAT IS SYNCHRONIZED MANUFACTURING?
It is any systematic way that attempts to move material quickly and

smoothly through the various resources of the plant in concert with market
demand.
Material should flow like brooks into streams and streams into rivers on
and on without dams or disruptions interrupting the flow.
This is achieved by finding a way to reduce work-in-process inventory

without harming Throughput and Operating Expenses.
4.2 WHAT ARE THE BASIC RULES OF OPERATIONS?
1. Improve flow.
2. Prevent overproduction.
3. Abolish local efficiencies.
4. Have a way to systematically identify blockages and remove them
(Process of Ongoing Improvement).
1. Improve flow: In any operations, it is observed that almost 90% of the

time is spent on wait and queue. It is important that we minimize this
time and let the material flow through the system as fast as possible.
2. Prevent overproduction: There are temptations to pull some orders

forward in order to have a large batch size, or even to produce
something for which there is no immediate market demand. It is
necessary to avoid this temptation. If we are able to prevent
overproduction, it will enhance the flow.
3. Abolish local efficiencies: As we have seen earlier, measuring local

efficiencies and holding people responsible for them causes them to
produce something that is not really needed. Abolishing local efficiencies
helps to prevent overproduction.
4. Have a way to systematically identify blockages and remove

them (Process of Ongoing Improvement): As you improve the flow,
more and more blockages will come to light. It is important to choose
which blockages to remove first and for that purpose, you need a
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constraint-based priority system in place, to work systematically on

blockages to flow, to make the flow even faster.
4.3 TYPES OF PLANTS
Production processes differ by structure and by the nature of the flow of

work-in-process through that structure.
There are four basic types of work flows and they are:
1. “V” type plants,
2. “A” type plants,
3. “T” type plants and
4. “I” type plants.
Let’s explain them below:
1. “V” type plants
The following naming conventions have been used in the Figure 4.1 below:
RM = One or more raw materials.
D1, D2, D3… = Various Departments or Machines or Resources.
Prod P1…, Prod Q1…, Prod R1… = Finished products produced.
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Figure 4.1: “V” Type Plant
The typical characteristic of a V type plant is, few materials generate a

variety of end products. There are several divergent points where the
material moves into various streams or processes that produces different
end products. Once a path is chosen, it is very difficult to “change your
mind”.
For example, in the above diagram, the raw material after being processed
by D1 goes either to department D2 or department D3. If it goes to say
D2, it may go in any one of the streams D4, D6, D7 or D8 and so on.
Typically, the Constraint is at the bottom and may be with very long
running setups.
Many times, it makes sense to produce the most common parts to stock,
and the end products to order.
Industries like Steel, Metal, Plastics, and Paper have this kind of plant.
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It is observed many times that WIP material is arbitrarily transferred from

one product line to another. This is called “stealing”. Stealing occurs when
work, that was supposed to go on a certain path, was “snatched” to
another path. Sometimes even the WIP is disassembled to meet the
requirements of some other order. This causes huge variability in lead time,
poor due date performance and high inventories. Further, the act of
“stealing” severely impacts human relationships.
2. “A” type plants

See the following Figure 4.2. “FG” Stands for Finished Goods and “RM”
stands for Raw Material.
Figure 4.2: “A” Type Plant
The typical characteristic of “A” type plant is, many raw materials are
processed and assembled into relatively fewer end products. In the figure
above, you will notice that there is only one product that is produced by
using many raw materials. Different parts which are needed by the same
assembly are often produced by the same production department.
Synchronization and availability of materials are the obvious problems for

“A” type plants. Since it is not possible to assemble when even one part is
missing, and since the production departments have to produce more than
one part for the same assembly, the sequence in which the production
department operates is crucial.
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Local efficiencies stand in the way of achieving reasonable synchronization.

And the negative ramifications (undesirable effects – UDEs) are:
• High inventories.
• Long lead times.
• Missing due dates.
• High level of expediting.
This type of plants is typically found in industries like Electronics, Furniture,

Helicopters, CNC machines, Footwear etc.
The pressure to expedite, usually by splitting batches, is especially high in

this environment. Large batches cause very long lead times because all the
parts need to be at the assembly.
Merging orders to one batch cause huge delays and thus pressure to split
the orders is high.
The impact of an emerging bottleneck is very significant. Due to the

nature, “A” type plants have many legs of the assembly and all of them
need to be processed before the assembly can start.
The need for expediting is very high as compared to “V” type plant. Again,
“stealing” is a common phenomenon.
3. “T” type plants
See the following Figure 4.3 below (FG stands for various Finished Goods
and RM stands for Raw Material).
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Figure 4.3: “T” Type Plant
The typical characteristic of “T” type plant is, the structures combine an “I”
type (discussed below) or an “A” type structure for components and a clear
“V” for the final product. The huge variety is created by various
combinations (configurations) of components. Almost each manufactured
part is required by more than one assembly and almost each assembly
requires more than one manufactured part.
The ‘T’ plant combines the problems of both “I” and “V” plants such as
Synchronization problems and materials availability, stealing, etc.
Because of the complexity, “T” plants do not have a real bottleneck. On

paper, capacity does not seem to be a real problem; however, assembly
results in shortages. There is a need to minimize batching to enable flow.
“T” type plant suffers from very poor due date performance and high level
of inventory as normal UDEs.
The typical industries that have “T” type plant are Connectors, Faucets and
Cars.
4. “I” Type plants
Please see the Figure 4.4 below. Similar naming conventions have been
used as in the earlier figure.
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Figure 4.4: “I” Type Plant
It is a process, transfer or assembly line where all the different functions

are tied together. You will notice that there are dedicated lines for products
and the material moves from one department to the other. “Stealing” is not
a problem and the Constraint can be easily determined.
The main problem of “I” type of plant is sensitivity to disturbances. Even

small disturbances can cause starvation for work downstream and blockage
upstream. The synchronization must be very high in order to avoid these
disturbances.
The typical industries that have “I” type plants are Bottling of Beer, Wines,
etc.
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4.4 THE COMMON UNDESIRABLE EFFECTS (UDEs)
Here is a representative list and may be observed in many industries:
• Poor Due Date Performance.

• Long lead times.
• Too high Inventories.
• Long Payback periods.
• Too many customer complaints.
• Bad human relationships.
What is the major cause of existence of these UDEs? The conventional

approach suggests that there is a lot of variability in our processes, the
skill levels of different people are different, vendor performance is awfully
unpredictable etc. etc. If it is true, then as the conventional approach
suggests, you need to put in comprehensive improvement efforts
everywhere. However, if you do so your time, money and other resources
will be spread across many initiatives. Therefore, you cannot expect
significant result in short period of time, because you lose critical mass.
TOC approach suggests that the real cause is “the mode of managing
operations”. If this is true, the implication is you need courage and
consensus to change the mode of operations and if you have it, then you
can have a real jump in performance in a very short period of time by
focusing on lowering variability where it is necessary. For this purpose, a
holistic approach to the UDEs is necessary.
So, what should we do to really embrace a holistic approach?
“Chain analogy” has shown us that change in one place has ramifications in
another; we need to look at the Cause and Effect relationship amongst the
UDEs to find out whether they arise from one core problem. If we establish
that they stem from one core problem, we will be able to devise a holistic
improvement initiative.
Measurements drive behavior. The mode of managing operations is

expressed and controlled by the measurement it uses. Typically, local
efficiency is used as the prime measurement by many industries.
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Let us examine the ramifications of applying the measurement of local

efficiencies in the context of Steel industry.
Dr. Goldratt said: “In Steel industry ‘Tons produced per hour (Tons/Hour)’
is the prime measurement applied to all the departments. ‘Prime’
measurement means, ‘if you get it, you can get away with anything. If you
don’t get it, nothing else matters’. Departments try to maximize their
performance as measured by Tons/Hour, since most people behave in line
with the way they are measured”.
Dr. Goldratt explained the ramifications as detailed below:

If
• departments try to maximize their performance as measured by Tons/
Hour and
• in most departments, some items require less time per ton than others,
Then, departments tend to produce fast items at the expense of slow

items.
The unavoidable consequences are:
• Departments get better Tons/Hour measurement and their

measurement looks good.
• The slow items get delayed. When this happens, the Due Date
performance goes down and more and more customers start
complaining.
There is another ramification. From time to time, departments have idle

time. If they do not produce anything, their measurement Tons/Hour looks
bad. They are not able to maximize Tons/Hour which they obviously want
to. So what do they do? They produce for stock.
If
Hour and,
• non-production results in zero Tons/Hour,
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Then, departments tend to produce for stock even when there is no market
request for the short or medium horizon.

• This not only delay other orders but also increases the inventory and
payback period gets extended.
There is yet another ramification. In most production environments, there

are setups and many setups take a lot of time. Now, during this setup what
is the Ton/Hour that they produce? Of course, zero. So again, their
measurement of “Tons/Hour” looks bad.
If

Hour and
• every setup reduces the measurement Tons/Hour,
Then departments tend to pull ahead orders that enable increasing the
batch size.

• Orders go late.
• Lead time increases.
• Level of inventory goes up.
If departments tend to:
• Produce fast items at the expense of slow items and
132
• Produce for stock even when there is no market request for the short
or medium horizon and
• Pull ahead orders that enable increasing the batch size and
• “V” type plant produces items that have many divergent points,
then, to maximize their performance of Tons/Hour departments tend to

take actions which result in “stealing”.
“Stealing” here means, using the parts produced for an order for another.
What are the ramifications? The ramifications are:
• Poor Due Date Performance.

• Long Lead times.
• Too high Inventories.
• Long payback periods.
• Too many customer complaints.
• Bad human relationships.
What we have established here is that the measurement “Tons/Hour” is the

cause for all the UDEs that we listed (and many other UDEs that we have
not listed). If we are able to do away with that, all the UDEs mentioned
above and the ramifications will go away. Instead, if we try dealing with
them individually, we are not likely to succeed.
So, if we systematically approach the root cause, we will be able to resolve

most issues without the need for dealing with them individually.
If this is so, how is it that “Tons/Hour” is the prime measurement? What

causes people to follow it? There must be a good reason why people
continue to use efficiency as the measurement.
Underlying every problematic policy/measurement there is a conflict

whether to change it or to comply with its existence. What significant need
is jeopardized if we do not follow efficiency measurement?
There are two needs to “manage well”. One is to “improve flow” and the
other is to “reduce waste”. Both the things – improving flow and reducing
133

waste – are essential and they are not in conflict. It is correct you need
both so that you can manage well.
However, what we observe is that the local efficiency blocks any

improvement in flow. So using efficiency as the measurement is not
recommended.
On the other hand, people believe that if they find any resource sitting idle,
it is a significant waste. So, in order to reduce waste, we need to use
efficiency as the prime measurement, so as to ensure that resources stay
idle as little as possible.
So, typically, people have a compromise. People use efficiency but when
something is really urgent, they override it by expediting. This way, people
think that they get best of both the worlds!
However, compromise does not solve the conflict. The best compromise we
can find will only satisfy both the needs only to some extent.
If we want to improve the system we must find a better way to deal with
the conflict – not with a better compromise, but in a way which will
eliminate the conflict itself.
A good solution that will create a quantum improvement should enable us

to fulfill both the needs, i.e.:
• to improve the flow and,
• to reduce the waste.
A good solution must remove the conflict by showing that one of the
requirements is not necessary. This can be done only by invalidating one of
the assumptions which makes the requirement necessary.
The conflict and the assumption are depicted in the Figure 4.5 below. It is
to be read from left to right as “In order to…”, “We must…”, i.e., “In order to
manage well, we must…”…
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Figure 4.5: Conflict Diagram
In order to manage well, we must constantly fight to reduce waste. In

order to reduce waste, we must use local efficiency because a resource
standing idle is a major waste.
In order to manage well, we also need to constantly fight to increase the

flow. In order to increase the flow, we must not use efficiency as a
measurement.
“Use local efficiency as a measurement” and “Don’t use efficiency as a

measurement” are in conflict with each other and cannot coexist as we see
in the diagram.
One way to solve this conflict (and this way we “evaporate the cloud” or
eliminate the conflict) is by proving that this assumption is invalid, i.e., let
us prove that “a resource standing idle is NOT a waste”. Let’s further prove
that it is beneficial to take aggressive actions to stop resources from
working from time to time.
“A resource standing idle is a major waste”
Dr. Goldratt has refuted this assumption with a great example.
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We rarely have a balanced plant. Different machines have different

capacity. Let us take a very simple example. Suppose there are only two
machines machine X and machine Y. Machine X produces a part and
machine B does some processing on it. Let us further suppose that
machine X is able to produce 30 units per hour and machine Y can process
only 20 units per hour. See Table 4.1 below:
Table 4.1: Machine X and Y

Resource Production (8h) Inventory
Machine X (30u/h) 240 units
Machine Y (20u/h) 160 units 80 units
Now, we decide to activate both the resources to 100%. If there are no

interruptions in the work, at the end of the day, i.e., after 8 hours of work,
we will have the following result:
So, at the end of the day, we have accumulated the inventory of 80 units.
When will this inventory get consumed? Probably on the next day. So, let’s
continue.
Day 2 = Opening stock = 80 units in front of machine Y.
Resource Production (8h) Inventory

Machine X (30u/h) 240 units
Machine Y (20u/h) 160 units 160 units
It is apparent that every day we will add 80 units to the stock that will
never get consumed. This inventory will go out of the roof and one day,
you will decide to scrap it! So if we activate machine X to 100%, it will
generate more waste. Just the opposite of what we intended!
If we want to avoid this waste, we have no option than keeping the

machine X idle from time to time.
So, a resource standing idle is NOT a waste; the opposite is very likely to
be true.
136
Let us see what happens when we try to activate even one resource to
100% by taking another example where there are say five resources.
Let us assume that there are five resources A, B, C, D and E and the work
flows through them in sequence as shown in the Figure 4.6 below:
Figure 4.6: Workflow
Let us decide to activate say resource C to work at 100% capacity. As it is

clear from the flow shown in the diagram, resource C is fed by resource B
and resource B, in turn, is fed by resource A.
Now let us consider that there is some interruption in the work of resource
B, i.e., the machine is down for some time. What is the impact on resource
C? The resource will also have to stop working until resource B is able
work. Similar thing can happen if resource A is down for some time. Hence,
resource C cannot work at 100% capacity if there are interruptions from
time to time.
The only way to constantly keep the resource C working is to create a bank
of work in front of it, so that it can continue to work by consuming the
bank of work even when the upstream resources are interrupted and are
not working for some time.
So, we now decide to create a bank of work in front of resource C. Well, it

is not free; we will have to pay in terms of inventory and lead time. Since
we want to activate resource C to 100%, we will bear that cost and create
a bank of work.
Now, when there is some disturbance upstream, i.e., for resource A or

resource B, resource C eats into the bank of work, i.e., it continues its work
using the material available in the bank. The level of work available in the
bank of work starts going down. But resource C can keep working until the
bank of work is fully exhausted.
Once the disturbance has been overcome, all upstream resources will
rebuild the bank of work, while at the same time, continuing to supply
137

work to resource C. They need to rebuild it before the resource C runs out
of work.
This is possible only if the upstream resources have more capacity than
resource C. We need this “protective capacity” so that resource C is
activated all the time.
Further, they need to rebuild the bank before there is another disturbance/
interruption. This means they must have considerable protective capacity.
Suppose the upstream resources have 5% protective capacity. This means

each one of them can produce 5% more than resource C in a given period
of time. So if there is some disturbance in upstream resources and
resource C works at its full capacity and consumes the whole bank, it will
take 20 times longer than it took to drain it. During this time, resource C is
exposed. So, 5% excess capacity seems to be too low.
So, the protective capacity needed is not negligible. So, if we want to

exploit a certain resource to 100%, all other resources must have much
more capacity.
What happens if we want to activate them to their maximum capacity?
Since they have much more capacity that resource C, they will create
mountains of inventory. Lead time will increase and we will have major
waste.
“A resource standing idle is a major waste.” Is this a valid statement? The

way to test it is to ask the question – “always, in all circumstances?” If you
can find a situation where this is not valid, then you should study the logic
behind the situation and learn from it. So, if we do ask the question, then
the answer must be “no not always, for example what about a fire engine
or a standby generator at a hospital!”
These two examples (there are many more) relate to an investment that
was consciously made – not in order to increase “productivity” – it was
made to protect “productivity”. So, in effect, the “system” accepts that in
order to protect its performance it must maintain some level of protective
capacity.
138
This is no different in operations management – there must be an

acceptance that at times there will be some level of protective capacity,
otherwise when the inherent uncertainties do strike, then we have no way
to respond and still achieve due dates or availability. The logic dictates that
in order to ensure that the capacity of the Constraint is not wasted, the
other non-constrained resources must have sprint capacity to catch up
delays when needed.
A capacity constrained resource standing idle is (usually) a waste – a non-

constrained resource standing idle is (usually) a necessity.
Conclusions:
• Resources standing idle are not necessarily a waste.
• Sometimes, resources not standing idle are the major cause for waste. If
we wish to avoid waste, we should stop resources from overproducing,
when the bank of work is full.
• When the Constraint is outside the operations (i.e., not enough orders),
no resource can be utilized to 100%. Activating resources to 100% will
not make more money, but more inventories.
• When the Constraint is in operations, there cannot be more than one

resource that can be utilized to 100%. Other resources can be activated
to 100% but it will not create more money, just more inventory.
We removed the main block – the conflict. But this does not mean that we
have found a solution. How can we reduce waste and increase flow?
When the Constraint is in operations, the utilization of the bottleneck

dictates the Throughput of the system.
Therefore, Dr. Goldratt said, “An hour lost at the Constraint is an hour lost
to the entire system”. The lost hour is wasted. You can never recover it.
He also said that it will be correct to say “An hour saved at a non-
constraint is a mirage”. Since by definition, non-bottlenecks have more
capacity, trying to save time of a resource that already has spare time will
not gain any additional Throughput.
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Therefore, non-bottleneck resources should not be judged according to

their own efficiencies.
And this is a major paradigm shift! Not a triviality.
All resources should be managed so that the Constraint can be utilized as

much as possible.
Dr. Goldratt said that in order to achieve this, we need to do the following:
• The Constraint should be manned constantly – even during breaks,

lunch hour etc.
• Non-constraints should not work on other things when they should

work on things needed for the Constraint.
Common procedures are likely to jeopardize the exploitation of the

Constraint. We need to change such procedures.
Often there are opportunities to offload work from the Constraint. We

struggle to decide on it if we are under the influence of the cost world
mentality.
Work should be offloaded from the Constraint – usually cost considerations

are negligible relative the gain in the Throughput.
Consider the following example given by Dr. Goldratt:
Look at the plant layout in Figure 4.7 below:
Figure 4.7: Plant Layout
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• Suppose you have the Constraint at resource “C”.
• It is feasible to offload some work done by resource “C” to resource “B”

who has plenty of capacity. If you do that, it will give us 5% more
capacity on “C”.
• However, to do the offload an investment of $5000 is needed.
• Also, Resource “B” is much less efficient – it will take twice as much time
to do this work.
• The sales are $5 million per year and the raw material content is 50% of
the sales price.
What is the Return on Investment period?
A. Never!
B. Three years.
C. About two weeks.
Tick the right answer above.
If your answer is not “About two weeks” look at the following calculations:
Sales increase: 5,000,000 * 0.05 = $250,000 per year.
Purchasing increase = 250,000 * 0.5 = $125,000 per year.
Operating expense increase = 0
Net profit increase = $125,000 per year.
Investment = $5,000.
ROI = ~ 2 weeks.
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We look for efficient resources. We are willing to pay more for such
resources and we believe it to be a good decision. However, Paying to have
a more efficient resource which is not a bottleneck is usually a waste.
Another great example from Dr. Goldratt:
Let us suppose that there is a proposal to add a new machine for resource
D in the example above. It will give us additional 50% capacity for
$100,000.
There is also an alternate proposal to buy software which will give us

additional 20% capacity for resource D in the example above for $20,000.
But resource D has ample protective capacity and we have “No layoffs”
policy.
What should be the decision?
A. Purchase the new machine.
B. Purchase the software.
C. Don’t spend your money in vain.
Tick the right answer above.
It is obvious that there is no point in making more investment in resource

D.
There are setups in a factory environment. However, they take time.

Sometimes, they take too much time. So, there is a pressure to reduce
setup time everywhere.
There could be considerable damage in saving setups on a non-constraint.
Usually, it takes some investment to reduce setup time. So, we decide to

minimize on number, setups by artificially creating large batches may be by
pulling some future orders or by producing for stock.
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Dr. Goldratt said this can cause considerable damage for the following
reasons:
• The Constraint may starve since it may not get the parts that it needs.
• This increases the level on inventory and lead time.
• The products thus produced may sit in our warehouse for a long time if
there is no market demand and later we may have to scrap it.
So, what do we gain on saving setup time on non-constraint? Just nothing.

It can only make us feel good that we are saving something!
4.5 THE WORK ETHICS
The current work ethics force people to “Look busy”. It demands that all
the resources should work as much as possible. Thus, the upstream
resources produce mountains of unneeded inventory.
The downstream resources have a difficulty. Their work depends on how

much work the Constraint does. Since, by definition, they have excess
capacity, i.e., much more capacity than what the Constraint has, more
often than not, they have idle time. The downstream resources are
unjustly accused of not working enough. If they sit idle, it would be against
the current work ethics. So, they are forced to follow the ethic “(Take it
easy but) look busy”.
They learn to slow down and after some time they become the Constraint.
This is very harmful for the company; but the current work ethics could
lead to such behaviors.
The current work ethic is appropriate only for the Constraint.
The new work ethic (TOC work ethic) suggests that resources need to
follow the Roadrunner rule:
• When you have work – work as fast as you can.

• Otherwise wait for work – sit on your hands, don’t do any work.
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This work ethic resolves the problem faced by downstream resources. But
what will prevent upstream resources from building too much inventory?
Dr. Goldratt named the procedure that enables working according to

Roadrunner ethic, it is called Drum-Buffer-Rope (DBR).
4.6 DRUM-BUFFER-ROPE (DBR)
The DBR system is designed to regulate the flow of work-in-process (WIP)

through a production line at or near the full capacity of the Constraint in
the manufacturing chain.
To achieve this optimum flow, the entry of work orders into production is
synchronized with the current production rate of the Constraint.
Let us see the meaning of each of the terms, i.e., Drum, Buffer and Rope.
DRUM: The Drum is the Constraint (ideally beating to the pace of the
market demand), rather the schedule of the Constraint of the production
system. It is called a “Drum” because it establishes a pace, or frequency,
to which the whole organization synchronizes itself.
It means, if the Constraint works faster, i.e., the drum beats are fast or the
rhythm is fast, the whole organization runs faster and matches the speed
of the Constraint.
Conversely, if the Constraint slows down, i.e., if the drum beats are slow or
the rhythm is slow, again the whole organization slows down to match the
speed of the Constraint.
This helps to minimize the chances of starving or overloading the

constraint. So, the whole organization dances on the drum beats of the
Constraint.
When you accept orders from your customers, you commit to supply a
certain product, in certain quantity, by certain date. Traditionally, people
release the material to the shop floor as early as possible, with the hope
that it will enable them to deliver as desired. If you also follow the suit, it
will be a sheer chance that you will keep your commitments without good
planning.
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Planning is an important activity. The activity can be complex if you try to

schedule every resource/machine/process/department. It would be correct
to base your production plan or schedule on the Constraint’s ability to
finish tasks. You are actually scheduling the Constraint rather than any
other resource/machine/process/department. As such, their schedule
depends upon the schedule of the Constraint.
What dictates what we should work on?
• What the market wants and
• What we are able to deliver.
Suppose that we have orders for three different products:
Product A – 30 units; Product B – 6 units and Product C – 10 units.
We cannot process all the orders at the same time because we don’t have
infinite capacity. Which work center has the least capacity? Of course, the
Constraint. Thus, we should first schedule the Constraint considering its
limited capacity. Suppose that the Constraint processes one unit in 30
minutes. What could be the schedule of the bottleneck?
0.00 hours to 15.00 hours – Product A – 30 units.
15.00 hours to 18.00 hours – Product B – 6 units.
18.00 hours to 23.00 hours – Product C – 10 units.
The list of work for the Constraint is called the Drum. It is called so
because all the resources should be managed so that the Constraint can be
utilized as much as possible. Therefore, the list of work for the Constraint
should be the drum beat dictating the pace of the entire operation.
The Drum is the means for exploiting the System’s Constraint. It dictates
the pace of the shop floor and matches it to the Constraint’s capabilities.
The actual Drum is the master production schedule. However, it is
recommended that one may not really make an exact schedule and leave
the same to the operators who know what should be sequenced after what.
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The Drum is the key for synchronization of the work of all other resources.
What are the considerations for sequencing the work at the Constraint?
• Which order is more important?
• Which product requires more lead time from the Constraint until
shipping?
• What inventory is already in front of the Constraint?
• Setup required by the Constraint etc. etc.
Caution: Don’t be oversophisticated in determining the sequence. It is

more important to have the Drum in place.
BUFFER: The Buffer is a time, rather than things or material. It is not the
stack of WIP waiting in front of the Constraint. It is the units of WIP
planned to arrive for processing some period of time before the Constraint
is scheduled to begin working on them.
In order to protect operations against the damages created by

interruptions that may happen from time to time, the Constraint must have
the right work available even if upstream resources run into unexpected
problems.
We make sure that the right work is available for the Constraint by
releasing the respective material to operations enough Buffer time before it
is due to be worked on by the Constraint.
The Buffer is a set time-interval; the time-interval material is released

before the Constraint needs it. Buffer is the time assigned for the material
to move to the completion or to the Constraint. Time is the obvious means
to protect the due dates.
Any planning should contain buffers against the natural “noise” in the
system. Buffers should be accumulated and placed only in areas that are
truly critical. The System Constraints are the critical areas that need
protection from disruptions in non-critical areas.
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Buffer is the protective mechanism against common variations of

uncertainty; it is used to overcome the common fluctuations.
The buffer size represents the estimation of the amount of (reasonable)

uncertainty that might impact the execution. Once the buffer is set, do not
allow any material release that is not in line with the Rope schedule.
Since all other resources have protective capacity, releasing a material

buffer time before the Constraint needs it, will result in having a bank of
work before the Constraint.
The bigger the Buffer, the higher is the protection; but bigger the Buffer
the higher the inventory and lead time too. So, we need to carefully choose
the size of the Buffer.
Generally, in a manufacturing environment, there are three possible

Buffers that you may have to create:
• The processes up to the Constraint. Let us call it Constraint Buffer. It

protects the Constraints from starving. It is a liberal estimation of the
lead time from raw material release to the site of the Constraint. We
refer Constraint as “Protected site”.
• The processes from the Constraint up to the assembly. This is called

Assembly Buffer. This is a liberal estimation of the lead time from the
release of raw materials to a process step where parts that don’t use the
Constraint are assembled with parts that do. It protects the flow of parts
from the Constraint against interruption due to the parts coming late
from non-constraints. We refer assembly as “Protected site”.
• The processes for shipping. This is called Shipping Buffer. It is a liberal

estimation of the lead time from the assembly to shipping. The Shipping
Buffer protects the Shipping Due Date. We refer shipping as “Protected
site”.
ROPE: The rope is essentially a communication device that connects the

Constraint to the material release point and ensures that raw material is
released into the production process at the rate of the Constraint. The
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purpose of the rope is to protect the Constraint from being flooded or

starved with WIP.
Tying the Rope is the act of choking the release of material in accordance
with the Drum and the Buffer. Rope is the schedule for material release.
Suppose we have determined the Buffer of 8 hours. It means the work is

released 8 hours before it is due at the Constraint. This means the
upstream work centers have 8 hours to finish their work on the material
released and deliver it to the Constraint for further processing.
In our example above, the release schedule will be as shown in the Table
4.1 below:
Table 4.1: Release Schedule
Start Time at the
Product Material Release Time
Constraint
Should have been released
A 0.00 hours
already
B 15.00 hours 07.00 hours
C 18.00 hours 10.00 hours
Rope also implies that you should not release the work before the
schedule, even if there are work centers without any work.
When orders are released based on the Rope, then any order in the shop is
truly required within buffer time. This is not the situation in the vast
majority of the shop floors. Material is released whenever the gating
operation (the first operation to work on raw materials) has some spare
time. The belief is: early release improves the chance of delivering on time
and achieving better efficiency is also good.
Now, the Roadrunner work ethic is appropriate for upstream resources as

well as for downstream resources. Upstream resources will not create
unneeded inventory since we choke the work released according to the
pace dictated by the Constraint.
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DBR Assumptions
• Continuous flow at small batch sizes is better (faster, more flexible) than
large batches and queues.
• Disruptions to flow come from variability (internal) and uncertainty

(external).
• It is not practical to eliminate all disruptions to flow in a system.
• Different process steps, work centers, or work cells inherently have

different capacities (rates of flow).
• Overattempts to balance capacity bring with them a number of difficult

decisions when the system is out of equilibrium with the market demand.
• The output of the entire system can never exceed the capacity of the
Constraint.
• “Increasing efficiency” anywhere but the Constraint does nothing to

improve the volume or speed of the whole system’s output; the same
efforts at the Constraint produce immediate benefits to the system’s
output.
• The net processing time of one unit of a product is very small compared
to the actual production lead time.
• Balancing capacity is an exercise in futility – it is expensive and difficult.
• Not all excess capacity in the system (e.g., at work resources other than
the Constraint) is really waste. Some extra (protective) capacity, or time,
is required everywhere—even at the Constraint—to offset disruptions to
flow that can’t be avoided.
• It is neither possible nor desirable to attain high levels of local efficiency

everywhere in the manufacturing chain all the time.
In order to implement DBR system, the following steps are necessary:
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1. Identify the Constraint
Don’t try to identify the Constraint by doing some calculations; it will be a

waste of time and may create confusion, since the data may not be
accurate enough.
The best way to identify the Constraint is to go and ask the people who
suffer from its existence.
Caution: Under the current system, it would be difficult to get the correct
answer. No departmental manager will want to say that his department is
the Constraint and that he is the trouble-maker. No manager will also want
to say that he is not the Constraint and by that way, invite trouble by
admitting that he has excess capacity (and by saying that invite you to
trim it). Hence, we are not likely to get the correct answer.
Asking people at the higher level may also be futile since they are carried
away by efficiency paradigm and most likely they will debate amongst
themselves and never come to a conclusion.
The only person who would probably give you the right answer is the
expeditor. This person is the only one who is operating with orders in mind
and not the local efficiencies. Ask the expeditor as to which department he
needs to visit more often for expediting.
If the expeditor or the management identifies a resource as the Constraint,

then accept it.
The expeditor may tell you that the Constraint is wandering, or the
management may give you several different answers. In such situation, act
as though there is no internal constraint. The current orders from the
market will serve as the Drum. DBR prevents the impact of local
efficiencies and oversizing of batches. The flow becomes smooth. If there is
a Constraint, it will reveal itself.
2. Choosing the Size of the Buffer
There are two ways to determine the size of the Buffer. One is to do
complex calculations. But the data may not be accurate.
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The best and easiest way to determine the size of the Buffer is to take the
existing lead time and cut it into half. Later, this size can be refined.
3. Tying the Rope
Release schedule = Schedule of the work at the Constraint minus the

Buffer.
Rope: Don’t release the work ahead of schedule.
If Rope is tied, stealing will not occur.
How should the tasks at non-constraint be prioritized?
If the non-constraints have multiple tasks, they need to be scheduled in

the sequence in which the Constraint is going to process the parts. The
Constraint schedule will dictate, and the non-constraints will subordinate.
They will produce exactly what the Constraint needs in the exact sequence
without paying attention to their local efficiencies.
How should the tasks of Support Functions be prioritized?
Generally, Support Functions do not participate in the flow of the work. So,
should we leave them alone? No. They play a crucial role for the
maintenance of the flow (like the resource fixing the machines etc.).
Currently, the priority system is arbitrary based on what people think to be

of high priority. Things like the seniority of the person who demands the
service or the “politically powerful” department, or simply the person who
shouts or screams the loudest, do matter.
The work priority for Support Functions should be fixed based on the Drum.
For example, if there are two machines that need some servicing by the
same resource, the machine that is working on the parts needed by the
Drum earlier should be serviced first.
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When is it necessary to expedite work?
Whether people like it or not, there will be interruptions in work which

could deteriorate the bank of work in front of the Constraint. If we want
100% safety against the interruptions, we need infinite Buffer, which is not
possible to have.
Expediting is needed to achieve high protection with reasonable Buffer.
Also, as the business continues, we may have to modify the Buffer size.
This is done by the mechanism called “Buffer Management” explained

separately.
Rules of thumb to monitor the Buffer size:
• If you are expediting much less than 5% of the work, the Buffer is too
big – you are wasting lead time and inventory.
• If you are expediting much more than 5% of the work, the Buffer is too
small – you are wasting efforts and risking Throughput.
• If you are expediting about 5% of the work, the Buffer size you have
chosen is just fine.
DBR helps in increasing Throughput while simultaneously reducing

Inventories by:
• De-coupling interdependency (by means of a buffer)
• Getting the variability to work in our favor and
• Protecting the Throughput capacity of the system.
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4.7 BUFFER MANAGEMENT
Buffer management is a control mechanism technique.
The objectives of buffer management are:
• To check whether the due dates or availability are threatened.
• To validate whether the buffers used are about right, adequately

protecting the system performance.
• To absorb minor deviations to our plan.
• To reveal and warn us about the major threats to our plan.
Buffer is a liberal estimate, i.e., a fairly long estimate of the lead time
between two internal points.
In order to manage the buffers to give us suitable signal for action, we

divide it into three equal Zones:
1. Zone 3 is the top end of the buffer. Since it is a liberal estimate, it is

much longer than the net processing time. But it is short enough that
many orders consume most of it. It is also referred as “Green” zone.
2. Zone 2 is the middle of the buffer. Variability and uncertainty

occasionally consume part or this entire segment. During this time,
orders can be expected at the buffered control point, i.e., Constraint, or
Assembly or Shipping, as the case may be. However, generally, they are
not. It is also referred as “Yellow” zone.
3. Zone 1 is the bottom of the buffer. Any penetration of this zone

constitutes a danger flag. This means that the orders are due very
shortly at the buffered control point (i.e., the Constraint or assembly or
shipping point) but are not there, i.e., we have very limited time to
bring them in. It is also referred as “Red” zone.
The situation where an order is not at the protected site (i.e., the
Constraint or Assembly point or Shipping point), it is referred as a “hole” in
the buffer. There can be holes in any of the three zones. These holes can
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be used as indicators to decide whether to intervene or not. It is very

natural that most buffers will be penetrated and consumed. But that does
not mean that you need to jump into action. It is important to know when
to intervene and it is equally important to know when not to intervene.
Let us see how to deal with the “holes” in the buffers at various “Protected
sites” and when and what actions need to be taken.
Holes in Constraint Buffer
Actions to be taken:
• A hole in Zone 3 means variation is cause for attention, but not action,
given that the order should be in the production process somewhere
(most likely it will be somewhere before the Constraint), but you don’t
need to worry about it. Material release should have taken place at the
beginning of Zone 3, and you might check to be sure that it really did
and there is no problem with the availability of the material itself.
• A hole in Zone 2 (Yellow zone) results from normal process variation and
is cause for attention, but not action, given that the material has already
been released and is somewhere before the Constraint.
• A hole in Zone 1 (Red zone) indicates a serious problem with the order.
Only holes in Zone 1 trigger corrective action, usually expediting,
because only a short time remains to bring the order in on time. Zone 1
(Red zone) orders can be considered as potentially late orders.
You need to try and finish the processing within the Buffer Time so that the
Assembly Buffer is not penetrated.
Holes in Assembly Buffer
• A hole in Zone 3 (Green zone) means that the order should either been
processed already by the Constraint or being processed by the
Constraint. You don’t need to worry about it. You might check to be sure
that the order is likely to be processed by the Constraint soon.
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is cause for attention, but not action provided that the order has been
processed by the Constraint. If the order has not been processed by the
Constraint, it means, the Constraint Buffer has been exhausted and the
Assembly Buffer has been penetrated. It may call for urgent action.
orders are likely to be late.
Shipping Buffer is not penetrated.
Holes in Shipping Buffer
• A hole in Zone 3 (Green zone) means that the order should either been
processed already by the Assembly operation or being processed by it.
You don’t need to worry about it. You might check to be sure that the
order is likely to be processed by the Assembly soon.
is cause for attention, but not action provided the Assembly operation
has been done for the order. If the order has not been processed by the
Assembly operation, it means, the Assembly Buffer has been exhausted
and the Shipping Buffer has been penetrated. It may call for urgent
action.
orders are considered to be almost late.
order is not delivered late.
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You will find that the Buffer Management actions are almost the same and
they differ only to a small extent. At any given time, you need to monitor
only one Buffer for an order.
The kernel of the idea behind buffer management is to monitor the cases
when the protection mechanism is nearly exhausted!
Look for the following signals from the Buffer Management System:
• An early indication of the hole in Zone 3 (Green zone). This will not only
tell you that the order is likely to be late, but will also leave sufficient
time for you to expedite.
• If there are more than one order in Zone 1 (Red zone) at a time is an
indication that the system is destabilizing. If there is only one order in
Zone 1 (Red zone) at a time, but it happens many times during a short
period, the system is still likely to be destabilizing. Examine the load on
the whole system and decide what actions to take to restabilize the
production system.
• Many orders penetrating in Zone 1 (Red zone) also indicates that a new
Constraint may be emerging. Investigate in to the case and take suitable
action.
• Holes in Zone 1 (Red zone) also indicate improvement opportunities. The

holes may be happening, for example, because of a low yield from a
resource with relatively large excess capacity.
At any given point of time, orders will be in one of the three buffers
depending upon the stage of the orders. You need to check the relevant
buffer zone and decide whether it warrants action or not.
Keep releasing orders as per the schedule dictated by the Constraint.

Before committing delivery dates for the new orders, check when the order
is likely to get processed by the Constraint, check the current Lead Time
and then commit the dates after calculating the Buffers.
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4.8 SIMPLIFIED-DRUM-BUFFER-ROPE (SDBR)
It is possible that you may find managing three buffers as a cumbersome,

complex mechanism and you may struggle with it.
Generally, market is the real constraint. Of course, from time to time, there
could be some fluctuations in the demand and when the demand is at its
peak, you may find that some resources are capacity constrained, though
temporarily. Identify such Capacity Constrained Resources (CCR). Typically,
the CCR is the internal constraint that you identified while implementing
DBR.
But, by and large, you may find that the market is the real constraint and
you generally have more capacity, most of the time, than what the market
is demanding.
If this is the case, you can move to SDBR. SDBR has only one buffer –
Shipping Buffer. The Shipping Buffer is the only Buffer and it encompasses
the entire production time plus the required pad for uncertainty and
variation. There is no “Zone 2 (Yellow zone)” in SDBR – Just a “Green”
zone and “Red” zone and they are not in exact proportion. The Green zone
is larger.
You need to release the Material Shipping Buffer time ahead of the delivery
due date. For example, if the due date of an order is say 25th March, and
the Shipping Buffer time (i.e., the liberal estimate of time that you would
need to complete the order) is 14 day, subtract 14 working days from 25th
March to arrive at the material release date and release the material on
that date – not before, not after.
As you go ahead, on regular basis, monitor the load on the Capacity

Constrained Resource (CCR), as mentioned above. Make sure that it does
not exceed 90% of its capacity. From time to time, when you find that the
load on CCR has exceeded 90%, take steps to reduce the load. Apply
overtime or additional shifts to eliminate the blockages. In extreme cases,
ask the sales people to back off demand generation until the issue is
resolved.
Use small production batches as far as possible; but do not go overboard,

otherwise due to their long setup times, a new CCR will emerge.
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Refine the Quoted Lead Time based on the current load on the CCR so that
the CCR doesn’t get overloaded. Verify the CCR regularly. Any significant
change in demand has a high probability of shifting the location of the CCR.
You need to frequently review the size of the Shipping Buffer. Products with
very different production routings may need different sizes of Shipping
Buffers. The Shipping Buffer depends on the excess capacity (i.e., more
excess capacity, smaller the Shipping Buffer and less excess capacity,
larger Shipping Buffers). Since excess capacity varies over time, it is
necessary to check the adequacy of the Shipping Buffer regularly.
4.9 MEASUREMENTS
The purpose of measurements is to know where we are and also to create

a basis for comparison as we go ahead.
TOC recommends measuring Throughput, Inventory and Operating

Expenses. Some metrics are calculated based on this information, as well
as some other information such as delays in order completion and supply
lead time.
Improving these metrics has a direct impact on the bottom-line of the

organization.
• Throughput,
• Inventory,
• Operating Expenses,
• Throughput-Dollar-Days,
• Inventory-Dollar-Days,
• Productivity.
• Inventory Turns.
Take some local measurements as mentioned below:
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• Utilization and efficiency of the constraint. Strive to improve it.
• Periodically, determine the extent of protective capacity of non-

constraints. If you find it to be low for some, probe into it and take
suitable action, as feasible.
• Find out and record the events when the work bank has gone below
2/3rd of the size and why. Take suitable action, as necessary.
• Start collecting information about Zone 1 penetration and analyze it

periodically. Initiate suitable action for the reasons that cause
maximum penetration in Zone 1 and minimize or eliminate them.
Every month, compare this data with the previous period and establish the
cause and effect relationship by identifying the actions that you took and
the effects caused by such actions. Share this information with your
people.
4.10 SELF-DEFEATING SUCCESS
Success
Upstream resources will occasionally be idle – have less than full utilization
– so they won't overwhelm the constraint with work. And downstream
resources will likewise occasionally be idle because they're waiting for the
constraint to complete its step. But if all goes well, the constraint itself will
have consistently high utilization, excess WIP will disappear, and more
orders will ship on time.
When this happens, the factory is producing as much as it can, subject to

the current constraint. This level of production is typically much more than
it ever could produce under traditional manufacturing when the constraint
was invisible. So, managers in a factory adopting DBR may go from
wrestling with insufficient capacity to having ample capacity.
A good implementation of DBR system will cut the lead time and improve
on-time deliveries. Due to the drastically improved service to the market,
an increase in sales can be expected.
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The Danger
Even a modest increase in sales drastically reduces the protective capacity
of non-constraints. Not having sufficient protective capacity will cause
shortage in the bank of work.
The Defeat
Shortage in the bank of work will deteriorate due date performance and
thus deterioration of service to the market. A market that has been
“spoiled” by very good service overreacts to the deterioration in service
levels. The result might be a net decrease in sales.
The Way Out

If we increase the Buffer, the decrease in protective capacity will not result
in shortages. Non-constraints will have more time than earlier since the
material will be pulled as per the increased buffer. The self-defeat will be
prevented.
The goal of the organization is not zero inventories. The damage caused by
not delivering on-time dwarfs the damage that is caused by a modest
increase in inventory.
This self-defeat can be prevented by monitoring how much we expedite,

and increasing the Buffer when we expedite about 10% of the work.
Whenever we expedite, we should record where the expediting takes place

– Department/Work Center/Supplier.
At the end of the month, we should summarize the data check where we
had to expedite the most. This is the place where we should focus our
efforts to improve the local efficiency.
4.11 IMPACT OF INVENTORY ON COMPETITIVE EDGE
At this stage, it is appropriate to discuss the impact on inventory on

competitive edge.
Dr. Goldratt has elaborated the role inventory plays in business and what
impact it has on competitive edge.
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A competitive edge can be gained by having better products, lower prices

or faster response.
A competitive edge can be gained through our products by both superb

quality and excellent engineering – more product features.
The same pattern holds true for price also. The company with highest
margins (lowest cost) will have more flexibility on pricing. Lower
investment per unit also gives a competitive edge since it has lower break-
even point.
Responsiveness also has similar two parts. Better due date performance
gives an excellent competitive edge. Shorter quoted lead times increases
responsiveness and gains competitive edge.
This is summarized in Figure 4.8 below:
Figure 4.8: Competitive Edge
Let us see how inventory impacts these six aspects.
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1. Impact of inventory on quality
High inventory environment: In such an environment, the defects are

identified very late, i.e., when we have a large batch, we have to wait till
the whole batch is processed and only then we can check the quality. It is
difficult to identify the cause for the defects. We are killed by sheer
volume. The scrap could be significant. There is a tremendous pressure to
expedite replacement parts and many times the management has to spend
their time and pay attention to see that the replacement parts are available
in time. And finally, there is a blame game.
Low inventory environment: It becomes easier to detect the defect

early and find the real cause. You do not need management time and
attention to expedite the replacement parts.
Management now has time and ability to find and eliminate the cause of
the problem.
2. Impact of inventory on engineering
The purpose of product engineering changes is:
• To improve our products, so that they are superior to those of our

competitors.
• To provide latest functions and features desired by the market to gain a

competitive edge.
• Be first in the market.
The impact of engineering improvements depends only on:
• Market research efforts to define market needs and
• Ability to develop the needed products.
How can it be that Inventory has an impact even here? Let’s see.
High inventory environment: When Engineering introduces a new

product/model or carries out changes in existing products, you face a
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challenge. You already have lots of WIP on the shop floor and generally it
cannot be used for the new product/model or you may have to carry out
huge amount of rework. You need to take a decision to get rid of it (by
scrapping). Otherwise, the implementation of engineering changes may get
delayed.
Also, you are likely to have Finished Goods in your stock as well as in the
market, i.e., in your distribution chain and it is very likely that once you
announce the new product/model, it will be very difficult to sell the existing
stock. You may have to get rid of it by offering a high discount. Otherwise,
introducing new product/model may get delayed. The market need remains
unfulfilled for a significant amount of time and there is a risk that your
competitive edge may be lost.
Low inventory environment: It will be easy for you to deal with the WIP
since the quantity involved is relatively small. The rework is not likely to be
significant. Even if you have to scrap the WIP, it may have a small financial
impact.
You are likely to have very little Finished Goods inventory with you and in
the market and it will be comparatively easy to sell it quickly with or
without discount. Even if it is sold with discount, the impact will be small.
So, the new product/model can be launched quickly and thereby gain the
competitive edge.
Increase in sales and market share as the superior product will be available
without competition for a significant period.
3. Impact of inventory on margins
High/low inventory is a relative term which should be seen with respect to

competitors.
What happens if we have high inventory relative to our competitors?
• Production lead time is higher than the competition and

• There is more and more pressure for early delivery from sales people.
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In this situation, you are under pressure and are forced to spend more on
overtime, outsourcing etc. So, it increases your operating expenses and
thus reduces the margins.
The situation gets worse if there are interruptions in the work.
In the low inventory environment, the production lead time is much

shorter. So, you have an upper hand in the market. Even if there are
interruptions in production environment, the damage could be minimal.
4. Impact of inventory on investment per unit
High inventory environment: At the end of the month, there is a

tremendous amount of pressure to deliver. There is a peak load at the last
operations. There never seems to be enough machine capacity in the final
operations when we need it.
Despite widely perceived need for the additional machine capacity, in

almost every case, the existing machine capacity in the last operations is
several times more than the average capacity.
There is usually enough capacity to handle even the very optimistic

projections in the last year of the five year forecast. However, the high
level of inventory masks it and it appears that the capacity is not enough.
These machines are often idle, but still we are forced to invest in more
machinery in order to make the monthly shipping targets.
Even the liberal doses of overtime are insufficient to handle the load. This
causes the purchase of even more excess capacity. More investment per
unit - causing loss of competitive edge.
Low inventory environment: In this environment, the load on the last

operations in more uniformly spread and the idle time is more uniformly
distributed.
Therefore, it becomes easy to handle expediting, if at all it occurs, without

buying additional equipment.
We are able to manage with the existing capacity and there is no need to
invest more.
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In the low inventory environment, the investment in equipment, facilities

and inventory are much less and consequently, the ROI is much higher
giving lower break-even point.
This causes lower investment per unit which gains a competitive edge.
5. Impact of inventory on due date performance
Common Complaints
• We miss due dates because our vendors are not reliable!
• We miss due dates because our customers are constantly changing their
minds!
Is improving due date performance beyond a Plant’s control? Or the

solution lies in the level of inventory?
In order to understand the impact of WIP on due dates, we must examine

something that looks as totally unrelated – the validity of our product
forecast.
Almost every company has a forecast of demand which is quite reliable for
some period of time into the future, and then the validity of the forecast
drastically deteriorates within a short period of time.
If we operate with high inventory relative to our competitors, it means that

our production lead time is longer than the valid horizon of the industry.
The length of the valid horizon is dictated by our low inventory
competitors. As a result, the high inventory company’s production plans
are based on pure guesses and not on reliable forecast.
It’s no wonder that due date performance is a problem where we have high
inventory. When we operate in lower inventory mode than our competitors,
we enjoy an enviable position that gives us an inherently more accurate
forecast. Therefore, our due date performance is much better.
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Remember, a prime reason that our vendors cannot deliver reliably is

because we keep changing our requirements on them, the same way our
customers are changing their requirements on us.
Therefore, inventory has a significant impact on the competitive advantage

of high due date performance.
6. Impact of inventory on quoted lead times
“My customer never complained about my quoted lead time until

competition started an unfair war!”
— Manager of a closed plant.
When the client is pressed for time, we can even offer it for free and it will
not help us to get the order if the Quoted Lead Time is longer than the
client’s need.
But what way inventory can influence Quoted Lead Times?
One is the mirror image of the other. If we reduce work-in-process

inventory, production lead times can be reduced proportionately.
So, finished good Inventory should be in proportionate to work-in-process
inventory.
The level of inventory needs to be based on Customer Tolerance Time and

if our lead times are short, we can manage with low finished goods
inventory.
Inventories = Production Lead Time minus Customer Tolerance Time
As we have seen, in high inventory environment, the lead time is larger as

compared to low inventory environment. Thus, low inventory environment
enables to meet the market need of shorter lead times.
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4.12 SUMMARY
Drum-Buffer-Rope (DBR) is the TOC application for operations. It is often

used to plan and manage discrete manufacturing, but DBR has also been
used by service providers as diverse as landscapers and hospitals, even
though their services are perishable.
Drum-Buffer-Rope (DBR) shows how to pace work flows through a system

by timing release of new work and buffering system leverage points for
statistical fluctuations, all in a way to maximize Throughput and minimize
flow time.
DBR gets its name from the roles that specific elements play during
scheduling and management of production.
To appreciate those roles, it helps to know the problems DBR was originally
intended to solve.
One problem with traditional manufacturing is about Inventory: There's a

lot of inventory before, during, and after production. That's a problem
because inventory is a significant investment, and it doesn't generate
revenue until it is sold.
Another problem is that excess inventory impedes the production process.

That is, as the shop floor becomes crowded with WIP, it gets harder to
monitor due dates and ensure that the most urgent jobs are done first. The
busier the shop gets, the less effective expediting becomes.
Thus, a third problem is that it is hard to predict when each job will be
completed. Once jobs are released into the shop, they are hard to control.
Some jobs may finish early, but too many jobs finish late, which leads to
customer dissatisfaction and missed sales. So as production slows, jobs
may be started earlier, thereby further increasing WIP, slowing production,
and perpetuating the push cycle.
Work also gets pushed into and through the factory by the desire for high
utilization, a measure of how long each machine and each worker are
actually performing tasks in the production process. The underlying
assumption is that anything less than high utilization on every machine and
every worker represents a lost opportunity for production.
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Though appealing, that assumption is flawed. For one thing, producing

goods that customers won't buy is wasteful, no matter how high it drives
utilization.
In DBR system, the Drum sets the pace and the rest of the organization
dances on the Drum beat, i.e., moves faster or slower with the Drum going
faster or slower.
A likely place to see WIP is ahead of the constraint, because it can produce
less than any other step, by definition. Therefore, that WIP is sometimes
mistaken for the buffer, but the drum buffer is actually all work scheduled
on the constraint, even if it is currently at an earlier step. That is, the
buffer is measured in time, not physical WIP units.
If all jobs ahead of the constraint are early or on schedule, the amount of
work needed to keep the constraint busy is adequate, and the buffer is said
to be in the green zone. However, when some jobs are behind schedule
and the possibility that the constraint could run out of work becomes
significant, the buffer is in the yellow zone.
Because normal variation causes some jobs to run early at the same time
that others run late, it is possible that the constraint won't actually run out
of work. Hence, a yellow buffer does not automatically trigger action.
However, when many jobs are behind schedule and it becomes clear that
the constraint will indeed run out of work without action, the buffer is in
the red zone.
Upstream steps then have to sprint to refill the buffer, and thereby keep
the constraint busy, while downstream steps may have to sprint to finish
late jobs on time.
In addition to the drum buffer, which contains WIP, the shipping buffer
contains Finished Goods. Because the market is the ultimate pacesetter,
the shipping buffer protects customers from late delivery, just as the drum
buffer protects the constraint from overloading.
The third and final element of DBR is the ropes, which govern when gating
events occur. The shipping rope governs work on the constraint needed to
meet market demand and keep the shipping buffer green. The constraint
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rope governs the release of raw materials to start new jobs that should
keep the drum buffer green.
Under DBR, jobs are released much closer to their due date than in
traditional manufacturing because they will spend less time waiting
between steps. Like the buffer, the length of ropes is measured in time.
The benefits of DBR are substantial. One literature review found the
following average improvements across 82 companies:
• 70 per cent reduction in lead time.
• 44 per cent improvement in due date performance.
• 49 per cent reduction in inventory.
• 63 per cent increase in revenue.
A central benefit of DBR is to change the production process from push to

pull: nothing gets produced unless there's a market for it. Market pull
through the internal constraint then optimizes production while minimizing
inventory.
Because the market is the key driver of DBR, how demand ripples back
through the distribution chain from customers to factory affects DBR. This
connection leads to the next TOC application.
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1. Explain in detail the basic rules of operations.
2. List the various types of plants and describe the typical problems faced
by them.
3. What are the common problems faced by operations? What is the cause
of their existence? Why?
4. Elaborate how DBR system is better than the conventional way of

manufacturing.
5. What is Buffer Management? How to carry out Buffer Management? How

does it help?
6. Define the measurements to be used. How do they help?
7. How inventory impacts competitive edge?
8. Write short notes on the following:
i. A resource standing idle is a major waste.
ii. Activating a resource and utilizing a resource (making money out of

its work) are not synonymous.
iii. An hour lost at the constraint is an hour lost to the entire system and
an hour saved at a non-constraint is a mirage.
iv. Paying to have a more efficient resource which is not a bottleneck is

usually a waste.
v. There could be considerable damage in saving setups on a non-

constraint.
vi. Roadrunner ethic.
9. Tick the correct option:
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i. The pace of a non-bottleneck production operation is controlled by the

pace of:
a. The previous (upstream) operation.

b. The next (downstream) operation.
c. A bottleneck operation.
d. Another non bottleneck operation.
e. The Production Manager.
ii. One of the key ideas in TOC is to maximize throughput by:
a. Balancing the production line, i.e., equal capacity at each operation.

b. Balancing the flow of work in the plant.
c. Maximizing production at each operation.
d. (a) and (b).
e. All of these.
iii. An objective in Operations is to:
a. Balance the capacity of each operation in the plant so that all

operations will produce at the same pace.
b. Balance the flow of work by allowing the most binding constraint to
set the pace for the plant.
c. Balance the capacity of each operation by recognizing the variability
within the system.
d. Balance the flow of work by allowing each operation to produce at its
own pace.
iv. The drum:
a. Enforces the pace.

b. Authorizes production.
c. Protects the pace.
d. Sets the pace.
e. None of these.
v. The rope:
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d. Sets the pace.
e. None of these.
vi. The buffer:

d. Sets the pace.
e. None of these.
vii. In the drum-buffer-rope method, material inventory buffers are placed:
a. In the warehouse.
b. Downstream from the drum.
c. Upstream from the rope.
d. Upstream from the drum.
e. Downstream from the rope.
Answers: (i) c, (ii) b, (iii) b, (iv) d, (v) a, (vi) c, (vii) d.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
173
 

USING TOC TO IMPROVE DISTRIBUTION SYSTEM
Chapter 5
USING TOC TO IMPROVE DISTRIBUTION
SYSTEM
Objectives
• To understand how to use TOC to improve a Distribution system.
Structure
5.1 Introduction
5.2 Background
5.3 Characteristics of a Distribution System
5.4 The Problem
5.5 Replenishment Time
5.6 The Conflict
5.7 Batching and its Ramifications
5.8 Five Focusing Steps
5.9 Solution
5.10 How to Make the Solution Work?
5.11 Next Step
5.13 Procedures for Retail Stores
5.14 Setting Good Criteria for Variety Decisions
5.15 The New Mantras
5.16 Operational Measurements
5.17 Advantages of TOC’s Distribution Solution
5.18 Summary
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5.1 INTRODUCTION
Almost all the functions in an organization are impacted by Distribution. So

let us not think that we are in production or we are in healthcare, so we
need not care about Distribution.
If you are working in Healthcare, how much are you impacted by

Distribution?
How much is the cost of the drugs, medicines? Isn’t it about 30% of the
money spent on Healthcare industry? If Distribution is not done correctly,
will it not bring the industry on its knee?
Every one of us who goes to a Retail Store is impacted by Distribution. You

go to a Retail Store buy a shirt and you like one; however, to your dismay,
you don’t find it suitable for your size. Similar thing happens when you
want to buy a pair of shoes. Even if you want to buy a particular brand of
toothpaste or soap, you may not always find it in the Retail Store that you
visit.
If the Distribution system chosen by the manufacturers is not proper, you

are impacted by it.
It is just not that you are impacted by Distribution but you can impact
Distribution too. This is irrespective of whether you are the first in the
Supply Chain, or second or somewhere in the middle or end; you can and
should impact the Supply Chain.
That’s why today the Distribution system is very important.
5.2 BACKGROUND
The Vicious Cycle
At the beginning of the year, we have our annual forecast. We make our
Sales and Marketing department to work hard, carry out surveys, use
software tools etc. and produce a highly reliable forecast.
Usually, the forecast is done for the existing markets as well as for new
markets that you want to target. The forecast is broken down to regions,
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towns, areas, months and weeks etc. This is done for every product and
our plan is in place. This plan is the basis of all our actions during the year.
Sales people are given targets accordingly. Factory is supplied with the
forecast and asked to produce according the plan. Even the Purchase
Department gears itself to procure the material keeping in mind this plan.
The Factory produces according to the plan and pushes the products to the
market. If there are distributors involved, the products are dumped on
them and they in turn try to do the same thing with Retail Stores. It is
Push, Push, Push, all the way. After all, we believe that more the stock
near the customer, better the chance of sale.
However, the market demand fluctuates and sales do not happen as per
the detailed plan. Nevertheless, the Factory continues to produce according
to the plan given to them (after all, they are measured on that) and keeps
pushing the products. As a result, the distributors and retailers have some
products in excess whereas some products in short supply. We are amazed
to know that the products which are in excess in some places are exactly
the same products that are not available in other places. We wonder why
this happens since we never exceeded the “Max Level” of stock at any
location and we placed orders as soon as we reached “Re-order Level” of
stock. Many sales opportunities are lost due to shortages – which are
actually in surplus elsewhere. Lots of cash is tied up in surplus products
and lots of cash is spent on cross-shipments. At the same time, lots of
money is lost due to shortages and we do not have even a fair estimate of
such a loss.
We take feedback from the market. We pull up our Sales people for not
meeting their targets. We revise our plan considering what happened since
we last planned. We revise the targets for Sales people. We incentivize
them. We pull up the Factory people since we found some gaps between
the plan and what they actually produced.
Now Sales people are more determined to meet their targets. They start
pushing hard. Factory people are more determined to produce exactly as
per the plan.
For some time, we find that the sales are growing. However, after some
time, we start seeing the same old problems all over again.
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We find more and more inventory everywhere but despite that, we have
more and more shortages everywhere. Now, we have more problems with
the Retail Stores who have started demanding more margins and more
credit period. We have a tough time with our suppliers for paying them as
per our commitments. When we want to introduce new products/models,
we have to incur a big loss by scrapping a huge quantity of the old
product/models or get rid of them by offering a deep discount. At times,
we wait till the existing stock is exhausted before introducing new products
and then we find that we are late in the market.
Despite all our sincere efforts, our customers are dissatisfied with us – our
products and their availability. We have more problems within our
organization – people start finger pointing to save their skin, to justify the
missed target. The Sales people blame the Distributors; Distributors blame
both – Sales people as well as Factory. The Factory people blame
Purchasing people for late procurement and Distributors for urgent orders,
so on and so forth.
Once again, we investigate, find the culprits and punish them. We once
again go back to the drawing board and have fresh forecasts and the
vicious cycle – the negative loop continues…
What we need is:
• More accurate forecasts,
• Significantly reduced replenishment time and
• Increased reliability of resupply.
We must gain in-depth understanding of the problem before we think of a

solution.
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5.3 CHARACTERISTICS OF A DISTRIBUTION SYSTEM
Let us start examining the characteristics of a Distribution system.
• The consumption locations are away from the location where we produce
our products.
• The time that we take to make our product available at the point of
consumption is longer than the tolerance time of our customers. For
example, what is the amount of time you are willing to wait to buy soap
or a toothpaste? Perhaps a minute or so? What will you do if you don’t
get it in a Retail Store when you need it? Perhaps you may never visit
that Retail Store again!
• When the customer tolerance time is much shorter than the time it takes
to make the product available at the point of consumption, it becomes
obvious that we need to hold inventories close to the point of
consumption so that we can make use of the business opportunity.
• Generally, inventory is expressed in terms of money, i.e., say $10 million.

Or it is expressed looking at the future to say “We have average six
weeks inventory” which means we have enough inventory to cover six
weeks of sale.
However, when you look at the details, you find that there are some items
that are totally missing. And there are some items we have so much that
they will even be enough for your grandchildren!
This is what they mean by “Average six weeks”!
There is a typical structure of a Distribution system:
• Generally, we have one of more factories of our own. We may also have
some suppliers who supply certain products. We may have a combination
of the two or we may have any one of the two.
• We have one or more Regional Distribution Centers (RDCs). We may

have these RDCs located at some strategic places. Periodically, either
based on their orders or based on some plan, products are supplied to
the RDCs from the factories or suppliers.
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• We have several Retail Stores. Products are supplied to them by these

RDCs. Retail Stores buy our products from the RDCs and sell them to end
customers. Retail Stores either buy our products by making advance
payment (in part or in full) or we grant them a certain credit period.
Certain margins are given to the Retail Stores so that they also can make
money. Typically, Retail Stores are expected to buy the products by
following the rules of Minimum Order Quantity. From time to time, some
schemes are introduced to induce the Retail Stores to buy more.
Let us see how the Distribution system works.
Distribution systems in our modern age operate in a way that seems to

make a lot of sense. Manufacturers have automated processes with ERP
systems to help them manage their shop floors.
Distributors and Manufacturers have very sophisticated forecasting

software to predict exactly how many items of each product will be sold.
Therefore, they should know how many units they should be sending to
Retail Stores and when.
If it is so, how is it that organizations still experience problems in

managing the supply chains? Is technology not enough?
What is the Manufacturer’s/Distributor point of view when he is deciding on

how much stock to keep at each location? He has two main questions in
mind:
• How much inventories to keep in hand? and
• How much to keep in Retail Stores?
The natural tendency is to keep the inventories as close to the consumers

as possible – if a product is not at the consumption point, then there is a
very thin chance that the item will be sold. Only a few consumers will be
willing to wait – immediate delivery is the name of the game.
Therefore, it is only logical that the manufacturer/distributor should keep

most of the stock as close to the consumer as possible, i.e., at Retail
Stores.
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This is a typical push behavior: pushing the products to the market in order
to feed consumption in time.
However, the push behavior requires a good forecasting model, in order to

predict where and when the stocks will be needed at the stock locations.
The advanced forecasting modules existing today try to model the demand
and create a good answer to the availability question:
What to hold at which place and when.
However, the forecasting mechanism, no matter how good it is, cannot

really predict what the demand would be like. Doing very accurate market
researches might give some answers, but one must at all times consider
some facts of life regarding statistics.
The first fact is that the narrower the aggregation, the worse the answer
becomes. It means that the question of "how much will be sold from the
product overall?" will yield a much better answer than the question: "How
much will we sell from the product at this specific location?"
This phenomenon stems from the fact that fluctuations average out on the
aggregated events (assuming they are independent events). If we predict
the sales at 100 different locations, we might get an answer that sales in
an average location will range from 10 to 25 units a day. If we ask the
same question on the overall quantity that we need to manufacture, we will
get a much more accurate answer – probably something like ranging from
1650 to 1850.
If we would just take the lows and highs of each consumption point and
aggregate them, we will get a much worse answer – from 1000 to 2500.
The second phenomenon is the wrong interpretation of data – people using

statistics must have good understanding of the aggregation mechanism.
There are some large mistakes being carried out on a daily basis all over
the world, because of lack of understanding of statistics. For example, a
clever man but not experienced in statistics might conclude from the
example above that since the consumption will be between 1650 to 1850
for all consumption points, each consumption point will have a
consumption between 16.5 to 18.5. Therefore, keeping 18 units for each
location will suffice. This will, of course, cause running out of stock in a
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fairly large number of Retail Stores, while others will be left with a lot of
stock they can't sell. The fact that we got an aggregated sum does not
mean that it can be applied to the points that make out this sum.
Another man might suggest protecting availability by putting 25 units at

each location – increasing substantially the investment and increasing
substantially the number of consumption points in which we will have
excess stock – taking unnecessary space and investment.
Another problem is that no forecasting model can take into account sudden
change in consumption patterns. In today's dynamic market, such events
are becoming quite frequent.
As the forecast of a single product at a specific location is subject to the

above mentioned impacts of fluctuations and uncertainty, it is a very poor
base for determining the required level of inventory of that product at that
specific location. It is clear that another mechanism is needed in order to
reach this decision.
5.4 THE PROBLEM
There is a mismatch in satisfying the market demand.
Let us try to determine how much inventory we need to hold at the selling
point. Let’s look at an example given by Dr. Goldratt.
Let us suppose that there is a demand for product X in the market.

However, customers need it immediately when they come to buy. The
factory that produces product X is located at a far-off place and they take
an average one month to deliver the products to you.
So, how much inventory will you keep so that you can deliver the product
to your customer when they ask for it?
The answer is obvious. You will keep one month’s inventory. But then you
need some inventory on the way since it takes so much time from placing
the order and receiving it. So how much inventory should be on the way?
Another month’s inventory. Right?
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So, you have two month’s inventory – one month’s inventory in hand and
one month’s inventory on the way. Now, you believe that you can service
your customer whenever he wants.
Now, look at this. What does “Average one month” means? It is not exact
one month but there is a variation. We all know it. It means sometimes it
will take less than one month and sometimes it will take more than one
month. What happens if it takes more than a month to receive the
product? If the factory has some more important orders in hand, it may
delay your order. It could take two months or even more. If customers
come, you are unable to service them. Also, if some customers demand
more than the average, you do not have enough inventories to meet this
increase in demand and your customer service is jeopardized.
So, what do you propose to do to protect your sales? Obviously, you will
want to keep two month’s inventory in hand and two month’s inventory on
the way. It doesn’t sound to be a great idea, but nevertheless, you will
keep four month’s inventory – two months of inventory in hand and two
months of inventory on the way – in order to protect your sales.
Now, look at the transportation time. It is not uncommon to see that the
transport is not available when needed or a truck carrying products for you
gets stuck on the way or they are simply late etc. etc.
This will jeopardize your customer service. You will want to be paranoid
and will keep three months of inventory in hand and three months of
inventory on the way.
Six month’s inventory! What an investment!
And what if the shelf life of the products is six months or less?
In this example, we considered only one product. What if you have several
products and the market demand is fluctuating over a period of time and
the reliability of different suppliers is different?
Typically, you will have the following Undesirable Effects (UDEs):
• There is a shortage of fast moving items.

• Slow moving items are piling up.
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• There is a high level of inventory everywhere.

• Lots of cash is tied up in inventory.
• Customers are dissatisfied with product availability.
• There are many emergency orders.
• Enough space is not available for display and storage of items.
• Product variety cannot be increased easily.
• Lots of slow moving items have to be disposed of at a reduced price or
scrapped.
• There is a lot of wastage due to product expiry or obsolescence.
• Lots of products have to be scrapped, or sold at reduced price when
new models are introduced.
It is obvious that the amount of inventory should be proportional to

consumption.
But is consumption the only dominant factor? What about Replenishment

Time?
5.5 REPLENISHMENT TIME
Replenishment Time is as important as the level of consumption. The

longer the Replenishment Time, each selling point needs to hold more
inventories.
How does the Replenishment Time impact the level of inventory – at the
selling point as well as on the way?
For that, we need to understand the different elements that comprise the
Replenishment Time as explained by Dr. Goldratt:
• Order Lead Time (OLT) – This is the time it takes from the moment a
unit is consumed until an order is issued to replenish it. In other words,
this is the frequency of ordering of the same product. It is the time until
an order is placed for replenishment or the time difference between two
orders.
• Production Lead Time (PLT) – This is the time it takes to process an

order plus the time in queue for producing plus the time to produce the
ordered product.
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• Transportation Lead Time (TLT) – This is the time it takes to transfer

the products to the point of sell. This is the time it takes to actually ship
the finished product from the supplying point to the stock location.
Replenishment Time = OLT + PLT + TLT
If we want to give excellent customer service, Dr. Goldratt said, we need to

hold a level of inventory that is:
“Maximum forecasted consumption within the average replenishment time,

factored by the level of unreliability of resupply”.
“Maximum forecasted consumption” means you need to be paranoid to

determine what could be the maximum sale within the average
Replenishment Time and then factor it to the extent of unreliability of the
supply chain.
Let us take an example. Let us calculate the “Maximum forecasted

consumption”. Let us consider a Retail Store that buys a product from us.
The Retail Store orders once in 15 days; this means that the Order Lead
Time is 15 days.
At our Factory, we club all the orders and batch them together and produce
them. It takes an average of a month. So, our Production Lead Time is 30
days.
Then we wait to gather enough orders to be delivered in the area where

the Retail Store is located. Then we hire a truck and deliver. This takes on
an average 15 days. So, our Transportation Lead Time is 15 days.
This adds up to 60 days, i.e., about two months.
This means, if the Retail Store places an order today, it is likely to receive
the delivery after about two months.
Let us consider the uncertainty factor. Our Production Lead Time is on an

average one month. It means, sometimes, we take less time and
sometimes, we take more. It all depends on the raw material availability,
other pending orders, gathering enough orders for suitable batching, setup
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time etc. At times, we take much longer. This could get even longer if the
Retail Store has ordered multiple products.
Even though we have produced the products, unless we have a full truck
load going to the area where the Retail Store is located, we do not deliver.
The unreliability factor is 1 when the Retail Store always gets the products
within the agreed time, i.e., two months in our example. So, considering
the past experience, the Retail Store easily considers the Unreliability
Factor. Let us say to be 2.
So, while placing the order, the Retail Store needs to forecast as to how
much inventories it will need in order to protect the sales during next 120
days, i.e., the Replenishment Time (60 days as calculated above multiplied
by the unreliability factor of 2).
The Retail Store knows that there are days when nothing is sold, there are
other days when some sale happens and there are yet other days when
there is a lot of sales. So, the Retail Store considers all that, gets
somewhat paranoid and places an order of 600 units.
So, the “Maximum forecasted consumption” within the Replenishment Time

is 600 units.
However, this means very high inventories. We have a problem.
5.6 THE CONFLICT
We have a problem. To make profits by selling more, we must hold high

level of inventories. This is because replenishment time is long, demand
cannot be accurately predicted and resupply is not entirely reliable.
However, we also need to reduce cost and therefore we must hold fewer
inventories because more inventories mean more investment, more limits
on cash flow and more obsolescence.
Any level of inventory you may choose will turn out to be unsatisfactory
compromise.
The following diagram lays out the conflict.
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Read the diagram from left to right. Read it with “In order to… we must…”.
This is shown below the Figure 5.1.
Figure 5.1: Conflict
In order to have a “profitable system”, we must “protect the sales” (if we

lose sales, we will not be able to make profits). In order to “protect the
sales”, we must “hold high inventories” because “replenishment time is
long, demand cannot be predicted accurately and resupply is not reliable”.
On the other hand, in order to have a “profitable system”, we must “reduce

the cost” (otherwise, the costs will eat up our profits). In order to “reduce
the cost”, we must “hold less inventories” because “more inventories mean
more investment, more limits in cash flow and more obsolescence”.
Can we invalidate any of the assumptions shown in the above diagram? Let
us consider:
• More inventories mean more investment: It is obvious that if we

hold more inventories, we will have to spend more money in creating and
holding it. This assumption seems very difficult to invalidate.
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• More inventories mean more limits on cash flow: More inventories

causes more outflow of cash. It does not guarantee more inflow of cash.
That poses more limits since we do not have unlimited cash. This
assumption seems very difficult to invalidate.
• More inventories mean more obsolescence: There are certain

products that have a limited period before they expire or they have a
limited shelf life. In this case, if we are holding large inventories, the
chances of obsolescence are more. This assumption seems very difficult
to invalidate.
• Replenish time is long: Invalidating this assumption means finding a

mechanism to drastically reduce the Replenishment Time. Most suppliers
demand higher price for priority delivery. So, it is costly. It takes lot of
time to significantly impact OLT, PLT and TLT. This assumption seems
very difficult to invalidate.
• Demand cannot be predicted accurately: Invalidating this

assumption means finding a mechanism to produce accurate forecasts. It
is impossible to accurately forecast at Product/Retail Store level. Only
trends can be predicted. This assumption seems very difficult to
invalidate.
• Resupply (vendors) is not reliable: Invalidating this assumption

means increasing the reliability of vendors. Replacing vendors will
improve things only if the existing vendors are exceptionally unreliable.
Educating the existing vendors will take a long time, if feasible. This
assumption seems very difficult to invalidate.
We are “stuck between the rock and the hard place”.
Let us look at the way the Distribution business happens and see if we can
invalidate some of the assumptions.
If we look at a Distribution network shown in the Figure 5.2 below, we see

a factory, a number of regional warehouses and several points of sale as
depicted in the picture below:
This is a generic case and there may be some variations.
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Figure 5.2: Distribution Network
Let us look at the Retail Stores. They are ordering according to their
forecast. If they need to hold three month’s inventory, it means what they
order now is likely to get sold after three months. Do they really know
what they are going to sell after three months or so? What is the level of
accuracy of such forecasts?
Actually, their forecast is an educated guess. It means they are pulling

according to their guess about the future as to what will be sold after three
months. There is 50% chance that what they order is too less or a 50%
chance of what they order is too much.
If the Retail Stores have estimated too high, the inventory will accumulate
at the Retail Stores. They will have too much of inventory. At the same
time, some other Retail Stores may have guessed it to be too less, they will
have too little inventory.
It means, we may have enough inventories in the system, but at some

time we will find too much inventory at some places while too little
inventory at the other places. Even though the total amount of inventory
might be in line with the market demand, there are pockets where there
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are not enough inventories causing orders on the factory to produce more.
And this demand from the Retail Stores is urgent since they don’t have the
inventories. So the factory is, all the time, under pressure even the total
amount of inventory is enough or bigger than what is really needed.
5.7 BATCHING AND ITS RAMIFICATIONS
This becomes such a big problem because we prevent a smooth flow of our
products. According to Dr. Goldratt, the biggest reason that prevents flow
is “batching”.
There are three places in a Distribution System that we do batching on a

major scale.
One batching is done at the Retail Store’s level and there are three reasons
for that:
• We don’t want to forecast every day because we don’t have time for it.
So, we issue orders once in two weeks or even once in a month. When
they do that, they have already done batching.
• Batching is done to save on transportation costs. It is considered to be a

stupid idea to ship a truck loaded only half of its capacity. We cannot
afford it.
• Suppliers offer a discount on quantity and Retail Stores want to avail of it

and hence they resort to accumulating and batching of orders so as to
qualify for the discount.
So, we batch a whole truck, a whole train and sometimes a huge shipment
in a ship. A huge amount of batching.
This is a common practice in warehouses/distribution centers.
The factory receives many urgent orders. They have setups. They have
efficiency measures. They batch the various orders to save their setup time
and have better efficiency.
These are the three places where batching is done at a mammoth scale
and that prevent the smooth flow.
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Thus, it is clear that Long Replenishment Time causes high inventories in

the system.
Keeping relatively high inventories in the system means:
• High investment,
• Limiting cash flow and
• High obsolescence.
But there is another worse ramification. The longer the Replenishment

Time, the slower the system reacts to actual market demands. This places
an emphasis on the accuracy of the forecast.
Due to this, the whole Distribution becomes immensely unstable.

So, despite so much of inventory in the system, we cannot reach 99% or
98% on time delivery to the end consumers.
Now, let us look again the conflict that we discussed earlier. It showed us
that in order to protect sales, we must hold high inventories because:
• Replenish time is long,
• Demand cannot be predicted accurately (forecast) and
• Vendors are unreliable.
If we are able invalidate any one of the above, we probably can services
our clients with much less inventories.
5.8 FIVE FOCUSING STEPS
Let us walk through the first three steps of Five Focusing Steps:
Step 1: Identify the system’s constraint
Step 2: Decide how to exploit the system’s constraint
Step 3: Subordinate everything else (to the above decision)
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Let us discuss them in the context of a Distribution system.
Step 1: Identify the system’s constraint
Identify “the thing” if you have more of it, you would have more
Throughput, you would have sold more. If you are under Distribution
system and you have plenty of right inventories, what is “the thing” that if
you had more, definitely you would have got more Throughput? What is
the Constraint of a Distribution system?
Many times, one has to look for a Constraint; it appears that everything is
a Constraint. People find it difficult to identify a physical constraint.
But this is not the case of a Distribution system.
It is Clients. The Constraint of the system is “Clients who come to buy”.

The more clients, who come to buy, the more will be the Throughput be.
Step 2: Decide how to exploit the system’s constraint
The second step is to “exploit” it, don’t waste it. If a client has entered to
buy, sell him – sell him what he wants or find something that he would
want to buy. But how? What does it take to “exploit the Constraint”? In our
case, it means you must hold the right inventory, at the right place, at the
right time – is the way to exploit the Constraint.
Easier said than done! It is not easy to determine what is meant by right
inventory – how do you answer the question “how much inventories of
different products should be held so that we can always satisfy our client
who has come to buy?”
Since the answer is not simple, people believe in “more the merrier” which
turns out to be a disaster, eventually.
If you don’t hold the right inventory at the right place, the client that
comes in to buy will say “Sorry” and maybe he will not visit you again.
The timing is also important. There are seasons and there are peaks and if
right inventories are not in place, we end up in losing sales.
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Not being able to satisfy a customer who comes to buy, is the opposite of
“exploit”. How many times have you gone to a Retail Store, liked a pair of
shoes and had to leave the Retail Store without buying it since the shoes
that you liked are not available in your size?
Unlike other systems, everybody in the Distribution knows the Constraint,

knows how important it is to exploit it and knows what is needed to be
done in order to exploit it.
Step 3: Subordinate everything else (to the above decision)
The problem is in subordination. How do we make the entire system to

subordinate so that we can exploit the Constraint? What must we do in
order to have the right inventory, at the right place, at the right time?
And this is not simple at all! Let us look at it and understand the logic.
5.9 SOLUTION
Why does a Distribution System Based on Pull Distribution Work

Better?
Let's look at the Retail Store and the different entities operating in this
environment.
We can categorize the items in the store to 3 different types:
• Fast Moving Items – These items are sold very fast, enabling the
retailer to reach high inventory turns.
• Slow Moving Items – These items are items the retailer just can't get
rid of – items which are running very slowly with low inventory turns.
• Regular Running items – These items do not fit the above categories.
What is bound to happen with the Fast Moving items? By definition, the
market demand is high for them relative to the amount of inventory we
keep from them. Therefore, they are the ones most likely to be sold out. If
we go to a retailer and ask him how many shortages he experiences, the
most likely answer would be: very few, maybe 2-3%.
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There is a lot of misconception here – since if we'll ask him: let us say we
stand outside your store and ask people whether they found what they
were looking for – in how many cases will we get an answer of "no" even
though you're supposed to carry what they were looking for? The most
probable answer would be: OK – probably 10-15%.
This means the level of shortages experienced in Retail Stores is much

higher than what the retailers think. If the typical buying pattern of
customers in the Retail Store is purchasing more than one item at a time,
this phenomenon is ten-fold: what is the chance, when having only 10%
shortages, for a customer to find all 8 items he's looking for in the Retail
Store? The answer is almost zero – affecting the buying experience of
almost every customer that buys in the Retail Store.
A very interesting factor comes into play when analyzing those missing
items. The 10-15% consists of mainly the Fast Moving items! If the retailer
would have known these items would be sold so quickly, he would have
bought a whole lot more. Therefore, the amount of lost sales he
experiences is far more than the 10-15% he will actually admit to! This is
true especially in the fashion business. Goods are bought by the retailers
once for the whole season. Therefore, the fastest running items will be
missing almost throughout the season! For example, an item which sells so
fast that the entire inventory is consumed in 2 weeks in an 8 week’s
season has lost sales of 3 times as much as was kept of it!
The other side of the coin is the Slow Moving items. These items are not
sold as the retailer had envisioned when he bought them, otherwise he
would have avoided them. The phenomenon that happens here is absurd –
the retailer will invest a lot of efforts to sell these Slow Moving items and
block his display space at the expense of the other items in the Retail
Store! This behavior, while expected from the psychological side, is
counter-intuitive in the business sense – huge efforts that will be invested
by the shopkeeper to sell the Slow Moving items could have yielded much
higher revenues from the Fast Moving items or Regular Running items.
This phenomenon sometimes dwarves the effect of shortages in the Fast

Moving items!
Some industries have adopted even phrasings to hide the fact they are
operating in a counter-intuitive way, because they have become desperate
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trying to solve these problems. The industry glorifies the stock-outs of Fast
Moving items (in TOC it is called lost sales) by calling them "sold out"! The
industry simply ignores the Slow Moving items phenomena by marking
them as "on sale" and investing huge efforts in selling them.
In a Distribution system that is based on pull mechanism, these negative

phenomena are cut to minimum. Since the TOC mechanism is based on
reacting to the actual market demand, and adjusting the buffers
accordingly, if the market demand picks up, the buffers will be increased,
creating a mechanism that allows stock-outs only for very limited time
periods. That means lost sales due to stock-outs of Fast Moving items are
minimal with the TOC methodology. Due to the fact that lower inventories
of all items are kept, and the quantities are further decreased when
consumption is low, Slow Moving items are much less of a problem as their
quantities are minimal. Therefore, using pull distribution is very effective in
eliminating lost sales.
What about our vendors?
We need to improve the vendors so that they supply us what we want,

where we want and at the time we want. However, if you were to improve
the vendors by educating them by conducting several “Vendor
Improvement programs”, it may take several years before you improve
them. And then, sustaining such improvement could be another challenge.
Even changing the vendors may not help.
We need to have more accurate forecast. Is it really feasible to forecast

very accurately? Even if you install a better computer system and software,
the forecast cannot be much better.
We need to substantially reduce the Replenishment Time.
How can we substantially reduce the Replenishment Time without

improving the vendors and without the need of more accurate demand
forecast?
If we can do that, then we can turn around the situation.
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What is the level of accuracy of the forecast at Retail Store level? In one
week, they may not be able to sell a single item of a product and in the
next week, they may sell 10 items. The variability is too high.
But what about a Regional Distribution Center (RDC) which supplies to

many Retail Stores? If they have sold 10,000 items this month, it is very
unlikely that they will not sell anything next month; perhaps they will sell
13,000 or 7,000 items. Buy the variability is far less.
It means the accuracy of the forecast at the RDC is far better than the
accuracy of the forecast at Retail Stores. The accuracy of the forecast
improves at the square root of the number that you aggregate. It means if
a RDC is supplying to 100 Retail Stores, its level of accuracy of forecast at
RDC is 10 times better than the accuracy of forecast at Retail Store level.
That is what the fluctuations are averaging out.
The same thing is true when we are going from the RDCs to the Factory.
The demand from the Factory is the aggregated consumption of all the
Retail Stores it feeds. Statistical fluctuations average out. The relative
variability of demand at the Factory is far too smaller than that at the
Retail Stores.
We have different level of accuracy at different levels in the system. How

can we use what we have already?
Traditionally, Distribution system is based on the wisdom of holding

inventories close to the consumption points.
Now, we realize that the more reliable places in the Distribution system are
the supply points; the further from the end consumptions, the more
reliable the forecast.
What will happen if, against all instincts, we hold most inventories NOT at
the points of consumption but at the source of supply, i.e., Factory? As Dr.
Goldratt said, “If you want to service your customers better, hold
inventories away from them!”
Let’s suppose that we will hold the inventory at the point where the
accuracy of the forecast is very high. The most accurate point in the
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system is at the source, i.e., at the Factory – that is where we have the
biggest aggregation.
Let’s hold inventory there. Let us call it Plant Warehouse or rather Central
Distribution Center (CDC). Usually, it does not exist, because you produce
and you ship it immediately. This is because when you ship, it looks like
you sold! (“Tell me how you will measure me, I will tell you how I will
behave!” … Dr. Goldratt). If at all it exists, it is filled with unused WIP – the
WIP for which you are not able to find market.
Typically, you may have multiple plants or multiple suppliers. Therefore, it

is advisable to have a Central Distribution Center (CDC). If you have only
one plant and you sell only the products produced by that plant, Plant
Warehouse and Central Distribution Center are same and you may call it
either.
Introducing the Central Distribution Center (CDC) and holding inventories

there, reduces the overall inventories in the system to the extent that the
problem is solved and enables us to:
• Operate according to much more accurate forecast,
• Operate with significantly reduced Replenishment Time and
• Increase reliability of resupply.
Because, introducing the Central Distribution Center (CDC) allows us to:
• Save inventory in all the Regional Distribution Centers (RDC). It stems

from the fact that introducing CDC drastically changes the Replenishment
Time to RDCs. Since the required inventory now resides at the CDC, The
Replenishment Time to the RDCs is only the Transportation Time.
• The variability of demand at the CDC is much smaller than the variability
of demand at the RDCs. So lower the variability, lower the “maximum
forecasted consumption within the Replenishment Time”.
• Therefore, the amount of inventory we hold at the CDC is smaller than

what we were holding at the RDCs.
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• The forecast accuracy deteriorates with the length of time forecasted.

The bigger the time horizon, lesser the forecast accuracy. Drastically
reducing the Replenishment Time reduces the time horizon for
forecasting; it becomes much smaller and hence the forecast accuracy is
far better. So, the chances of having shortages and surpluses at the
Retail Stores are reduced dramatically.
• Consequently, this reduces the number of urgent orders on Factory.

Every shortage at the RDC triggers an urgent order on the Factory. At
least for half of the products where there are urgent orders, you find that
they are in surplus at other RDCs. Even then, the Factory needs to
produce them. Our new action minimizes this extra and unnecessary
burden on the Factory since an urgent order is raised on the Factory only
when stock for a product gets depleted at the CDC.
• This drastically reduces Production Lead Time. If the Production Lead

Time goes down, there is no need to hold high levels of inventories at the
CDC.
• With this, the level of unreliability of resupply to RDCs goes down

substantially. It is restricted only to the unreliability of Transportation
Time. Our Factory becomes more and more reliable in keeping its
commitments for resupply. So, we don’t need to hold more inventories at
the CDC to cover this risk. The unreliability of transportation is much
smaller than the unreliability of production.
By introducing Central Distribution Center (CDC), we achieve all the three:
• Operate according to much more accurate forecast,
• Operate with significantly reduced Replenishment Time and
• Increase reliability of resupply.
If you hold the inventories of all the products at the CDC, what is the
Replenishment Time from the CDC to RDC?
It is not any more connected to Production Lead Time. It is just the

Transportation Time. If you implement this action, you have almost cut the
Replenishment time almost by half!
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Now, what is the Replenishment Time from the RDC to Retail Stores? A day
or two? Certainly not months anymore! Because, most of the time they will
have what the Retail Stores ask.
What we have done is, we are now holding all the inventories at the CDC
and thereby have decoupled the Production Lead Time for Replenishment
to our RDCs.
Now, if we do the same thing at the RDCs, we will cut the Replenishment
Lead Time from the RDC to Retail Stores not by factor of 2 or 3 but much
more.
Suppose our Replenishment Time from the RDC to Retail Stores was 30
days. Now, we can replenish the Retail Stores within one day. So, we have
cut the Replenishment Time by a factor of 30!
Our level of Inventory was 3 to 4 times bigger than the Replenishment

Time. This enables us to cut enormously on inventories.
There is much more than this. If we can guarantee that all the products are
available at the CDC, then we can also guarantee that they are made
available at RDCs too. In turn, we can guarantee the Retail Stores to have
whatever products that they want.
All this is done very quickly by simply holding inventories at the point of
aggregation, i.e., CDCs and RDCs.
By doing this, we have not only cut the Replenishment Time and level of
inventories but we have increased the reliability drastically. We have
reduced the unreliability only to the function of transportation rather than
the unreliability of production and vendors to the production (which is
causing the majority of the problems).
Now, the question is: how much inventories we should hold everywhere
and how much in the system?
That’s not difficult to figure out. Let us look at the formula again.
“Maximum forecasted consumption within the average replenishment time,

factored by the level of unreliability of resupply”.
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It means let us find out the paranoid consumption during Replenishment

Time and factor it by the level of unreliability of resupply to make it sure
that we will always have enough inventory to service the market.
Replenishment Time between the Factory to CDC is not small; let us say it
is two weeks. Here, you need to consider the paranoid consumption of the
whole country. That is not small and you need to multiply it by the factor
that would cover the variability of resupply. We will have to hold here quite
a lot of inventory.
But how much we can trim from the RDCs? How much inventory do we
need there?
Production Lead Time is now out of the equation for the RDCs since we are
already holding the inventory at the CDC. So what happens to the
Replenishment Time between the CDC and RDCs? It shrinks drastically only
to the extent of Transportation Time. So, we can now shrink the inventory
held there substantially!
The same logic applies to Retail Stores where the paranoid is very high.
But we have reduced the Replenishment Time so drastically that the Retail
Stores don not need be so paranoid now and can hold much less
inventories.
Though in this scheme of things, we need to hold a lot of inventory at the

CDC, the overall inventory in the system goes down dramatically.
The vast experience tells that if you are able to have 85% availability –
meaning 85% times when clients need something, you have it – with this
system in place, you can raise it to 99% with only 1/3rd of the inventory
that you were holding before!
5.10 HOW TO MAKE THE SOLUTION WORK?
The idea seems to be good. But how to make it work?
We believed that we need to keep the products close to the customers and
now we are doing exactly opposite. We have been pushing the products in
the market. From that, we have now changed from “PUSH” to “PULL”.
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The procedure is simple:
There are two sets of actions that need to be taken.
The first set of actions is:
• If you have a factory, implement TOC’s solution for Operations.
• Create a CDC if you don’t have. Calculate the inventories that you need
and get it done from your Factory.
• Take similar actions for your RDCs too.
The second set of actions is:
• Determine the inventories to be kept at each Retail Store by using the

same formula.
• Retail Stores need to report what they sold on daily basis. They don’t
need to place any orders. What RDC will do is to replenish what they
sold; nothing less, nothing more. By doing this, we are minimizing the
Order Lead Time drastically. Earlier, we were placing orders once in two
weeks or even once in a month. By reporting daily sales, we are doing
away with the hassle of placing orders. Also, we used to place orders
based on our forecast. We are doing away even with the forecast. We are
only replenishing what has been consumed.
• RDCs will quickly replenish what has been sold by the Retail Stores.
Every day, they will report to CDC what they have dispatched to Retail
Stores.
• The CDC will quickly replenish what they have dispatched and maintain
their level of inventories. There is no need to place any orders or do any
forecasts.
• The Plant, in turn, will receive from CDC the dispatches made by them
every day and will arrange to produce and replenish the CDC what they
have dispatched.
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As a result, the level of inventories in the system will be maintained based

on the actual consumption by the market. If the actual consumption
changes, the signal will go right up to the Factory; which will produce
accordingly.
Thus, the market will PULL what it wants and our Distribution system will
subordinate to the market needs and will work at the pace of the market’s
drum beats.
This gives us a major jump in performance.
5.11 NEXT STEP
So far, we have dealt only with the variability in forecasted consumption.

However, there are businesses where the level of consumption itself is
expected to change, e.g., demand for some product may increase whereas
the demand for some other products may reduce. Many times, the demand
is seasonal.
It is almost impossible to forecast changes in demand. There is no point in

trying it. What is really needed is we should be able to quickly respond to
the changes in demand.
Let us see how this can be achieved. Let us begin with RDCs.
There is a current practice in RDCs to order periodically. This is because it

requires time and attention to place an order. Secondly, if they are buying
from the suppliers not owned by the company, the suppliers offer good
quantity discount and the RDCs want to avail of it.
However, the use of computers makes it easy to report daily sales to CDC.
Also, it is possible to negotiate with the suppliers to give quantity discount
based on the quantity supplied over a period of time say a month or a
quarter.
So, it is feasible to substantially reduce the Order Lead Time without

spending too much of time and/or money.
There is another thing that needs to be done.
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We have calculated the inventories needed at the RDCs based on the

formula discussed earlier. This is good and it will help us to keep the right
quantity there.
However, it may not be good enough to react to changes in demand.
For that purpose, we need to use the following mechanism.
We start with the inventory that we calculated using our formula. Let us
call it “Target Inventory” or “Buffer”. The term “Target Inventory” means
this is the maximum level of inventory that we intend to hold for a product.
The term “Buffer” indicates that this is the amount of inventory we hold to
make sure that we are able to supply the products within Customer’s
Tolerance Time.
Now, we divide this Target Inventory in three equal zones and we name
each zone as Red, Yellow and Green.
Let us take an example. Suppose that we have calculated the “Target

Inventory” or “Buffer” to be say 600 units of a product. This 600 units get
divided into three equal parts of 200 each.
Red: If the quantity goes down to “Red” level, i.e., below 200 units, it is an
indication that we have low inventory. The inventory at the consumption
point is at risk of a depletion – units in transport/manufacturing
(depending on which consumption point it is) should be considered for
expediting efforts and an urgent replenishment order must be put to the
supplying source if nothing is available on the way to the consumption
point.
Yellow: If the quantity is between the lower and upper limit of yellow
zone, i.e., between 200 to 400 units, it is an indication of having adequate
or good enough inventory. The inventory at the consumption point is
adequate but there is a need to order more units from the upstream supply
chain.
Green: If the quantity is between the lower and upper limit of green zone,
i.e., between 400 to 600 units, it is an indication of having high inventory.
The inventory at the consumption point is high – providing more than
enough protection for now.
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This is shown in the Figure 5.3 below:
Figure 5.3: Green, Yellow and Red Zones
Every day, you need to update the receipts and issues and arrive at the
stock level and map it to the zones in the buffer to know the Buffer status.
When the sales happen, the level of inventory goes down and when they
receive the products, the level of inventory goes up. This is explained in
the Figure 5.4 below:
Figure 5.4: Buffer Status: Yellow
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The above diagram shows that the Buffer status is Yellow when we map the
current level of inventory to the Target level. The value of 40% indicates
we have consumed 40% of the Buffer (100% is the Target Inventory).
Let us see the example of Red level in Figure 5.5 below:
Figure 5.5: Red Zone Example
The above diagram shows that the Buffer status is Red when we map the
current level of inventory to the Target level. In this case, we have
consumed 80% of the Target Inventory.
Check the colors for all the products every day and take actions as
described below:
• If the level of inventory has reached zero, expedite orders in an

emergency mode as sales are already lost and will continue to lose until
the products are made available. Take evasive actions, as needed.
• If the Buffer level for a product is in red, check the order position for
such products and expedite, if necessary. Typically, some orders should
be on the way already.
• If the Buffer level for a product is in yellow, you need not take any
action; the level of inventory is OK.
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• If the stock level is higher than the Buffer level for a product, it is an
indication of excess stock. Take quick actions to get rid of this excess
stock before it becomes obsolete.
You may not really have to check this manually. If you are able to set up a
suitable computer system, it may highlight the products in red zone where
some immediate action is needed.
From time to time, we need to take decisions regarding increasing or

decreasing the Buffer.
We use this mechanism to quickly respond to changes in market demand

for every product. It is called “Buffer Management”.
Why changes in Buffer level are needed? Generally, the business situation
is dynamic and very few things may remain static. For example, the
following may create a need to change the Buffer levels:
• Market demand going up or down.
• You may anticipate start or end of a season.
• There could be changes in Replenishment Time (Order Lead Time,

Production Lead Time and Transportation Lead Time). There may also be
changes in unreliability factor. If you are really following the TOC
principles, they are likely to go down.
• You may introduce some new products/models or decide to discontinue

some of the old products/models.
• You may acquire new customers and/or spread business in new

territories.
All these may call for changes in Buffer levels of existing products or
defining Buffer level for new products/models. It is important to set a
suitable signaling system for the same.
What does this signaling system mean? How should we use it?
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Signaling system is an extension of the mapping of the inventory levels

with the Buffer levels, as explained above.
You need to take the following actions from time to time:
• If the Buffer level for a product remains in red for two or three
consecutive Replenishment Periods, increase the buffer level for that
product by 30%. You need to place fresh orders for this purpose.
• If the Buffer level for a product remains in green for two or three
consecutive replenishment periods, reduce the buffer level for that
product by 30%. Cancel the existing orders or stop issuing new orders till
the new level is reached.
• When you increase or decrease the buffer level for a product, it may take
some time to reach the new level and to have some degree of stability.
Wait for two or three replenishment periods to settle it down. Do not
change the buffer levels during this period unless there is sudden
massive change in demand.
From time to time, you may need to increase or decrease the buffer level
in anticipation of start of a season or end of a season. Also, you may have
to take such action when you are launching sales promotions or advertising
campaigns.
Buffer Management is a future-oriented process. Buffer Management is the

tracking and assessment of the consumption and replenishment of stock.
Buffer Management is an execution control method that provides priorities

based on the actual consumption of the buffers.
Its purpose is to provide a simple, easy to understand view of the

availability of your products.
This is the most important and most useful phase. Here, you collect some
real-time data and chart it in such a way that it directs the management
attention and action to such areas and products that run the risk of losing
sales.
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The buffers help management to act proactively. Buffer Management

identifies potential problems much early. Buffer Management frequently
checks the consumption rate of each product. As long as there is some
predetermined proportion of buffer remaining, the predefined Buffer Level
is assumed to be OK. If the consumption rate becomes faster than the
replenishment rate, a warning signal is raised so as to minimize the risk of
losing sales. Similarly, if the consumption rate falls beyond a certain level,
suitable signal is raised, so as to minimize the risk of having surplus
quantity or obsolete products
Buffer management has actually two different objectives:
• Signaling when expediting efforts are required for an item at a specific

location. This is a kind of local decision that should be taken in the
execution phase.
• Signaling when the buffer is not adequate. This is a planning decision,

based on the feedback coming from buffers. Such a signal should make a
distinction between an arbitrary incident that caused expediting efforts,
and determining that the buffer is not adequate.
It is important to set a suitable signaling system. If the number of products

transacted is small, you may be able to manage with a spreadsheet;
however, for a large number of products, you may need suitable software.
Following are the assumptions that must be valid before you set up the
Buffer Management System:
• You have daily ordering system in place. In case, it is really not feasible
to place orders daily, orders are regularly placed at whatever frequency
feasible.
• You have done away with Minimum Order Quantity. Nobody holds back
an order so as to reach this number.
• You have stopped maintaining Min-Max level of stock for monitoring.
• The system of placing order on reaching Re-order level, if existed, has

been stopped.
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You are able to replenish stock within the replenishment time.
Make sure that these assumptions are valid before implementing the Buffer
Management System.
It may become complex to do the above-mentioned steps manually or

even by using spreadsheets. It is advisable to use some TOC based
Replenishment software.
This is the way in which you will ensure that you have right quantity in
place with respect to market demand. You will also notice that you have
created some ability to cater for some fluctuations in the market demand.
5.13 PROCEDURES FOR RETAIL STORES
The procedures for Retail Stores are almost the same as for the RDCs. As
with the CDCs and RDCs, even the Retail Stores need to report their sales
on daily basis. These sales reports are treated as orders. This way, we do
away with cumbersome process of ordering and do away with the issue of
finding time to do so.
With the reduction in inventories, a lot of storage space is available. This

freed storage space can be used to store additional products that were not
sold from the Retail Store earlier. So, the product portfolio can be
increased.
It is important to make it sure that the space so released is used for our
products only and not used for competitors’ products. This is very
important and we need to protect the space – storage as well as display
space – assigned for our products.
5.14 SETTING GOOD CRITERIA FOR VARIETY DECISIONS
Henry Ford once remarked; “You can have any color of car, as long as it is
black”. The quote highlighted what Ford had to offer, as a choice set, to its
customers in the early 20th century. The Model T was produced in only
black color.
Today, no marketer can dare make a statement like Henry Ford. They know
that the customers of 21st century are already spoilt for choice. As more
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and more categories and products are moving away from being just a
utility item to a differentiated, preferred brand, the marketers of competing
brands are trying to beat each other, while trying to overwhelm the
customer with choice.
However, from seller’s point of view, there are three types of products/
items – Fast Moving items, Slow Moving items and Regular running items.
To differentiate between these three items, a simple criterion exists: the

inventory turns – meaning how many items of a product are at a Retail
Store relative to the inventory level of this product.
However, it is not enough to know the quantity in which several items are
sold, it is important to know also their financial value. Just knowing from
the items which are Fast Moving items and which are the Slow Moving
items will not help much in driving any operational decision. There are
other criteria that must be considered. It is important to know the financial
value of such items.
The goal of setting such criteria is obviously relevant when the Retail Store
owner needs to choose which items he would like to keep and which ones
not to keep. This is only relevant when the variety of products is very large
and the ability of each Retail Store to keep a large amount of products is
limited. Just taking into account the inventory turns will not help. Some
items are sold at such a low Throughput that even if they are Fast Moving
items they are not giving much to the bottom-line, but certain items can
be sold only once every year (an obvious Slow Moving item), and the
margin is so high relevant to the investment that it is a great item to have.
For the manufacturer/distributor, a measurement like that can be used to
determine which products he would rather not have at all, signaling a new
product design is needed.
The best measurement for determining how much a certain product is

worth keeping at the Retail Store is simply Return on Investment (ROI) –
how fast this product is bringing value. Since the ROI measurement was
created in order to help in decisions concerning choosing between different
projects, it's a perfect fit here. The distributor and Retail Store owner are
always limited by the amount of cash and/or space, so they should be
focused on the items that would contribute the most to the bottom-line.
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In TOC financial terms, this is the way this return is measured: How much
Throughput does one gain from this product over a period of time. The best
time period to look at is a year, to take into account the effect of sudden
peaks in demand (usually stemming from seasonality).
To calculate the Investment, consider the following:
• The inventory kept at the Retail Store is the one covering the demand.
• The inventory kept on the way is also an investment in order to protect

from the fluctuations in demand.
• There is almost always something on the way because in the pull

distribution replenishment solution inventories are replenished on a daily
basis (and sometimes more frequently).
Taking these into account, the best number to represent the investment
needed to generate this product’s Throughput is the buffer size. By
multiplying the buffer size in the Truly Variable Cost (TVC) of this product,
the real Investment needed to generate the sales of this product is
realized.
Therefore, the formula is very simple – to calculate the ROI, all that is
needed is taking the yearly T from this product and divide it by the TVC per
unit from this product multiplied by the (average) buffer size throughout
the year.
The ROI measurement enables differentiating between 3 different groups

of products:
• Star items – These items represent a very quick ROI – meaning keeping
them is very good for business – and for the manufacturer/distributor
this is a kind of product he would like to keep at all the Retail Stores he
services.
• Black Hole items – These items take a very long period in order to
return the investment done in them. For the manufacturer/distributor, an
item in this group signals the possibility to stop producing/purchasing.
However, this is not conclusive, as some items (usually referred to as
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Strategic) are a must to have even though their margin is so low that it
puts them in this group.
• Regular ROI items – These items are not in either category.
It is obvious that there is a correlation between the Fast Moving items and
the Star items, but this is in no way a 1 : 1 correlation, as is clearly
demonstrated by the extreme cases discussed earlier.
The decision how to set the limit between the different groups is up to the
specific environment, but the general guidelines are taking the high 10%
as stars and the low 20% as black holes. One of the possibilities to treat
black hole items is to try and change the price tag of some of those
products – making them more lucrative if they can be sold at the higher
prices.
5.15 THE NEW MANTRAS
Let us clearly understand what all we need to do differently:
• Remember “If you want to service your customers better, keep the
inventory away from them”. This is counter-intuitive, but we have seen
above how it helps to dramatically improve the customer service and
availability.
• It is important to remember that you need to “Replenish what is sold”.

Do not dispatch what you have produced; but rather dispatch what has
been sold.
• “Order daily replenish frequently”. Put in place a system of daily ordering

(reporting sales data) throughout the Distribution system.
• It is important to “React to the signals from the Buffer Management

System”. The dominant color of the Buffer is Yellow. Most of the Buffers
for the products in the Distribution should be in yellow zone. When they
are in red or green zone, take actions mentioned above, as appropriate.
• “Make win-win offers to Suppliers” so that they have enough motivation

to ensure availability at the CDC. If you are buying some products, it is
important to persuade the suppliers to supply frequently.
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• “Make win-win offers to Distributors and Retail Stores” (where RDCs/

Retail Stores are not owned by you). Offer them quantity discount for
their purchases over a period of time, rather than for an order thereby
doing away with need of batching.
• “Thrive on aggregation” in the world of variation. As we have seen, the

variation in forecast at the CDC is much lower than that at the RDCs and
the variation in forecast is very high at the Retail Stores. So, base your
plans on the variation at the aggregation point, i.e., CDC.
• “Pull, don’t push”. Sales at the Retail Stores should pull the products
from the RDC and that should pull the products from the CDC. Let the
Factory produce what has been dispatched from the CDC. Do not produce
based on some other forecast and then keep pushing the products to the
market.
5.16 OPERATIONAL MEASUREMENTS
What measurements should we use to evaluate the Distribution system?
Let us assume that we have put the new Distribution system in place. We
have set the new rules.
Periodically, we will want to know how well we are doing. So, we will
calculate Throughput, Investment and Operating Expenses and judge the
performance.
Dr. Goldratt suggested that we need to do something more.
In judging the Distribution system, keeping in mind that we need to induce

fast improvement, should we concentrate on:
• What is done properly? or
• What is not done properly?
Concentrating on what is done properly will be good for the morale. But will
it trigger corrective actions?
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Concentrating on what was not done properly will trigger corrective actions
– fast improvement. And highlighting the improvement relative to previous
results will provide positive motivation.
The operational measures should focus on Reliability (things that should

have been done, but were not) and Effectiveness (things that should not
have been done but nevertheless were).
How can we measure Reliability and Effectiveness?
Reliability
Missing the commitments made to the clients is the end result of “things
that should have been done, but were not done”.
Therefore, the measurement must take into account the importance of

missed commitments in the eyes of the client.
Missing on something that had the sales value of $10,000, is not equal to
missing on something had the sales value of $100.
We should consider the money value of the missed commitments.
Similarly, missing by one day is not equal to missing by one month. Missing
an order by a day is not same as missing an order by ten days.
We should consider the time by which we missed our commitments.
Reliability is measured by Throughput-Dollar-Days. This has been discussed

in earlier chapters.
Effectiveness
Dr. Goldratt said that the end result of “Things that should not have been
done but nevertheless were” is excess inventory.
In measuring inventory, two things are important:
• The value of the excess inventory and
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• The time until the inventory is held.
Effectiveness is measured by Inventory-Dollar-Days. This has been

discussed in earlier chapters.
To complete the operational measurements, we need to add “Local

Operating Expense”. This has been discussed in earlier chapters.
Every link in the Distribution system should be measured on:
• Primary Measurement
❖ Throughput-Dollar-Days. The target is zero.
• Secondary Measurements
❖ Inventory Dollar-Days
❖ Local Operative Expense
The target for the secondary measurements is to reduce them without

jeopardizing the primary measurement.
5.17 ADVANTAGES OF TOC’s DISTRIBUTION SOLUTION
Apart from increase in sales, Throughput and reduction in level of

inventories, there are several advantages. Here is the list:
• Least dependency on forecast.
• Superior product availability (minimal shortages).
• Faster new product introduction.
• Ease of increasing product portfolio/variety.
• Improved feasibility to expand the sales channel.
• Improved ability to react to demand within a peak.
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• Feasible to turn slow movers into make to order.
• Reduction of near expiration product – lower inventories and replenished

faster means that products on the shelf are much fresher with the TOC
solution. This increases sales because some customers are reluctant to
purchase products that are close to their expiration date (milk, meat, and
medications are some examples) or which look like they have been
sitting around for a long time.
• Possibility of getting better and more shelf space.
• Reduction of the dependency on forecasts.
• Faster replenishments.
• More stable production schedule. There is lesser need for urgent

deliveries.
• There are lesser cross-shipments.
• Priorities are known and more stable.
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5.18 SUMMARY
The simplest way to explain the TOC Distribution and system is by looking
at what happens every day with a soft drink vending machine. Typically, it
is replenished every day or even twice a day. The person who replaces the
items has a clear visibility by design of the vending machine. He can easily
figure how many bottles of Coke, water etc. have been consumed. He
replenishes precisely what is consumed – nothing more, nothing less. The
vendor is holding his inventory at the next highest level, i.e., the vehicle –
the truck, which makes it easy to distribute his product to various vending
machines.
So, after completing his rounds for the day at each vending machine, the
truck driver returns to the RDC and replenishes his truck for the next day.
And the RDC is replenished by the CDC and so on. The overall inventory is
held to the minimum value, thus tying up much less cash.
This is precisely what TOC Distribution solution is about.
If we want to reverse the vicious cycle created by the conventional

thinking, we need to do few things which are exactly opposite of what we
are doing now, things that are counter-intuitive.
So, what is the solution? What are the things that we need to do to reverse
the vicious cycle?
What are the things that we must stop doing to help reversing the negative
loop?
We stop pushing our products through the Distribution chain. We treat

forecasts as a good starting point rather than believing it to be true right
up to the lowest level. Instead, we start responding to realities very
quickly. We very frequently replenish what is actually bought by the end
customer. On a daily basis, we collect the product sales data through our
Distribution channel and ask the Factory to replenish just that. We switch
over from “Push” to “Pull” system.
Whatever is purchased by the end consumer gets pulled through our chain
starting with Retail Stores right up to the Factory (and even beyond). This
is an important change – we move from producing fixed quantities at
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random intervals to producing variable quantities based on actual

consumption.
We do away with Min-Max stock levels and Minimum Order Quantities. We

make efforts to bring down our Replenishment time by reducing the Order
Lead Time, Production Lead Time and the Transportation Lead Time.
We bring down the Order Lead Time by placing orders every day for the
quantity sold, rather than aggregating them for a week or fortnight or even
a month.
We bring down our Production Lead Time by implementing TOC solution for
Manufacturing.
Though we do not have much control over the transportation time, we

replenish the stock more frequently and thereby we bring down the
Transportation Lead Time.
We set up a system in such a way that when a sale happens in a Retail

Store it triggers an order on the RDC, which in turn, triggers an order on
the CDC, which in turn, triggers an order on the Factory. When one is sold
to an end customer, it gets all the way back to the manufacturer that they
need to make one. With buffers in place, you can manage the flow from
one point in the supply chain to the next. The concept of pull – not push –
builds on these buffers and allows the Retail Stores at the end of the
supply chain to pull inventory from previous points in the supply chain, as
needed, by having in place a daily ordering and frequent replenishment
system.
“If you want to service your customers better, keep the stock away from
them!” is our new system and “Order Daily and Replenish Frequently” is
our new Mantra.
As an aggregated effect of these actions, the vicious cycle is reversed.
Summarizing the Four Questions
1. What to change?
• Replenishment time is too long
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2. What to change to?
• TOC Supply Chain Management
3. How to cause the change?
• Establish the Plant Warehouse or Central Distribution Center (CDC).
• At each place and for each product, establish the inventory target
according to the formula.
• Move to ‘Order daily – Replenish frequently’.
• Monitor the inventory targets according to the zones.
• Re-examine policies of make to stock – make to order.
• Educate subsystems to monitor execution using Dollar days

measurements.
4. What creates the POOGI?
• The buffer management statistics.
Expected Results
• Inventory in the system decreases by about 50%.
• Sales go up by about 20%-30%.
• Inventory Turns increase – more than double.
• Fewer cross-shipments amongst RDCs.
• Obsolescence drops substantially.
• Operating Expenses stay about the same.
Relationship with suppliers and clients improves significantly.
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1. Write a detail note on the current practice of running a Distribution

system.
2. What are the typical characteristics of a typical Distribution system?
3. Explain how the first three steps of the Five Focusing Steps are applied
to a Distribution system.
4. Write a note on Replenishment Time explaining the components and

how they can be improved substantially.
5. Explain briefly the TOC solution for Distribution and what actions are
necessary to make it work.
6. How Buffer Management is carried out in Distribution system?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
220
 

CRITICAL CHAIN PROJECT MANAGEMENT
Chapter 6
Objectives
• To understand how TOC can be used to improve project execution

performance.
Structure
6.1 Introduction
6.2 The Vicious Cycle
6.3 The Problem
6.4 Time Estimates in Projects
6.5 How Safety in Estimates Gets Wasted?
6.6 The Learning
6.7 Critical Path and Critical Chain
6.8 The Solution
6.9 Guidelines
6.11 CCPM in Multi-project Environment
6.12 Execution Management
6.13 CCPM and Five Focusing Steps
6.14 CCPM Culture
6.15 Summary
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6.1 INTRODUCTION
Do most projects deliver just what the client needs, when promised, and at
or under the original cost estimate? Worldwide experience says otherwise.
Projects usually have great excuses for not meeting one or more of the
necessary conditions for success of a project. Usually, it can be blamed on
someone or something, "Out of our hands." You may have heard about
some of the big ones: the Chunnel (late by 19 months, cost overrun by $3
billion), the Denver Airport baggage system (late by 15 months paying
$1.1 million per day as interest), the Super Conducting Super Collider
(project was terminated), several defense projects etc. Some do get
done...eventually. Later than promised, at higher cost, and usually missing
scope at 'completion.' The Chunnel finally opened, it just couldn't transport
passengers. So did the Denver airport, but it still ate passengers baggage.
Since projects show the same symptoms across many types and sizes,
over a long period of time, and even across many countries and cultures,
isn't it likely that there is a fundamental flaw in the way we manage
projects? The major innovations made in project management about fifty
years ago, computerized critical path scheduling and Earned Value, or Cost
Schedule Control Systems (CSCSs), do not seem to remove the symptoms.
Many of the biggest project failures have had great CSCSs.
Some Statistics
A well-known report shows that after more than 10 years of

improvement, the number of successful application development projects is
actually declining. Project failures are increasing:
• Only 28% of projects succeed, down from 34% in 2002
• Failures (projects cancelled before completion) are up to 18% from 15%
• The remaining projects are "challenged" (seriously late, over budget or

lacking expected features)
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6.2 THE VICIOUS CYCLE
We are giving estimates. We know that we are going to be judged how well
we are standing on our own estimates. We are padding them because we
want to be realistic and reliable. So, we add enough safety in our estimates
at the task level to make sure that considering our past experience, our
current estimates give us enough safety to complete the tasks within the
time.
We make it acceptable by keeping some recent data with us to justify.
However, due to reasons like Bad Multitasking, Students Syndrome,

Murphy’s Law, Parkinson’ Law (see below) etc., our projects are delayed.
We are blamed. We learn our lesson. We decide to be even more paranoid
for the next project. We give even larger estimates. The level of safety is
anything between 80% and 95% (more the experience, more the safety!).
After all, our reliability is at stake.
Owing to uncertainty, our detailed plans start becoming irrelevant. We start

managing our projects without referring to such plans. These things lead to
problems and some times, there is a chaos. At times, we don’t know what
is important and what is not. There is increasing pressure on us to show
progress. So, we start on as many paths as we could, doing easy things
first. We look good for quite some time until the real problems start
showing up. Suddenly, we find that the project which was going well is
likely to be delayed.
Meanwhile, we start on more projects and there are more problems. Then
we do more multitasking. So, it takes more time until we solve the
problems. By then, we have yet more problems. So, we become more and
more paranoid in our estimates.
Things become worse and worse until there is a limit put by the external
world which is “Sorry, if that’s really your estimate, then there is no
project”.
This is the vicious cycle, the negative loop.
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6.3 THE PROBLEM
The Golden Triangle and the Golden Hexagon

Every project has at least three promises – Scope, Budget and Schedule as
shown in the Figure 6.1 below. It is important to deliver projects with full
scope, within budget and within time. Project Managers struggle to manage
all the three. It is common to see that if Project Managers try to stick to
the schedule, they often go either over-budget or deliver less scope by
cutting corners.
Figure 6.1: Golden Triangle
Project Management experts feel that apart from keeping the Scope,
Budget and Schedule, it is necessary to manage three more things such as
Quality, Risk and Customer Satisfaction as represented by the Golden
Hexagon shown in Figure 6.2 below:
Figure 6.2: Golden Hexagon
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The Project Managers have to do a balancing act to manage all these

variables and they face several problems while doing so.
As Dr. Goldratt said, typically, projects face the following problems:
• Usually original due dates are not met,
• There are too many changes,
• Too often resources are not available when needed,
• Necessary things are not available on time,
• There are fights about priorities between projects,
• There are budget overruns,
• There is too much rework.
And here are different versions, extensions, reasons and ramifications

arising out of the above:
• It is very difficult to meet the original completion date, many times.
• There are budget overruns, at times.
• Compromises on scope are done many times.
• Cycle time keeps increasing, over time.
• Cycle time is too long.
• Many times, we struggle to manage the budget for projects.
• There is a high risk of delay in many projects.
• There are too many changes in many projects.
• Scope is identified late and can change after work has started, at times.
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• There is too much rework in many projects.
• Variability makes it difficult to manage rigid schedules in many projects.
• Updating plans works for only a few days before the project again
deviates from plans, many times.
• There are no means for evaluating impact of new work.
• Requirements develop concurrently with design, implementation and

verification in many projects.
• Plans have missing tasks, missing dependencies in many projects.
• We don't have the time to make schedules, at times.
• We don't have the time to status schedules, many times.
• We don't know when a project is "done", in many situations.
• Customers do not see us as reliable, at times.
• There are many customer complaints, over time.
• Customers push for increasingly shorter completion time.
• Too often resources are not available when needed.
• Many times, we have difficulty in balancing needs of a project versus the

nice-to-haves of a project.
• Necessary things are not available on time, many times.
• There are fights about priorities between projects, many times.
• Many times, people perceive they have more work to do than time
available in which to do it.
• Priorities frequently change even between departments.
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• It is difficult to manage current workload many times.
• There is constant fire-fighting in many projects.
• Resource hoarding occurs on some projects.
• Other parts of the organization do not provide what is needed in time, at

times.
• There are frequent interruptions in many projects.
• Needed decisions/issues resolution takes lot of time in many cases.
• We don't have enough people to do all the work.
• There is often a conflict between doing things well and getting to specific
date-based milestones and this causes trouble later.
• We don't know how to say, "No" to new projects; requests for task
switching; scope changes etc.
• People who work on projects also have significant non-project

responsibilities, in some cases.
People generally believe that each project is unique and has its own
challenges and these challenges stem from the uncertainties that do exist.
In view of this, they try some of the following (and even more):
• Improve their processes (ISO, Six Sigma ...) to control variations.
• Improve people (Training in technology, project management, domain,

behavioral, soft skills ...).
• Adapt new technology.
• Adapt new methodologies.
• Adapt better estimation techniques.
• Try to reduce uncertainties everywhere.
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With due respect to these efforts, what we see is:
• Huge spending.
• People are pampered and yet frustrated.
• Insignificant improvements.
• Problems do recur.
• Uncertainties remain.
• Pointing fingers is the norm.
The result is “not much of sustained improvement”.
It would be worthwhile asking a question to ourselves: Is there any better

way to manage projects? And the answer is an emphatic “YES”.
6.4 TIME ESTIMATES IN PROJECTS
Estimate is an estimate is just an estimate! – not a sacrosanct number, not

a commitment.
An estimate is not a single number. It’s a range of possibilities – a

statistical entity.
There is nothing like “Accurate Estimate”!
Accuracy is a statement of the variation in the result, and has nothing to

do with the chance occurrence of hitting a single-point prediction.
An estimate is subject to uncertainty and variability.
Let’s assume that there are about 8 tasks to be done in sequence in a

project and each task is likely to take about 8 days each. So, what is your
estimate?
8 Tasks multiplied by 8 Days? It’s 64 Days? Right?
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But what is meant by 8 tasks? We just said that there are “about” 8 tasks,
isn’t it? Here, you need to interpret the term “about”. As you know, in
project environment, it is extremely difficult to know the exact number of
tasks before starting a project. So, based on your experience, you may
interpret the term “about” as 8 tasks ±1 task.
Similarly, each task is likely to take “about” 8 days. So, here again, you
need to interpret the term “about”. Let’s assume that here also your
interpretation is 8 days ±1 day.
So, what is your estimate now? Is it 8 tasks ±1 task multiplied by 8 days

±1 day? So the range of your estimate would be 7 tasks multiplied by 7
days (i.e., 49 days) to 9 tasks multiplied by 9 days (i.e., 81 days), i.e.,
somewhere between 49 to 81 days. Right?
And what if your interpretation of the term “about” is ±2 or even ±3?
So, this proves that an estimate is not a sacrosanct number; it is a range

of possibilities.
But why do we need to take cognizance of that? It is because there is a

good degree of uncertainty and variability in project environment. Nobody
is surprised if a task which was estimated to take three days actually ends
up in taking ten days. Conversely, it is not uncommon to experience that a
task that was expected to take eight days is completed in four days.
Given this background, let us see what happens in most project

environments. People are asked to give estimates. There is a hard
negotiation before agreeing. Once agreed, it becomes their commitment.
The uncertainty and variability is forgotten. If people take longer than
estimated, they are looked down upon. If this happens frequently, they are
branded as unreliable and inefficient.
People want to give reliable estimates. They intuitively know that there
would be some problems, some interruptions, and some delays when they
actually do the task. So, while estimating, they look at their recent worst
experience and give such estimate that they are reasonably sure of
meeting.
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This also means that they keep a lot of safety in their estimates. They
become paranoid (if not hysterical) to make it sure that their estimates are
reliable.
The most common, natural, easy and spontaneous approach to dealing

with uncertainty regarding project completion is to add safety time into
each of the task duration estimates during the planning phase. The belief is
that, if we protect every task, the whole project is protected. In fact, so
much time is added to individual tasks that safety time comprises the lion’s
share of the planned project duration. Many times, it is much more than
the actual task time! Unfortunately, people are rarely aware of it. If they
are asked “How much safety have you incorporated in your task
estimates?” most will probably say “None”; if a person is very cooperative,
he may say “10%”. In reality, it is somewhere between 80% and 95%.
More the experienced the person is, the more the safety!
In the above example, will your estimate be closer to 49 or will it be closer

to 81 (or even beyond 81)?
Would you like to try an example? Please do this with your team.
Tell them: tomorrow morning at 9.00 am you need to attend a meeting in

an office 15 km away from your home.
Then ask: at what time will you start from your home? (Note the time they
mention).
What is the best time that you have ever taken to travel this distance?
(Note the time they mention).
Further tell them: suppose you are told that you will be meeting the top
boss and he will give you promotion letter! And if you are late, he will not
give you promotion!!
Now ask them: at what time will you start from home? (Note the time they
mention).
(Whenever I asked this question to an audience, at least one person said

this and the rest agreed “I will go there tonight and stay in the office or
somewhere nearby!!!).
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Now ask them to explain the difference among the time you have noted:
the normal time, the best time and the paranoid (or hysterical?) time.
People will realize that they put in lot of safety in their estimates.
Here are some quotes to make this lighter:
“I love deadlines. I like the whooshing sound they make as they fly by.”
— Douglas Adams
“Project Management: The art of declaring man hours with a straight face
when you know perfectly well they're 100% fiction.”
“Any project can be estimated accurately (once it's completed).”
“For a project manager, overruns are as certain as death and taxes.”
So, knowingly and unknowingly, they build lots of safety in their estimates
and it is for every task. Ironically, the more experience you have, the more
safety in your estimates!
What is the element of safety built-in in our estimates? The typical answers
will vary from 5% to 15%. Perhaps, this is explicit safety or contingency.
Here, we need to understand that an estimate is just an estimate. It is a

range of possibilities, it is a statistical entity. Though every project may be
different, two things are common in all the projects – uncertainty and
variation. The degree may vary from project to project, time to time, but
uncertainty and variation are always there. While estimating we do account
for this and most of the time it is implicit. If we use the productivity
numbers for estimation, they would reflect the uncertainty and variation in
the projects considered to arrive at productivity numbers. If we do not
have productivity numbers, we rely on our experience – typically our worst
experience drives the estimation which again has these factors built-in.
People want to be reliable and therefore they want to give estimates that
they see as achievable rather than bare minimum (though they may claim
it to be so – again with the intent to be reliable).
So, we take care of this variability and knowingly or unknowingly, we put in

lot of safety or buffer.
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Further, every level of reviewers adds its own safety. Even the “global cut”
by the customer is anticipated and built-in.
If this is the case, then our estimates are full of safety and if it is true then
no projects will ever have any overrun. Will they?
Is there something wrong in the logic that states that we have lot of built-
in safety or there is something fundamentally wrong in the way we use the
safety and that safety since hidden and unknown is wasted?
6.5 HOW SAFETY IN ESTIMATES GETS WASTED?
Let us discuss the reasons as to why the safety in projects gets wasted. We
list five main points below and discuss them:
1. Multitasking
2. Murphy’s Law
3. Student syndrome
4. Parkinson’s Law
5. Dependencies
1. Multitasking
What is multitasking?
In simple words, working on more than one task during a period of time —
typically it means leaving a task incomplete and starting on another and
may be yet another. It is about having multiple tasks open – and available
to work – making incremental progress on many without finishing any.
What is the common belief?

Multitasking is so deep into our DNA that we often don't even think about
how damaging it is to our productivity. Even worse, many people who claim
to be great at multitasking are simply not aware of how much of their
productivity suffers from switching between tasks.
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People generally believe that Multitasking is good. It helps them to show

progress on many tasks. After all, they are supposed to deliver multiple
tasks; there are different projects/people who want these tasks to be done
so that they can go forward in their work. That way, the organization will
be able to deliver more projects/orders.
What does it mean practically?

When someone is working on say four tasks A, B, C and D, he is spending
10% of his productive time on each task. That adds up to 40% of his time.
Where does the other 60% go?
That missing 60% goes to…
• Breaking concentration on the task you are working on.
• Picking up another task.
• Organizing materials related to that task.
• Remembering where you were last time you worked on that task.
• Establishing concentration on that task.
• Overcoming emotional inertia.
• Recreating the train of thought that got you to the current point on that
task.
• Work on that task for some time and then it's time to switch again!
The fact is, when we attempt to Multitask, we usually switch tasks poorly.
That is because we tend to just drop one task and start another. We do this
without carefully leaving the task – or de-engaging. To de-engage, we
must note information like the task status and devise and update the task
triggers for future re-engagement. Not doing this causes a host of
problems. When we de-engage improperly, the following deadly things
happen:
• We lose our place and it will now take longer to come back at the same
place when we return to the task.
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• When we frequently switch between tasks, we are just clouding our

minds with many fuzzy images of previous tasks while working on the
one at hand. Residual memory from the previous task or tasks can
impede cognitive thinking on the current task. This can result in poor
thinking, garbled task memory, slow performance, and outright mistakes
– sometimes catastrophic.
Another example:
Let us assume that there are four projects to work on and all of them are
expected to take four weeks each (too simple an assumption. The reality is
much more complex). Let us further assume that you have only one
resource who could work on these projects (another simple assumption).
So, the resource is working on four projects and he devotes one week for
each project. Here is how the projects would progress (see Figure 6.3
below).
Figure 6.3: Projects Progress
In this case, the first project with four week duration will get delivered in
13th week, the second in 14th week and so on.
Now, look at the Figure 6.4 below which shows if he devotes continuous
time for each project, how the delivery would happen:
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Figure 6.4 Projects Progress
At least the three projects would get delivered faster than the earlier way
of doing them. (Actually, in the earlier way, it could take much longer as
explained before).
Why multitasking is bad?
What are the possible consequences of Bad Multitasking?
• Each project would take longer.
• Lot of time could get wasted in switching between the tasks.
• Due to frequent interruptions, the quality of the output could be low.
It makes sense that if you try to do two things at once — read a book and
watch television, for example — that you're going to miss important details
of one or both.
Multitasking is an opportunity wasting behavior.
A quote from an unknown source:
"Unfortunately, even in the face of the mounting scientific and anecdotal

evidence (not to mention individual blood pressure and stress levels) that
multitasking doesn't work, companies cling to it like shipwrecked survivors
to flotsam. They believe that asking employees to multitask saves them
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money and time when chances are good that it will do neither. This
unintelligent intransigence is all the more troubling because most of us
intuitively recognize the problems multitasking can pose. We cringe at the
thought of someone operating a lathe while scanning the crawl on CNN or a
teenager talking on a cell phone while driving.
When one's attention is divided, something's got to give. Companies that

see multitasking as part of the solution to their staffing issues are actually
making their problems worse and are not, finally, doing more with less.
They are doing less with less.”
Therefore, multitasking is “an art of screwing everything up at once”.
Is there anything like Good Multitasking?
Yes, fortunately, there exists something like good Multitasking too!
Imagine a resource is focused on a task which is likely to take say more

than a week. Further imagine that there is another project which is stuck
on a problem which this resource has the ability to resolve. If this problem
is resolved, the stuck project can move ahead.
In such a situation, it would be alright to do an exception and allow the

resource to stop working on the task in his hand, go to the stuck project,
resolve the issue and come back.
As a result of this action, if the stuck project starts moving ahead, this
action is called as good Multitasking. If however, the stuck project, after
this resource has resolved the issue, gets stuck somewhere else, it would
be a bad Multitasking.
A Clarification
People often confuse between multitasking and managing multiple
responsibilities. These two things are not the same. One may have many
responsibilities and is required to spend time on multiple things during the
course of a day. However, it is important to ensure that they do not leave a
thing incomplete and switch to the next and leave that task incomplete and
again switch the task.
A game to imbibe the concept
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Number-Alpha Game
Purpose: To show the devastating impact of multitasking.
Instructions
Use a piece of paper and draw the following Table 6.1:
Table 6.1: Number Alpha Game

Sr. Number Alpha
1 1 A
2 2 B
3 4 D
4 7 G
5 11 K
6 16 P
7 22 V
8
9
10
11
12
13
14
15
Recognize the series in Number and Alpha. You will quickly find out that
both are incremented by 1, 2, 3 and so on and so forth.
Fill in rest of the table. When you reach alphabet "Z", you need to go back
to alphabet "A" and continue. Use different color pens for Number and for
Alpha.
Now, assume that you are the only resource on two projects, viz., Number
project and Alpha project. You need to work on both the projects
simultaneously, i.e., increment a number and then increment an alphabet
and then again the next number and the next alphabet and so on. Take two
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pens with different colors and decide which color you will use for Number
project and which color you will sue for Alpha project.
Write an arbitrary number in the first row under "Number" project; say, for
example, you may write the number "137". Also, write an arbitrary
alphabet, say "M" in the first row under "Alpha" project. This is your
starting point.
Now, you start working from this point onwards. At the end of it, note the
time that you took. Check the work you did and count the defects (don't
count the cascading impact) and note it. Write down how you felt while
working in this way.
Then work on one project at a time. Work on the "Number" project first,
finish it off and then work on "Alpha" project. Again, write some arbitrary
number, say "181" and some arbitrary alpha, say "Q" in the first row.
Remind yourself about the colors to be used for the respective projects.
Note the time as soon as you finish the "Number" project. Then continue
on the "Alpha" project. Note the time you took at the end of it. Note the
number of defects found. Write down how you felt while working in this
way.
Then, compare the time taken to complete each project. Compare the
number of defects found. Then compare what you felt while working on
these two experiments.
You will observe that there is often significant frustration and quality
problems with the first approach. The difference is much more than speed.
Then imagine what will happen if there is a third project say drawing
symbols like circle, triangle and square in a sequence.
Real projects are much more complex. What would happen to them, if they
multitask?
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2. Murphy’s Law
Do you believe that “if anything can go wrong, it will”? If you do, then you
are a staunch believer of "Murphy's Law”.
Here is how this law originated. Edward Murphy, an engineer, was part of a
team of an engineering project in an air force base. During one of the pilot
tests, his assistant committed an error due to which the test failed. In
sheer frustration, Murphy said, "If that guy has any way of making
mistake, he will”.
Another engineer George Nichols, who was present, recounted that

"Murphy's Law" came about through conversation among the other
members of the team in mockery of Murphy. This was condensed to "If it
can happen, it will happen”.
The phrase first received public attention during a press conference in

which John Paul Stapp, the captain of the project, was asked how it was
that nobody had been severely injured during these tests. Stapp replied
that it was because they took Murphy's Law into consideration. Their
interpretation of the law was, "It is impossible to consider all the
possibilities before doing a test”.
From its initial public announcement, Murphy's Law quickly spread to

various technical cultures connected to aerospace engineering. Soon
people's imagination took over and the law was used to capture the
common tendency to emphasize the negative things that occur in everyday
life – all variants of "If anything can go wrong, it will". For instance, if you
have been preparing for a project for a long time and are prepared for all
the eventualities except one, this one eventuality is bound to occur and
create a hurdle to the project's successful completion. This is Murphy's Law
in action.
In reality, Murphy's Law is really "Finagle's Law of Dynamic Negatives".

Finagle's Law was popularized by science fiction author Larry Niven in
several stories depicting a frontier culture of asteroid miners.
This witty and cynical law has now captured universal imagination in most
areas of life, including money.
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Here are some popular mutations of the law:
• If there is a possibility of several things going wrong, the one that will
cause the most damage will be the FIRST to go wrong.
• If anything just cannot go wrong, it will anyway.
• Left to themselves, things tend to go from bad to worse.
• If everything seems to be going well, you have obviously overlooked

something.
• Things get worse under pressure.
• The Murphy Philosophy: Smile ... tomorrow will be worse.
• Matter will be damaged in direct proportion to its value.
• It is impossible to make anything foolproof because fools are so

ingenious.
• The chance of the bread falling with the buttered side down is directly
proportional to the cost of the carpet.
• For the poor people, the bread fells always with the buttered side into the
floor.
• You will always find something in the last place you look.
• If you are looking for more than one thing, you'll find the most important
one last.
• No matter how long or how hard you shop for an item, after you've
bought it, it will be on sale somewhere cheaper.
• The other line always moves faster.
• Anything you try to fix will take longer and cost you more than you
thought.
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• Any time you put an item in a "safe place", it will never be seen again.
• Your best golf shots always occur when playing alone.
• The worst golf shots always occur when playing with someone you are
trying to impress.
• The light at the end of the tunnel is another train coming in.
• Whatever you want, you can't have, what you can have, you don't want.
• Whatever you want to do, is not possible, whatever is possible for you to
do, you don't want to do it.
• Traffic is inversely proportional to how late you are.
• The complexity and frustration factor is inversely proportional to how

much time you have left to finish, and how important it is.
• Anything that can go wrong has already gone wrong! You just haven't
been notified.
• Cheer up, the worst is yet to come...
• Whenever you cut your finger nails, you find a need for them an hour
later.
• The file you are looking for is always at the bottom of the largest pile.
• When things go from bad to worse, the cycle repeats.
• Nothing is as easy as it looks.
• Everything takes longer than you think.
• A surprise monetary windfall will be accompanied by an unexpected

expense of the same or greater amount.
• The one emergency for which you are fully prepared will never happen.
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• There is never enough time or money.
• It's too good to be true.
3. Student Syndrome
Student syndrome refers to the phenomenon that many people will start to
fully apply themselves to a task just at the last possible moment before the
expected completion time. This leads to wasting any buffers or safety time
built into individual task duration estimates.
The student syndrome is a form of procrastination. However, it usually

includes more of a plan and sincerely good intentions. For example, if a
group of students goes to a professor and asks for an extension to a date
given by them to finish some project, they will usually defend their request
by noting how much better their project will be, given more time to work
on it; they request this with all the right intentions.
In reality, most students will have other tasks or events that place a
demand on the time they fully intended to commit to improving their paper
or project. In the end, they will often end up close to the same situation
they started with: wishing they had more time as the new delayed date of
completion approaches!
This same behavior is seen in businesses; in project and task estimation, a

time or resource buffer is applied to the task to accommodate for overrun
or other scheduling problems. However, with student syndrome, the latest
possible start of tasks in which the buffer for any given task is wasted
beforehand, rather than kept in reserve.
This behavior pertains to the psychology of procrastinating, something

students are particularly prone to do. Like a student who studies pulls an
all-nighter trying to cram for an exam, project participants often start their
tasks late, using their safety time to work on other things. The flaw in their
thinking is that everything will go smoothly and they will have enough time
to get their work done.
It's a fantasy for students and project managers. A student who sits down
to study will inevitably be thrown off track by an impromptu party in his
room, a power outage, or some campus mischief. A project can be thrown
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off for any number of reasons thanks to that other law, Murphy's Law,
which states, "Anything that can go wrong, will." And when it does, the
original time estimate whether padded or not, will be far too short.
Student syndrome is something that happens to us naturally. First, we fight

for safety time. We estimate on the basis of our recent worst experience.
We even factor in the "global cut" that our boss or our customer may
cause. Based on the organization setup, each level of reviewers may add
their safety. Then negotiations happen.
When we get enough safety, we have enough time, so why hurry? The
irony is, we ask for time so that we can complete the task within that time
and once we are granted the time, we intuitively know that there is a huge
safety that is built-in, we start wasting it (or using it for something else).
When do we sit down to do it? At the last minute. That's human nature,
isn't it? Only once we start the work can, we find out if there is a problem
or not. If there is, we start to work frantically and burn a lot of midnight
oil!
But we have already wasted the safety, so now we are going to be late.
4. Parkinson’s Law
Do you ever spend all day in front of the computer without getting much of
anything done? Me too!
It is so easy to just work on stuff, spend our time and not be terribly
productive, especially if there's no deadline looming.
There is actually a "Law" called Parkinson's Law that explains this

phenomenon.
Parkinson's Law is the adage first articulated by Cyril Northcote Parkinson

as part of the first sentence of a humorous essay published in The
Economist in 1955:
"Work expands so as to fill the time available for its completion."
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It was originally intended as a humorous poke at bureaucratic

organizations, but nowadays productivity geeks everywhere have taken it
and learned some real lessons from it.
The "space" or time available is filled up with whatever is available rather

than what is valuable. We get busy (we fill up the available time or space
with some activities) instead of producing the highest desired results. We
spend to the limits, not the actual realistically set limits, but the limits of
our credit. We eat without limit, to the degree that it is available (and 2/3
of us are overweight and killing ourselves!).
Parkinson's Law states the amount of work increases to fill the available
time for completion. At times, we even exceed the time! If people finish a
task early, they have the tendency to "polish" it or improve it.
In projects, it means that early task completions are never reported.

Resources will continue to work on "improving" their task or will simply find
something else to do until the due date of that task.
Parkinson's Law – work expands to fill the time available for its completion
– means that if you give yourself a week to complete a two hour task, then
(psychologically speaking) the task will increase in complexity and become
more daunting so as to fill that week. It may not even fill the extra time
with more work, but just stress and tension about having to get it done.
Parkinson's Law works because people give tasks longer than they really
need, sometimes because they want some “leg room” or buffer, but usually
because they have an inflated idea of how long the task could take to
complete. People don't become fully aware of how quickly some tasks can
be completed until they test this principle.
Most employees who defy the unwritten rule of "work harder, not smarter"
know that, despite the greater return on investment for the company, it is
not always appreciated. That is related to the idea that the longer
something takes to complete, the better quality it must inherently be!
If you give yourself three months to write a report, it will take you 3
months, but if you give yourself three days to write the same report you
will write the report and probably exceed the quality of the three month
report (due to greater focus).
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When you give yourself only two hours to complete a "full-day's work" you
become super-efficient and you have incredible focus, moving smoothly
from one task to the next.
The thing is, Parkinson's Law doesn't just apply to productivity. It also
applies to other aspects of life. For instance, a school boy, no matter how
big a bag he had, it is always full. He starts with a small bag and fills it, so
next year, he gets a larger bag. He then fills that too! A few years in and
he realizes that half the stuff he is carrying, he doesn't need, so he empties
it out and starts with an emptier bag.... which he fills again!
Some generalizations/corollaries of Parkinson's Law:
• The more time you have for completing a task, the more time you will
waste.
• Data expands to fill the space available for storage.
• Storage requirements will increase to meet storage capacity.
• The demand upon a resource tends to expand to match the supply of the
resource and the reverse is not true.
• Take it easy, but look busy.
• Expenditures rise to meet income.
• The smaller the function, the greater the management.
• If we wait until the last minute, it only takes a minute to do.
• The stomach expands to accommodate the amount of junk food

available.
• The amount of junk carried is in direct proportion to the amount of space

available.
Our organizations are built in a way to facilitate Parkinson's Law. For

example, the rule is, we are supposed to work through nine to five. As a
result, no matter how much or little work actually needs to be done, it gets
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scattered throughout this allocated time. What we fail to realize is that

because we have so much time allotted to complete tasks that we often
work just for work's sake. This means filling the void with often useless
activities that are not highly focused and do not bring us closer to our
personal or financial goals.
Employees are given unimportant paperwork and other tasks just to keep
them busy till the end of the working day. They waste their precious time
shuffling papers, making coffee and doing other useless activities causing
zero productivity to the company. Companies' disregard to the Parkinson's
Law causes them to lose a lot of money and time.
How to Defy Parkinson's Law
Just because we call it a "Law", it is not a "Law" in terms of science. It is a

behavioral law and with some simple practices, you can defeat it. Here are
few tips:
• Run against the clock. Make your To-Do List, prioritize it and estimate the
time needed. Then give yourself just half of the time to finish those
tasks. If a task can swell to fill the time allocated, then equally, the effort
given can be limited by reducing the allocated time, down to the least
amount of time actually needed to complete the task. You have to win
against the clock; strive to beat it as if it were your opponent in some
sport or game, without taking shortcuts and producing low-quality
output. Decide what is most valuable and insert that into your To-Do-List.
This is using The Law of Displacement, illustrated by inserting something
into a bathtub full of water and it will displace the water. Keep putting in
more good stuff and the other stuff gets displaced. (The guy, who
realized this first, was said to have exclaimed “Eureka!”)
• Crush the pests that eat into your productivity. Look for those little time-
fillers, like email and feed reading, that you might usually think take ten
or twenty (or even, god forbid, thirty!) minutes. These are the "pests" of
the productivity – little pests that do nothing but make your life a painful
– pains that you can't seem to get rid of, no matter how much you run
around the house with a shoe or bug spray. Instead of doing the leisurely
20-30 minute morning email check, give yourself say five minutes. Don't
give these tasks any more attention until you've completed everything on
your To-Do List that day, at which point you can indulge in some email
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reading, social networking and feed reading to your heart's content.

These are tasks where 10% of what you do is important and 90% is
absolutely useless. This forces you to tend to the important tasks – feeds
you need to read in order to improve in your work and emails that are
actually high-priority. Experiment with how far you can take this. Make
your criteria for what makes an email important and stick to it.
You can experiment with Parkinson's Law and squashing your deadlines
down to the bare minimum in many areas of your life. Just be conscious of
the thin dividing line between 'bare minimum' and 'not enough time' –
what you're aiming for is a job well done in less time, not a disaster that's
going to make you repent.
We normally are the victims of "Parkinson's Law". We automatically and

unintelligently fill up the amount of time and space allowed.
HEED THIS LAW OR... Your life will be filled with mediocrity, with the
randomness of whatever comes into it. You'll being "at the effect of"
circumstances. And you'll always be too busy to do what really matters...
too busy to have a good life.
If you want to be happy and have a good life, it is essential that you heed
this law!
Dependencies
A delay in one step is passed, in full, to the next step. An advance made in
one step is usually wasted. This is true for sequential steps. In sequential
steps, deviations do not average out. Delays accumulate, while advances
do not. Therefore, safety disappears!
What about parallel steps? Look at the following Figure 6.5:
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Figure 6.5: Impact of Delays in Parallel Steps
Let us say that there are four tasks A, B, C and D that are required to be
completed before Task E can be started. Let us also say that the tasks A, B
and C are finished five days ahead of time and Task D is delayed by 15
days.
In this case, the early finishes do not matter since the task E cannot be
started unless the task D is also completed.
The task D is late and takes 15 days more. So, this delay of 15 days, and
not the advances made by the other tasks, is passed on in full to the next
task, i.e., task E.
In the case of parallel steps, the biggest delay is passed on to the next
step. All other early finishes do not count at all! This way, most of the
safety put in doesn't really help.
Further, early finish almost never gets reported due to the following
reasons:
• There is little positive incentive to finish ahead of time.
• If you finish a task earlier than planned, you might be accused of

sandbagging your estimates instead of being rewarded for completing
ahead of schedule.
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• Your future estimates are cut based upon such history.
• The next task may not be ready for an early start.
• You are not liked by your colleagues who are struggling to meet their due
dates.
So, for these reasons, the early finishes rarely get reported and the safety
put in to the estimates is wasted.
6.6 THE LEARNING
Safety
We try to protect the performance of each step. Most of this protection is
wasted. Despite so much of safety, the project as a whole is exposed.
Perhaps, putting safety at step level may not be a good idea.
Some propose that 'float' or 'slack' in the project network helps protect the
project from this reality. Unfortunately, not only does project network float
not depend on uncertainty of the activities in the network path, but it is
usually inversely proportional to the protection you need. That is, the
longest non-critical project paths, which usually need the most uncertainty
protection, have the least float.
The only thing that counts is the performance of the project as a whole. We
don’t have to win all the battles, as long as we win the war! Similarly, it
doesn’t matter how many steps are not completed on time…as long as the
project is delivered when promised.
Projects and Manufacturing

Dr. Goldratt initially applied TOC to identify the root cause of many
production problems: the way companies manage statistical fluctuations
and dependent events.
A project is like a production line, from a different (moving) frame of

reference. In a production facility, work moves through the workstations.
In a project, work moves through the activity network.
In a production facility, one of the mistaken policies was to use inventory in
front of each workstation to attempt to account for output fluctuations and
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dependencies. In projects, people add safety margins (time) into each

activity.
They assume if each activity has a high probability of getting done within
time; the project has a high probability of getting done within time. This
idea is similar to the thought that if each machine in a factory can keep up
its efficiency, the factory is efficient.
The TOC based Drum-Buffer-Rope solution demonstrated that this

assumption was wrong. Can you see some reasons that the activity safety
assumption might be wrong for projects?
Managing Safety
We either need a crystal ball which will take us ahead in time to see what
is going to happen so that we know where the safety will be needed or we
need to find a better way to manage the safety.
Goldratt came up with an approach, which helps us in using this very

variability to the advantage of the projects, rather than suffering from it.
Before we take a look at it, we need to get an idea about what is “Critical
Path” and then what is “Critical Chain”.
6.7 CRITICAL PATH AND CRITICAL CHAIN
Critical Path
Critical Path is the longest chain of dependent events, longest in time. The
critical path determines the time it will take to finish the project. Any delay
on the critical path will delay the completion of the project.
There are non-critical paths that meet the critical path at some point of
time during the project.
We have an option to go for an Early Start or for a Late Start for non-
critical paths.
Let us take a simple example to understand this concept.
We need to build a plant. We need to construct the building and then make
it functional – meaning install electrical lines, the water and furniture, etc.
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We also need to select and contract the various vendors to build our
machines, and allow enough time.
Once the building and machines are ready, we can install them.
And this way the plant will get ready. Let us draw a simple diagram (Figure
6.6 below).
Figure 6.6: Critical Path
Look at the above figure. Path A has “Build Building” which will take 90
weeks and “Make it Functional” will take 30 weeks.
Path B has “Contract Vendors” which will take 15 weeks and “Build
machines” will take 90 weeks.
When the building is functional and machines are built, we can install the
machines in the building which will take 30 weeks and our project will be
completed.
Path A will take 120 weeks (90 weeks plus 30 weeks) to complete and path
B will take 105 weeks (15 weeks plus 90 weeks) to complete.
Which path A or B is the critical path? Which is the longest path? Of course,
path A.
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The critical path in our example is, the path through steps to construct the
building, making it functional and installing the machines in it. A total of
150 weeks.
Critical Chain – An Improvement over Critical Path

Critical Path is the longest chain of dependent events, longest in time. The
critical path determines the time it will take to finish the project. Any delay
on the critical path will delay the completion of the project.
The Critical Chain is the longest chain of tasks that considers both task
dependencies and resource dependencies.
This is different from the definition of the Critical Path, which is defined as
the longest chain of tasks based upon task dependencies.
In many projects, resources work on tasks across many paths. So looking

at the task dependencies alone is not enough; we need to look at the
resource dependencies also.
Further, there are non-critical paths that meet the critical path at some
point of time during the project. In real-life projects, there are several
tasks that are not on critical path. We have an option to go for an Early
Start or for a Late Start for non-critical paths.
Early Start
If we start all the paths at their earliest start, the project leader will have
too much on his hands. He is bound to lose focus. Typically, Project
Managers are tempted to opt for early start. This helps him to show some
progress somewhere when the project status review is conducted by the
project sponsor. He may look good for a long time until delays on critical
path/chain start showing up. Here, “hope” seems to be the only strategy
and the project managers sincerely hope that the variations will average
out (but they don’t).
Further, if investments are required for certain paths, “early starts” could
force early investments with the risk of high interest burden and the risk of
obsolescence.
If we have many “early starts” and as it happens many times, there are
scope changes, and the risk of rework is very high.
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Late Start
If we start a path on its late start, then the path doesn’t have any time
slack which means that any delay on that path will also cause a delay in
the project. So if we start everything on its late start, everything becomes
important.
Either policy, Early Start or Late Start does not help.
TOC asserts that every system has a constraint. TOC demonstrates that
constraint time is much more important than non-constraint time. What is
the value of time lost at the constraint of the project? Could you have
many non-constraint activities done ahead of schedule and the critical
activity very late on a project? Does the use of Early Start scheduling make
this even more likely? If so, your Earned Value may look good early in the
project. What shape is the project really in? What is going to happen when,
somewhere near the end of the project, the paths merge? Then, reality will
tell you where the constraint was.
How do we protect our projects from the uncertainties and variations? How
do we resolve the dilemma of Early Start versus Late Start? How do we
make use of the huge safety that we build in our estimates?
TOC shows the way. Let’s see how.
6.8 THE SOLUTION
The solution lies in the answers to the following questions:
• Where does the constraint reside in our projects?
• How do we use the built-in safety/buffer better?
• What do we measure in the projects?
• What cultural changes are needed to implement the solution

successfully?
Let us answer the questions in detail.
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The Constraint
The critical path, no doubt, gives us some direction towards the constraint.
It separates the path where any delay on it would delay the entire project.
It takes care of task dependencies. However, that is not enough. Typically,
projects have resource dependencies too.
When a new path is drawn after considering the task dependencies (critical
path) and resource dependencies, it is called CRITICAL CHAIN. Critical
Chain is the constraint in the projects which limits the performance of the
project execution. After having identified the constraint, we need to exploit
the constraint and then subordinate everything else to the constraint. We
will see how this is achieved.
Project Buffer
How to use safety/buffer? If Critical Chain is the constraint, how do we
exploit it?
We need to make it sure that the project managers focus on it. The tasks
on Critical Chain should receive the highest level of priority. However, this
is not enough. In order to ensure that the variability of the tasks do not
delay the Critical Chain, we must protect it by adding time buffer between
the Critical Chain and the delivery date. This buffer, called Project Buffer, is
created by pooling the safety that got built-in at task level while
estimating. In this process, we need to trim the safety at task level where
it may get wasted and pool it together at project level so that it becomes
feasible to absorb the consolidated impact of the uncertainties and
variations. This way the early finishes will set off the late finishes since the
step level buffers are pooled together. When we aggregate the safety that
is spread across the task, the variations average out.
In other words, the critical chain approach suggests the shifting focus from
assuring the achievement of individual task estimates (sub-optimization) to
assuring only the project completion due date, that is the global goal of the
project. To protect the project due date, and to avoid wasting task safety
times, Critical Chain Project Management (CCPM) approach prescribes that
safety times should be eliminated from the individual task duration
estimates. We must aggregate them in the form of time buffers at strategic
locations in the schedule because an aggregation of task safeties in the
form of buffer provides a better protection. The Critical Chain Methodology
exploits the statistical law of aggregation by protecting the project from
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uncertainty of the individual tasks in a task path with time buffers at the
end of path in the project network. The protecting time buffers are not
slack time. They are an integral part of critical chain schedule with
shortened or aggressive task duration estimates.
In addition, estimates of durations are never perfect. Without inserting of

absorbing time buffers, the protection of project completion due date and
committing to it in the critical chain planning cannot be reliable.
This also removes the risk of Student’s Syndrome and Parkinson’s Law
since people get a challenge to meet the reduced time made available for
tasks. If Murphy’s Law strikes and wastes time, the Project Buffer will take
care of it. This finally leads to saving of time for the project as a whole.
CCPM shifts the safety times associated with the Critical Chain tasks to the
end of the Critical Chain in the form of a Project Buffer to protect the
project due date promised to the customer from variation in its Critical
Chain tasks. This improves the reliability of the overall due date as well.
The promised delivery date of the project is then the sum of the Critical
Chain duration plus the Project Buffer duration.
Feeding Buffer
After having set up the Project Buffer, we need to synchronize the rest of
the paths to Critical Chain. This is called “Subordinating everything else to
the constraint” in TOC terminology. As we know, that the non-critical
chains have the potential to delay the Critical Chain. The uncertainties and
variations coupled with Student’s Syndrome, Parkinson’s Law and Murphy’s
Law could eventually delay the Critical Chain and hence we need to protect
it from such delays.
Here again, we trim the safety that is embedded at the task level for each
of the non-critical path and pool it together at a place where the non-
critical path meets Critical Chain. This is called Feeding Buffer.
Feeding Buffers are another type of time buffers in CCPM that are inserted
whenever a non-critical chain task joins the Critical Chain. Their aim is to
protect the Critical Chain from unforeseen difficulties and disruptions on
the non-critical tasks feeding it, and to allow Critical Chain tasks to start
early in case things go well. When the project network consists of only one
path, no feeding buffers are needed.
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The following figure 6.7 shows the buffers:
Figure 6.7: Buffers
Resource Buffer
CCPM has introduced the concept of Resource Buffer. This is not a physical
buffer. It is an early warning or a wakeup call for the tasks that are on
Critical Chain so that the next resource is aware of the priority. Resource
Buffer is an early warning for them telling them to be ready for certain
critical tasks. This is necessary because CCPM is not governed by due dates
of individual tasks. The resources are expected to work as fast as possible
and complete the tasks irrespective of the due dates. People don’t wait for
the due date to arrive before they start or finish the task. In this process, it
is important to alert them for priority tasks.
The Resource Buffer works as an advance warning signal to the critical

resources that should work on a Critical Chain task which is expected to
arrive shortly. This wakeup call will cause the critical resource to complete
any non-critical task and be ready to start work on the Critical Chain task
as soon as its predecessors are completed. The Resource Buffer does not
use time on a schedule which protects the Critical Chain from lack of
availability of required resources and provides the possibility for Critical
Chain tasks to start early.
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But we need some guidelines to decide how to create a Critical Chain, how
to create and manage buffers. In the next point, we have some guidelines.
6.9 GUIDELINES
Guidelines for Creating a Critical Chain (CC)
Ideally, which tasks should be on Critical Chain (CC) and which should be
on non-critical chain? Many times, you may not have such a choice since
the plan is prepared based on task and resource dependencies. If however,
it is feasible, keep in mind the following guidelines:
• You may have some tasks, which are very important to the success of
the project and you want to give them priority treatment. Put them on
CC.
• The tasks that are less important may be put to a non-critical path.
• The tasks that need more scrutiny or there is inherent ambiguity should
be brought on the CC.
• The tasks that do not need any scrutiny may be put on a non-critical
path.
• Having a highly variable task at the end of a CC is risky. You need to

move the risky task to a non-critical path or try to move the risky activity
earlier in the process.
• The tasks that have resource dependency need to be adjusted for their
positions on critical and non-critical paths.
Guidelines for Creating Buffers and Setting Priorities
• Create the Project Buffer and Feeding Buffer by cutting 50% of the task
time and pooling the same at the end of the CC.
• Don’t trim with a razor blade a cut made with a hatchet. Many times, due
to the pressure from the customer, the estimates are already trimmed.
Trimming them further by 50% may not make sense. If using the full
50% buffer presents an unacceptable delivery time, you may have to
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trim back the buffers. We are looking at creating aggressive but possible
schedules that gives us challenges as well as a safety net.
• Protect the Resource Dependency by creating a Feeding Buffer before

such tasks.
• There is no hard and fast rule for buffering. The buffer can be smaller
when the process is highly predictable whereas the paths that have
highly variable tasks may need larger buffer. Buffering on some ‘well-
known or stable processes’ could be reduced. Buffering on some
“experimental processes” could be increased.
• The number of activities in a sequence does have some bearing on the

size of the buffer. If there are fewer tasks on a path, you may need
larger buffer, as there is very little scope for averaging out the variation.
• If a path has several tasks, you may keep a smaller buffer so that the
variation gets averaged out, i.e., some tasks may take lot more time,
which is offset by some tasks that happen faster.
• Intuition is as good an indicator of variability as some statistical

techniques. If you feel you need more, you probably do.
• It is obvious that topmost priority is given to the Critical Chain and we

start on it as early as possible. However, we have a choice as to when we
should start on non-critical paths. If we start early on all the non-critical
paths, the project manager has too much on his plate and s/he loses
focus. If we start everything “As Late as Possible”, everything becomes
important and the project is exposed. CCPM recommends that we should
go for Late Start after we have provided for Feeding Buffers.
• Once we spread the non-critical paths “As Late as Possible” (after

providing Feeding Buffers), the priorities become clear. The first priority
is for the tasks that are on CC. The next priority goes for the non-critical
paths that meet the CC early.
• There is another consideration for prioritizing the non-critical paths.

During the course of project execution, it is natural that people take
more time as the safety has been trimmed. This extra time used
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penetrates the Feeding Buffer. The extent of penetration in the Feeding

Buffer is another consideration for setting the priorities.
• The paths that meet the CC late in the project may be given lower
priority. Similarly, the paths where there is little or no buffer penetration
may be given lower priority.
• If at all multitasking is a must, the resources working on lower priority

paths are chosen, as feasible.
After all this discussion and worry about buffer size, remember the system
has so much variability in it that you will never know if you picked the right
buffer size.
Buffer Management is a future-facing process. Buffer Management is the

tracking and assessment of the consumption and replenishment of buffers
during project execution. Its purpose is to provide a simple, easy to
understand view of project health against original promises and provide
guidance on when – and when not to – develop and apply corrective
actions to the project effort.
Buffers are created at the beginning of the project. When people take more
time for task completion, they consume the buffer. When people finish their
tasks before time, the buffer is replenished. This activity goes on and on till
the end of the project. As the project progresses, the buffer consumption
and replenishment is measured.
In order to provide focus and be proactive during project progress, the

buffers are monitored to ensure that CC and project due date are
protected. This mechanism is called Buffer Management and is the key to
managing and tracking of project performance in CCPM. Every task in a CC
schedule is connected either to a project buffer or feeding buffer. As project
execution proceeds, if a task takes longer than estimated, it consumes the
buffer connected to its path.
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What Buffer Management Does?
The buffers help management to act proactively. Buffer Management

identifies potential problems much earlier than they would ordinarily be
detected using traditional project management techniques. Buffer
Management frequently compares the consumption rate of each buffer to
the progress rate of the task chain leading to it. This comparison may lead
to the following:
• As long as there is some predetermined proportion of buffer remaining,

the chain progress (project progress in case of project buffer) is assumed
to go well.
• If the executing chain consumes a buffer by a certain amount, a warning

signal is raised.
If the buffer consumption rate is high so that whole of the buffer are
expected to be consumed before completing of the tasks leading into it,
corrective action should be taken.
The use of Buffer Management is like the use of statistical process control
(SPC) in production environments, helping differentiate the impact of
common cause variation (related to anticipated, accepted risk in the
project world) from special cause variation (unanticipated or unplanned
risks). It is based on straightforward methods of assessing both the
consumption of buffers relative to project completion and the trending of
that consumption, and requires minimal data gathering to facilitate its
calculation. As a result, buffer reporting becomes a tool that is usable by
top management, project managers, resource managers and task
managers. It helps the managers to assess and appropriately act on risks
as they raise their head.
What Do We Measure During Project Execution?
On regular basis, the project manager ensures that the following for the
tasks in progress: collecting “how much more time is needed for task
completion?” This is the only data element that is required to be collected
preferably every day and it is highly critical to ensure that it is so collected.
All reports, predictions and task priority depend on this single data
element.
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Here, it is important to note that under CCPM, we do not collect data on

percentage completion. What we collect is the time required to complete
the task. These numbers give us a good insight into the buffer penetration
in the immediate future. It is felt that the percentage completion is not a
good indicator of the progress and it does not tell us how much more time
is needed.
This way, the measurements become simple. Most of the metrics calculated
out of a traditional system tell us that something is wrong, when it is too
late, whereas CCPM provides us in-process control; it gives us warning
signal beforehand, so that it is feasible to take corrective action and keep
the things from going late.
The buffers are divided into three equally sized regions (Green, Yellow, and
Red). If the buffer consumption is in the green zone, no action is required.
If the consumption enters the yellow zone, then the project manager
should assess the problem and think about possible courses of action. If
the buffer depletion reaches the red zone, then the project manager should
act.
The two essential measurements of project performance in buffer

management are the percentage of the critical chain completed and
the percentage of the project buffer consumed. The relationship
between the Critical Chain completed to the amount of project buffer
consumed is the signal to management for appropriate action.
Project review meetings focus on whether the completion of the critical

chain is at a pace for completion without consuming the project buffer. In
this environment, the role of the project leader shifts from a focus on all
tasks to those tasks that are on the Critical Chain. Also, focus remains as
necessary for any feeding chains that may be in danger of impacting the
ability to start a task on the Critical Chain.
To calculate the buffer consumption rate and project progress, frequently

reporting the Remaining Duration of each task is needed. Compared to the
traditional project monitoring, this is a shift from focusing on per cent of
work (task) complete to focusing on how much time is left to accomplish
unfinished (chain) tasks. This traditional manner of project control is
subject to different interpretations. There is a human tendency to say that
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a task is 90% completed very quickly, and then spend just as long or
longer finishing up the last 10%. Hence, CCPM tracks progress through the
team members’ estimates of remaining duration rather than work
performed.
A comparison of the remaining duration of a task with its original estimated

duration is an ineffective measure of progress of the tasks on the chain.
The buffer management reports the remaining duration of the project
buffer as measurement of the project performance.
The formula for calculating Chain Per Cent Complete for Critical Chain is:
% Chain Complete =(Original Critical Chain duration – Remaining

Duration of Longest Chain)/Original Critical Chain Duration.
The formula for calculating Percent Buffer Consumption is:

% Buffer Consumption=(Original Critical Chain Buffer duration –
RemainingBuffer duration of longest chain)/original Critical Chain
Buffer duration.
Buffer Management may be carried out by either using absolute Buffer

Penetration Method or by using Relative Buffer Penetration Method as
enumerated below:
Absolute Method
Buffer Management started with a simple tripartite "Red-Yellow-Green"
process as shown in the Figure 6.8 below.
Figure 6.8: Project Buffer
The buffer is divided into three equal parts for the life (duration) of the
project. If consumption of the buffer is less than 1/3 of its original size,
project health is considered OK (green).
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If the buffer consumption crossed the 1/3 line into the middle (yellow), it is
deemed that appropriate action is to watch and plan possible buffer
recovery actions.
If the buffer consumption enters the red zone, it is considered to be the

time to take those actions. The idea of delaying implementation of recovery
action is to avoid unnecessary "tinkering" with the system and distraction
of the project team.
The weakness of this method is, it ignores the fact that by very nature of
the system, there would be penetration and fewer and fewer buffers are
needed as the execution progresses.
Also, this method does not capture the severity of delays early in the
project.
Relative Method
It is important to catch with the possibility of major problems going too far
too quickly. A refinement of this approach – sort of a SPC-like approach –
added a watch on the trend of buffer consumption.
If the rate of project buffer consumption proved to be consistently faster

than the rate of completion of the Critical Chain, a "yellow-zone" watch and
plan state would be triggered. If that trend continued for a number of
reporting periods, the developed recovery plan would be implemented.
It is a fact that as the project approaches completion, less and less buffer
is required to protect against uncertainty. Therefore, the original straight
division of buffer into thirds is transformed to a sloping set of thresholds,
with larger and larger "green" portions of buffer as the more of the project
progresses. This is depicted by the chart below.
These charts are often called “Fever Charts” indicating that these charts
show the health of the project and suggest whether any action is needed.
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Chart 6.1: Fever Chart
Watch the project in the above Chart 6.1. Watch the movement from
yellow zone to red zone to the border of green zone and then again to the
yellow zone as it nears the completion.
These "fever charts" have also been adapted for quick views into the
relative health of multiple projects, as shown in the Chart 6.2 below:
Chart 6.2: Fever Chart for Multiple Projects
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In the above chart, all the projects are shown. Also, their movement from
green to yellow zone and from yellow zone to red zone and from red zone
to yellow zone is shown.
Recognizing the clear value of trend watching, snapshots can occasionally

come in handy when comparing the states of different entities; for
example, the relative health of projects is an effort to determine whether
one deserves special management attention.
This variation of the fever chart nicely summarizes current completion

progress and buffer state for a number of projects in varying conditions.
Those that have crossed thresholds in this reporting period are indicated by
two dots and an arrow. This provides clear, uncluttered focus that allows
the quick assessment of a range of projects.
This way project monitoring and control becomes easy. By measuring the
percentage of buffer consumption relative to the percentage of the Critical
Chain completed, the management is able to measure the status of the
project at any given time. There is a clear focus on managing the Project
Buffer which protects the Critical Chain. And there is an insight into non-
critical paths by way of penetration/replenishment of Feeding Buffers.
6.11 CCPM IN MULTI-PROJECT ENVIRONMENT
How do we manage multiple projects today? We don’t. Really! What we do

is, we manage single projects and fight over resources. We manage single
projects but create loads of work and hope the functional organizations can
cope with it.
What happens in multi-project environment? When too many projects are

executed simultaneously, many resources will find themselves under
pressure to work on more than one task – bad multitasking is unavoidable.
Prolific bad multitasking significantly prolongs each project’s lead time.
The prevailing myths are:
• The earlier we start each project, the earlier each project will be finished.
• The more the number of projects we start, the more the number of
projects we finish in a window of time.
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• My project is more important than yours.
It is not important how many battles are lost, as long as we win the war.
Similarly, it is not important how many tasks are delayed, but it is essential
that the project is delivered on time. Our old paradigm – Keeping all the
resources busy all the time – is really counter-productive and it causes
delays.
As Dr. Goldratt said, “Most compromises on content or budget stem from

the pressure to meet the promised due date”.
If CCPM helps an individual project to do well, it can play a great role in

Multi-project environment too. Let’s explore in brief.
If the organization's current paradigm can be described best as one that

includes heavy amounts of multitasking, and if the organization's decision-
maker really achieves the five components of the TOC Multi-project
Management Solution, then, typically, the organization will double the
speed with which it completes its projects, while simultaneously driving its
on-time performance well above 90%. But, this sort of improvement
requires that the organization's decision-maker takes full responsibility for
the success of the change process. This full responsibility is indicated by
the decision-maker's willingness, rather eagerness to understand the TOC
solution completely and to see that solution applied it to the organization's
operations without any compromise.
The TOC Multi-project Management Method consists of the following

components:
• Reducing Bad Multitasking

• Full-kit preparation
• Project planning
• Staggering the projects
• Execution management
Reducing Bad Multitasking
Bad multitasking becomes unavoidable, when too many projects are

executed simultaneously and thereby many resources are put under
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pressure to work on more than one task. Prolific bad multitasking

significantly prolongs each project’s lead time.
Flow is the number one consideration. Projects need to move, rather than
getting stuck somewhere or waiting for something. People are in a hurry to
start projects; but what is really important is not “how many projects you
start” but “how many projects you complete”.
The statement, “the earlier we start each project, the earlier each project
will be finished,” is not correct for multi-project environments (not only the
first elephant, but also the last elephant will go through a door much
faster, if they go in procession).
So, how to increase the flow? The way is by reducing the number of open
projects. This action can reduce bad multitasking without causing
starvation of work and therefore significantly reduces the lead time of all
projects – it increases the flow.
So, rather than starting every project when it comes, it is essential to

properly control the number of projects that are open at any given point in
time and thereby, maintain the workload at a predetermined level.
For this purpose, the following steps are essential:
• Freezing projects
• Accelerating the project completion
Freezing projects: The objective of “Freeze” is to improve the flow and

throughput of projects by reducing the number of open projects.
There can be two extreme cases; one when there are very few projects
and two when there is too many projects.
When there are too few projects, it causes starvation of work and it lowers
the rate of projects completion.
In the opposite extreme, when there are too many projects in execution,
“Bad Multitasking” lowers the rate of projects completion.
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Between these two extremes, there is (almost) a plateau.
Having prolific Bad Multitasking is a clear indication that a system is in the

second extreme case. Reducing the load by about 25% moves the system
away from one extreme without the danger of reaching the other extreme.
A person in charge of a cluster of projects can and should decide on their

relative priorities.
Many times, the habit of multitasking is deep-rooted in organizations. One

may feel it almost impossible to change this human tendency in the short
run. Freezing the projects reduces opportunities for Bad Multitasking
thereby helping people to focus.
For this purpose, the organization needs to prioritize the projects and start
freezing the projects from the bottom of the list until about 25% of the
workload is frozen.
Though it may vary significantly from business to business, the following

general guidelines may be considered for the purpose of prioritizing the
projects:
• Relative importance of the project to the organization/customer.
• The Throughput and other benefits to be derived on successful

completion of the project along with the impact on Investments and
Operating Expenses.
• The expected due date.
Projects that are at a very advance stage may be considered for higher
priority.
Accelerating the project completion: In most multi-project

environments, the eagerness to start all projects as fast as they are won
causes spreading resources too thin amongst projects. This practice causes
the lead time of all projects to increase and promotes Bad Multitasking.
Freezing 25% workload enables the Project Head to release some of the
resources. These resources are not kept idle; but they are used for
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accelerating the open projects. You need to determine the optimal number
of the various types of resources needed for each open project. Then use
these freed resources to prudently strengthen the open projects. For this
purpose, you need to go in the sequence of the project priorities that you
have decided, as discussed above.
Manning of projects, according to their optimal number of resources (rather

than trying to squeeze in more projects), leads to an overall increase in the
rate at which the company finishes projects. This decreases the projects’
lead-times also (in some environments by up to 25%).
Full-kit Preparations
When a project is won, typically, we are in a hurry to start. For this

purpose, we often overlook the fact that we are starting a project without
necessary preparations. The current pressure often causes projects to be in
execution without completing the needed preparations, e.g., detailed
specifications, authorizations, materials, licenses, drawings, tools and
equipments etc.
We believe that the project teams can catch-up later. Moreover, the
preparations that are necessary before the start of the project are not
defined many times. The resources dealing with preparations are caught in
a never-ending catch-up cycle.
Freezing of projects frees up, for a while, ample capacity of the resources
dealing with preparations. You need to use this reduced load on resources
that do the preparations to ensure that “full-kit” practice becomes the
norm.
The things that are missing are usually the things for which there are some
difficulties to complete. Therefore, if given the option, resources working
on preparations would prefer to focus on preparing for the new projects
about to be released rather than relentlessly chasing the preparations gaps
on open projects.
We need a full-kit manager in place and he instructs the relevant resources

to complete the preparation steps, first for the running – not frozen –
projects, then to complete the preparations for frozen projects. Only when
(most of) the above is done, the full-kit manager guides to work on the
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preparations for the new projects waiting to be released. They always

follow the projects priority.
Once it becomes a habit to always make full kit available, the people start
seeing the advantages and once they see the advantages, they voluntarily
follow the new procedure of making the full kit.
Project Planning
“All too often only the original plan and scheduling data are ever produced,
they continue to cover the office wall long after they are obsolete and bear
little resemblance to the current progress of the job.”
Planning is useless unless it significantly helps operations. CCPM under the

umbrella of TOC has been presented as an answer to this weakness.
Let us see how.
Realistic Plan should:
• Match the current rate of completion out of the virtual drum. (A plan
must predict outcome which is at least as high as currently achieved).
• Not cause overload on key resources. (Overload is defined as loading
resources with more demand than they have capacity to perform).
• Be based on project structures (PERTs) that are “good enough”.
• Be based on priorities given to the projects that reflect the true

management preference.
It is necessary that all projects plans are built by creating a proper network
of tasks (using templates, where appropriate). As per CCPM guidelines,
the time estimates are cut in half and are inserted towards the end of the
chains as project buffer and feeding buffers as discussed above. Then the
projects are staggered or pipelined as explained below.
It is critical to ensure that resources are aware that their estimates are
regarded as just estimates - they will no longer be judged according to
meeting their time estimates at task level.
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The resulting planning ability is used to determine reliable and acceptable

due date commitments for new projects.
As we have seen earlier, contrary to the common belief, safety embedded

at the task level prolongs the project without providing sufficient safety to
the project completion. Therefore, we are cutting it and adding it at the
appropriate places.
Flow is the number one consideration (it is not important to finish each
task on time, it is essential to finish each project on time).
Shifting the safeties from the tasks to the end of their respective task
sequences (paths) not only places the safety in the place where it should
be but also requires much less safety than the sum of safeties removed
from the tasks. This requires that resources will no longer be judged by
meeting their time estimates.
Critical Chain Methodology provides a proper guide for where and how
much safety should be inserted in project planning. To get excellent
control, it is necessary to keep the number of tasks in Project Plan Network
to less than 300 (for huge projects zooming might be needed). It is
advisable to create and use templates (when applicable). It significantly
reduces the planning time and reduces unneeded variations in the way the
projects are planned.
Too detailed Project Plan Networks, i.e., the plan having more than 300
tasks are counter-productive as far as the execution and control is
concerned. Vast experience shows that a plan that is too detailed (over 300
tasks) is useless as a tool for execution (that is the main reason for
neglecting the plan much before the projects are finished). In most multi-
project environments, Project Plan Networks do not exist or they are much
too detailed.
All projects about to be released must have appropriately detailed Project

Plan Networks.
The following guidelines can help to tame the tendency to over-inflate a

Plan:
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• A Plan is not a task manual. It should not explain how to do a task by

getting into too much of detail. It should not mention every step that is
needed to do the task.
• A Plan is not a reminder list. It is a network of interdependent tasks.
• A task that takes less than 2% of the project’s lead time must have a
very good reason to appear in the Plan. This rule will help to keep out the
detailed tasks.
• A task represents a group of work. It should not be broken down to

several tasks just because it requires different resources for different
durations of time. But it should be broken for chosen key resource type;
a task should be defined so that a type of resource is required for most
of the task time.
• In most multi-project environments, many projects are variations of the

same generic project. Use templates (Project Plan Networks of generic
projects) as the base for constructing the Plan for projects. This reduces
drastically the required time and efforts for preparing a project plan and
also eliminates overly detailed tasks that should not appear in the plan.
In most projects, the same type of resource is required to perform several

tasks. Not considering resource capacity – assuming the same resource
can perform multiple tasks in parallel – makes the plan unrealistic to start
with and encourages, by design, Bad Multitasking.
Many times, a task which is a prerequisite for another task is actually a

prerequisite for just a portion of that task. In such case, it is advisable to
split the task into two – one with dependency remains on the same chain
and the other may move on to a parallel (non-critical) chain. This way you
may be able to shorten, significantly, the lead time of the path.
Stagger the Projects
It is necessary to reduce the workload by freezing the projects. It is

necessary, but not sufficient.
In multi-project environments, most key resources work across projects.

So, there are many occasions when there is a resource contention. At
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times, project managers need to fight for certain resources that are
required for other projects at the same time.
Not considering resource contentions across projects makes the plan

unrealistic to start with and encourages, by design, Bad Multitasking.
Can we really deal with the resource contention within and across projects?
If we try to do that, it will be a futile and exhausting exercise. An effective
way to deal with resource contention across projects is to do good enough
smoothing of the load on each resource type. The temporary peak loads
that remain in the plan (and the many more peak loads caused by Murphy)
are absorbed by the buffers.
All the projects in each "project pipeline" must be staggered, so as to

prevent the overloading of all resources. The overwhelmingly important
condition that must be achieved and maintained is that everybody in the
system always has more than enough time to do all the work of all the
projects. This is what's required to convert a PUSH to a PULL system. This
is what's required to achieve and maintain real speed.
Projects have several non-critical paths. Most of them meet the Critical
Chain at some point or the other. Typically, it is the capacity to handle the
integration of various paths becomes the Constraint and you will find many
projects are waiting for the integration to complete. Sometimes, a resource
type is the Constraint.
Such resource is somewhat similar to the constraint resource in Drum-

Buffer-Rope (DBR) implementations for manufacturing. It is used to
minimize resource conflicts, mounting of tasks and prevent choking the
organization with too many projects. Just as material is scheduled into a
production line based on the system’s constraint (the drum that controls
the pace of production), we need to schedule the initiation of projects into
our operations based on the availability of such resource.
So, it is important to stagger the project considering the integration

capacity so that the load on integration resources smoothens.
Start in the order of project priorities. Take the project having topmost
priority and see when the integration resources are needed and assign the
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time slot. The Critical Chain is, thus, anchored and the rest of the legs, i.e.,
paths follow accordingly.
Then take the next project in the priority list and repeat the action. Then
continue with the rest.
During this exercise, you may find that the same time slot is required by
more than one project. You can continue assigning the time slot as long as
there is enough capacity. Once this capacity is nearly exhausted, you need
to assign a different time slot. This will typically change the date by which
the project can be completed. Inform the customer accordingly.
This is how projects are staggered and due dates are determined.
This also helps in making due date commitments for the new projects.
6.12 EXECUTION MANAGEMENT
Is there a problem between Planning and Execution? Planning is targeted

to ensure smooth, well synchronized execution, thus achieving the
objectives.
The role of execution is to carry out the planning – as long as the planning
is good enough, meaning it is doable and there is no change of priorities.
So, how rare is it to override the plan because it cannot be executed as it

is? What should we do when Murphy makes the initial planning irrelevant?
Is there any value to a plan that is not executed close enough to it?
Planning is a set of decisions that consider the system as a whole, look into
the future as far as practical, thus ensuring high level of performance.
Planning tries to draw optimum results from the system. The decisions are
taken ahead of time to allow the chain of all necessary actions to take
place.
The execution activities should conform to the planning as far as possible.

The execution of high level planning might contain planning at lower level.
This does not change the relationship between planning and its execution.
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The execution should trace the deviations from the planning and take
corrective actions. Sometimes the execution needs to override the planning
directives. Note, those involved in execution are focused on their local area
and on the short time frame.
Monitoring the actual usage of the buffers highlights any threat to the
planning. The execution should react to the generic priorities and warning
generated by the buffers.
The plan must be approximately right and not absolutely wrong. The
execution must take care of the normal variations in the process. Plan only
what is absolutely necessary – determining only those parts that any
deviation might impact the planning objectives, providing protective
mechanisms (buffers) to protect the planning. The execution is given some
flexibility to maneuver the less sensitive operations, provided the planned
instructions are executed as it is.
Measure the Buffers

If you want to achieve real performance, you must enable and motivate
your managers and resources to achieve real performance. By staggering
the projects’ you begin to enable your managers and resources. They also
need real-time information about the projects. The buffers provide the
status of the various projects. Measure and report buffers and now you
have enabled and empowered your team.
The organization's decision-maker must insist that all the buffers of all the
projects, particularly the project buffers, be updated at least weekly; if
possible daily. The organization's decision-maker must also make sure that
the enterprise-wide buffer report is distributed widely and regularly
throughout the organization.
Manage with the Buffers

The organization's decision-maker must hold all the managers in the
organization accountable for the status of all the project buffers.
Specifically, with weekly buffer report review meetings, the decision-maker
must make it unquestionably clear to all the managers, particularly to the
resource managers, that s/he wants them to do their best to prevent any
project buffer from becoming completely consumed.
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Using Buffer Report

The buffers generate real-time signals that reflect the current state of your
projects. Think of them as gauges on your management team's instrument
panel. More importantly, they are gauges on your instrument panel too.
Measurements drive behaviors. The wrong measurements drive the wrong

behaviors. Let us see if the buffers are the right measurements. Let us see
what behaviors are caused by measuring the buffers.
Pretend that you are one of the managers. Your boss holds you
accountable for preventing any project buffer from being consumed
completely. If you want your boss to conclude that you are doing a good
job of managing the system, then you strive to avoid excessive
consumption of any project buffer. In the event that one project appears to
be getting into trouble, you are very likely to shift resources from some
other project, putting those resources to work on the troubled project for a
brief period.
How do you know which project is getting into trouble? The enterprise-wide
buffer report tells you, way in advance of the crash, letting you and the
other managers take appropriate evasive action.
How do you know which project can afford to release resources, even for a
brief period? Again, the enterprise-wide buffer report tells you. The
enterprise-wide buffer report shows you and every other manager how to
allocate resources dynamically, in real time. It lets the entire management
team make the most effective use of available resources, constantly. In a
very real sense, your enterprise-wide buffer report becomes your team's
management information system.
Using Buffer Report for Managing Supply Chain

But the buffer report is not just for internal use. Your enterprise-wide
buffer report also gives you the means to implement true supply-chain
management. By sharing the appropriate sections of your buffer report
with your suppliers, you can provide powerful, real-time feedback to those
suppliers, helping them to be a part of your solution, rather than waiting
until they become your problem. This is true supply-chain management.
Your enterprise-wide buffer report also lets you manage the downstream
components of your supply chain, your clients. By sharing key parts of your
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buffer report with your clients, you provide them with a clear look ahead,
letting them anticipate early project completions. In other words, you can
manage your clients far more effectively.
In addition, as you build your clients' trust in your team's ability to deliver
on or ahead of schedule, your clients begin to lose trust in your
competitors. In the eyes of your clients, you become a most valued,
trusted supplier. Your competitors, of course, end up being measured
against the standard that you set.
So, are the buffers the right measurements for a multi-project

organization? Is buffer management effective? You decide!
6.13 CCPM AND FIVE FOCUSING STEPS
The TOC approach prescribes that the system constraint has to be

identified. The TOC is based on five focusing steps for global system
performance improvements and applied to project management as follows:
1. Identify the system’s constraint. TOC identifies the system’s

constraint as that part of the system that constraints the objective of
the system. For a single-project environment, this means identifying the
Critical Chain, or “the longest chain of precedence and resource
dependent tasks that determines the overall duration of a project” as
the constraint. In the multiple-project environment, the so-called drum/
integration resource that more than any other, limits the number of
projects that an organization can deliver, is identified as a constraint.
2. Decide how to exploit the system’s constraint. For a single-project,

this means focusing on the tasks in the Critical Chain to ensure that
work is performed efficiently and without delays. To achieve this, the
key contributors of delays in tasks completion time should be identified.
Applied to multiple-project situation, this means prioritizing all projects
and then staggering them according to the capacity of the scarcest
resource, i.e., drum/integration resource, ensuring that it is not
overloaded.
3. Subordinate everything else to above decision. Applied to a single

project, this means that non-critical tasks must not interfere with or
delay work on critical tasks. In multiple-project environment, this
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means that non-critical resources may wait to ensure high utilization of

the bottleneck resources across the projects.
4. Elevate the system’s constraint. For both single and multiple-project

cases this step suggests investment in additional resources, or
increasing the capacity of resources that most impact the Critical Chain
or total project organization throughput. In certain cases, elevating of
Critical Chain constraint may be carried out by assigning some of the
non-critical resources to the Critical Chain tasks.
5. If, as a result of the previous steps, the constraint has alleviated, return
to Step 1.
6.14 CCPM CULTURE
CCPM calls for a different culture and not adapting to the culture may lead
to failure of CCPM. The following are the salient points:
CCPM Culture for Top Management (including Delivery Heads,

Resource Heads and Function Heads):
• Encourage focusing and discourage Bad Multitasking.
• Commit due dates based on the staggering mechanism.
• Ensure and demonstrate support for the priority system created by Buffer
Management.
• Buffers are a project resource and should not be tampered with. Top
management is often tempted to trim the buffers. They need to
remember that, by such actions, they are jeopardizing the project
success.
• Measure the project progress only on the basis of Chain Completion and
Buffer Penetration.
• Examine the recovery actions for projects whose progress is not

satisfactory.
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• Offer help; ask, “is there anything I can do to help you complete the
task/project faster?”
• If resource help is needed and no free resources are available, consider

assigning suitable resources from a lower priority project only after they
complete the tasks they are currently engaged with.
• Examine the impact of the help given in the past reviews and determine
and give further assistance, if required.
• Every two weeks, review projects.
• Ensure that the project teams are engaged in managing buffers rather
than eliminating uncertainty/variation.
• Ensure that uncertainty/variation is handled by improvement teams
based on POOGI – Process of Ongoing Improvement.
• Drive and support POOGI for the root causes identified.
• All projects in execution are of equal importance and need to be

completed as fast as possible. Avoid sacrificing one project for the other.
Once you have decided to do a project, it is important to finish it as
desired.
• Demonstrate, support and promote CCPM culture.
• It is important to know when to intervene; it is equally important to

know when not to intervene. Make suitable judgment based on the
recovery plans for the projects in red zone.
CCPM Culture for Project Managers, Resource Managers and

Function Managers:
• Embrace uncertainty as a fact of life. Assume that unplanned and

unexpected events will happen. Recognize Murphy’s frequent visit to the
projects and prepare for it. The Project Buffer and Feeding Buffers are
the solid ways for protecting against Murphy.
• Make realistic estimates – Be paranoid; but not hysterical.
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• Projects need safety; not for every step but it is to be placed at strategic
place. Safety is a project resource.
• Ensure good assignment of resources to projects.
• Flow is the number one consideration (it is not important to finish each
task on time, it is essential to finish each project on time).
• Eliminate behaviors that waste Safety:
❖ Bad Multitasking.
❖ Unreported Task Completions.
❖ Incomplete preparations.
❖ Delayed task starts and procrastination (Student’s Syndrome and
Parkinson’s Law).
❖ Unclear Completion criteria.
• Be committed to the Buffers – Do whatever possible to complete each

task in such a way that the respective buffer at the completion of the
task is in a better position than it was when the task started.
• If the task is late compared to the schedule, this is no reason for

immediate concern, as the buffer on the chain on which the task is
situated will absorb the delay.
• Project control focuses on buffer consumption: as long as this is in good

enough proportion with Chain completion, then the project is likely to
complete by its committed due date. Track the consumption and
replenishment of buffers.
• Review daily the list of tasks penetrating the most into the project buffer
and check if recovery actions are taken or required to ensure that the
project is effectively progressing.
• Act on the tasks escalated by the Task Managers.
• Act on the tasks that are ready but not started.
• Drive a “project buffer recovery" process for cross-departmental actions

and exceptions not handled by task management when a project is red,
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i.e., the rate of consuming the project buffers is higher than the rate of
completing the Critical Chain.
• Identify which tasks are essential to check with the corresponding task
manager if proper actions have been taken and if help is needed (and
therefore also knowing which tasks do not require intervention).
• Ensure and demonstrate support for the priority system created by Buffer
Management.
• Offer help; do not ask why there was a delay and who is responsible for
it.
• Seek help when you need it.
• When you remove the safety from a task, you must accept the fact that
this task has a good probability, say 50%, of exceeding the estimate.
This is not bad; it is normal.
• You can’t have an environment where tasks’ actual time are analyzed
against estimates, and reported and treated as problems.
• Be committed to the Buffers –
❖ Intentionally Consuming Buffers is bad.

❖ Eliminating Buffers is worse.
• Ensure that the resources are protected from Multitasking. One may
assign multiple tasks to people for the sake of operational convenience.
However, it is important that clear priorities are set and managers explicitly
discourage the Multitasking behavior that people might demonstrate.
CCPM Culture for Task Managers
• Flow is the number one consideration. Ensure that the tasks are not
stuck.
• Avoid Bad Multitasking – Once you start a task, work it through to its
end, without stopping and as fast as possible.
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• Ensure good assignment of resources to tasks, i.e., assign maximum

effective number of resources per task.
• Only follow priorities as represented by the buffer colors. Follow priorities

– always start working on task with the highest priority.
• Tasks are assigned and executed according to their priorities.
• There are no milestones. Either you don’t start a step, because it is

impossible to start (and then do seek help to make it possible), or, if a
path is clear to work on, you work on it as fast as you can.
• Based on the tasks’ priority of currently executed tasks, aiming at
minimizing/eliminating delays, decide on the level and type of
intervention.
• Talk to your Resources every day and offer help for faster completion of
tasks whenever needed.
• Talk to your Project Manager/Functional Manager/Resource Manager

regularly and seek help when needed. Identify and raise issues early.
• Make preparations in advance for incoming tasks.
CCPM Culture for Resources
Resources need to follow what is called “Relay Runner Ethic”.
What is Relay Runner Ethic?
Look at the Figure 6.9 below:
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Figure 6.9: Relay Runner Ethic
The goal of a relay race is to win the race. Each runner runs his leg as fast
as possible and hands the baton off to the next runner.
The next runner is ready to run as soon as the preceding runner is

finished.
The competitive excitement of the race encourages the runners to do their

best and beat their best times. Because runners capitalize on an early
finish of the preceding runner, a fast leg can offset a slow leg to the benefit
of the team.
See this is reflected in the culture that the resources need to follow:
• When one task is getting close to completion, the next task’s resource is
on the track and ready to go as soon as possible.
• The task scheduled start and finish dates are de-emphasized.
• Once a task is started, the resources work as fast as possible towards

completion without clocking themselves to the scheduled finish date, or
the original planned duration.
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• Resources capitalize on the early finishes by their predecessors or try to

compensate the late finishes by their predecessors by doing their task
and as fast as possible.
• Task work should be performed continuously, on a single task at a time.
• Report delay reasons (“what are you waiting for?”) regularly and ask for
help whenever a delay is not solved so that the task completion
positively impacts the attached buffer.
• Report remaining duration daily, and task completion immediately.
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6.15 SUMMARY
Peter Drucker said that a great deal of new technology is not new
knowledge. Innovation is new perception. It is putting together things that
no one had thought of putting together before, things that by themselves
have been around a long time.
The question that we should therefore answer is not whether the ideas
underlying CCPM are really new, but rather whether CCPM puts things
together in an innovative way that could be beneficial to the practitioner.
We do have knowledge of Critical Path, and we do start early on some

paths and late on other paths. We do know about Resource Dependency
and we try to manage it. We often make aggressive schedules. Making
provision for contingency is not new to us. We try and make our team
members aware of the priorities and expect them to work as fast as
possible. We know our problems, we intuitively know the solutions also,
though we may not have ever bothered to verbalize them and associate
them with some principles or theories. We do most of these things in
isolation or in some combination (and wonder at times, when they do not
work consistently well).
However, we have not seen these things packaged together by following a

sound theory. Dr. Goldratt applied TOC to the field of Project Management
and came up with the Critical Chain Approach to Project Management
which bundles our experiences and best practices together, keeps away the
myths and gives us a way to have better control over projects and
associated people.
Putting Critical Chain Scheduling and Buffer Management in place is not

quite as easy as flipping a switch or turning on a new piece of software. It
requires real change in how projects, resources, and priorities are
managed. It requires commitment and demonstrated support from the
senior management.
If, we need to get projects moving faster,
If, we need to keep projects flowing smoothly,
If, we need to know what to worry about,
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If, we need to know what NOT to worry about!
If, we need ‘good enough’ project status,
If, we need to be predictable,
we need Critical Chain Project Management.
Keep the following rules in mind:
Rules for Planning
• Make realistic plans (be paranoid, not hysterical).
• Limit the task detailing. Let a task represent a group of work. Even a
very large project may have less than 300 tasks with zooming in, as
appropriate.
• Create, use and modify templates and keep them updated, wherever
applicable.
• Create buffers and treat them as project resource (rather than

management resource).
• Reduce cycle time (cut the buffers into half).
• Actions are taken to ensure that due dates for new projects are
committed only according to the Staggering mechanism (or top
management’s decision to postpone a specific existing project).
Execution Rules
• Assign maximum effective resources to tasks.
• Ensure flow.
• Eliminate Bad Multitasking.
• Follow priorities.
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• Manage Buffers.
• Respect Staggering dates.
Features of CCPM
• New way for Project Management.
• Helps to define where to focus.
• Takes care of both Task as well as Resource Dependencies.
• Embraces uncertainty as a part of life.
• Use variation for project advantage.
• Simple and meaningful measurements.
• Project Prediction made easy.
CCPM provides
• Rules of Thumb for Project Planning
• Resolution for priority issues
• Challenging environment for the team
• Information as decisions
• New ethics and code of conduct for the PMs, RMs and TMs
• Provides visibility to individuals as to how they influence project’s success
Pitfalls addressed
• Student’s Syndrome
• Bad Multitasking
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• Parkinson’s Law
• Murphy’s Law
• Loss of Safety due to dependencies
• Panic due to frequent changes
• Team Morale Issues
CCPM does not
• Ask for ideal scenarios, perfect data.
• Create information overload or information vacuum or out-of-date

reports.
• Create analysis paralysis or a huge bureaucracy overhead.
• Need a Rocket Science.
Benefits of CCPM
• Improved project management success.
• Reduced time to market.
• Simplified project management.
• In-process controls.
• Creates environment for teamwork and high productivity.
• Increased team satisfaction.
• Competitive edge.
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1. Mark the following statements as True or False:
i. The earlier we start each project, the earlier each project will be
finished.
ii. Reducing the number of open projects can reduce bad multitasking.
iii. The bigger the uncertainty, the bigger the safety embedded in the
task’s time estimates.
iv. More the number of tasks in the Project Plan Network, more the
control.
v. Critical Chain is a chain of critical tasks.
vi. Planning is useless unless it significantly helps operations.
vii.Putting safety for every step protects the project from delays.
viii.Estimate is a commitment to deliver.
ix. A plan that is too detailed (over 300 tasks) is useless as a tool for
execution.
x. A plan is equivalent to Task Manual.
xi. A plan is an excellent tool as “reminder list” for the Project Manager.
xii.A task that takes less than 2% of the project’s lead time must never
appear in Project Plan Network.
xiii.It is not important to finish each task on time, it is essential to finish

each project on time.
xiv.Task priorities are decided by Project Managers.
xv.Project Managers are supposed to intervene only when a project is in

red zone.
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xvi.Root cause analysis is necessary for every delayed task.
xvii.Project Managers should try to eliminate uncertainties.
2. What is Critical Path?
3. What is Critical Chain?
4. What is Project Completion Buffer?
5. What is Feeding Buffer?
6. What is Student Syndrome?
7. What is Bad Multitasking?
8. What is Murphy’s Law?
9. What is Parkinson’s Law?
10.What is Staggering?
11.What is Relay Runner Ethic?
12.What is Buffer Management? How project progress is measured?
13.Describe the issues faced by Projects Managers.
14.Explain the Golden Triangle and Golden Hexagon of Project

Management.
15.Why people embed safety in projects? Why do they embed safety at

task level? What are the ramifications?
16.What guidelines are to be kept in mind while
a. Determining Critical Chain

b. Determining the Buffers and
c. Setting task priorities.
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17. Explain the concept of Fever Charts and how they are used.
18.Compare the traditional culture with the culture necessary for

implementing Critical Chain.
19.What are the peculiarities of implementing CCPM in multi-project

environment?
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
292
 

USING TOC TO IMPROVE MARKETING
Chapter 7
Objectives
• To understand how to apply the principles of TOC to Marketing.
Structure
7.1 Distinction between Marketing and Sales
7.2 Marketing
7.3 Decisive Competitive Edge and Unrefusable Offer (URO)
7.4 Reliable Rapid Response
7.5 Inventory Turns DCE (For Consumer Goods)
7.6 Inventory Turns DCE [For Vendor Managed Inventory (VMI)]
7.7 Very High Due Date Performance (DDP)
7.8 Pay Per Click Offer
7.9 For Whom Can You Develop Offers?
7.10 Market Segmentation
7.11 Summary
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7.1 DISTINCTION BETWEEN MARKETING AND SALES
“Marketing is spreading the corns for the ducks to come and sit. Sales is
taking a gun and shooting a sitting duck. If the duck is not sitting and
moving like a mosquito, don’t blame the sales person; blame the fact that
you don’t have marketing.”
– Dr. Eliyahu M. Goldratt
In other words, marketing is bringing the market to desire your product or

service. When you are at the stage of marketing, you don’t see individual
prospects; you see at least a section of the market.
Sales is using the prospect and to close the deal. If you think shooting a
sitting duck is easy, try doing it. But remember if you miss the shot and
the bullet goes near its ear, the duck will fly away.
Good marketing is having a lot of sitting ducks with glue on their feet.
To continue with Dr. Eli Goldratt’s interesting analogy:
“If selling were the same as shooting sitting ducks while they ate corn by
the side of a lake, then advertising would be the same as spreading corn
for the ducks to see and come ashore to eat. Marketing would be figuring
out that ducks ate corn in the first place.”
Marketing is about generating demand, i.e., constructing a value

proposition to large enough markets and creating mass awareness.
Sales function is about converting the demand to money, i.e., directly

dealing with specific prospects.
7.2 MARKETING
What is the problem?
What is the core problem that prevents companies from doing a good job
of marketing?
The problem is still the notion of local optima to reach the global optima.
And this is what creates the real conflict for marketing.
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Due to this local approach of looking at the thing and trying to optimize
each part, we have increased drastically one of the perceptions of value
that exists in the field. When you have a product or service, there are two
different perceptions of value of the same product or service.
One is the perception of the value of the supplier which is based on the
efforts that have gone into providing this product or service. The more
efforts, the more money and the more time that you took to provide this
product or service, the more you think it is valuable.
This is something what is called “Supplier’s perception of value” which is

according to the investment that is made to bring the product or service to
the market.
However, there is another perception of value for the same exact product
or service. This is called “market’s perception of value” and it has got
nothing to do with your costs or your efforts to bring the product to the
market. It is solely according to how much benefit the product or service
will bring to the clients. It has everything to do to satisfy the client’s needs,
but nothing to do with your efforts. Suppose you have put in huge efforts,
but this product is not satisfying the needs of the clients or is satisfying the
needs to a small extent; the market’s perception of value will be small.
So, the customer’s perception of value is according to the benefits

expected from acquiring the product or service.
Performing the task of Marketing is a formidable challenge because:
• On one hand, to generate demand, one must act upon the client’s
perception of value which is determined according to the benefits
expected from the product/service. Also, different clients have different
perception of value.
• But on the other hand, one also must act upon the supplier perception of
value which is according to the investment in the product/service. The
perception is that the total sales should generate profit.
When the tension between the two different perceptions of value exists,
the unavoidable marketing conflict emerges.
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These two perceptions of value generate a conflict and this conflict is at the
root of jeopardizing our efforts in marketing. Let’s have a look at the
conflict in the Figure 7.1 below:
Figure 7.1: Conflict – Pricing Decisions
In order to arrive at good pricing decisions for the company, we must get
good sales volume. In order to get good sales volume, we must act upon
market’s perception of value.
However, in order to arrive at good pricing decisions for the company, we

must get reasonable product margin. In order to get reasonable product
margin, we must act upon the supplier’s perception of value.
Unfortunately, the market’s perception of value is not about the same as

the supplier’s perception of value and therefore the conflict arises.
As long as this conflict exists, the marketing has both hands tied. We have
to find a way to resolve this conflict and this is actually the Marketing’s job.
There are two erroneous assumptions:
The first assumption is the connotation of local optima coming from the
word “product margin” which is calculated based on product cost. In order
to “Arrive at good decisions”, we must “get reasonable product margin”
because having positive product margin for each product/service
guarantees that the company is profitable.
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This is an incorrect assumption. The companies that are losing money do

have a positive product margin, yet they keep losing money. It means
there is something wrong with this assumption.
And what we have learned in earlier chapters is that product cost is

baloney! Dr. Goldratt said,
“Supposing our company is producing just one unit of a product, so it

needs to recover all the money spent including the overheads, when it is
sold. But suppose if we produce two units, instead of one, what happens to
the product cost? The whole calculation of product margin has to change.
So, this product cost keeps changing depending upon the number of units
we sell. Now how many units we will be able to sell in a given window of
time cannot be predicted accurately. So we need to make some
assumptions about the sales and we find that most of the time they are
wrong. How can we base our pricing on wrong assumptions?”
There is another devastating assumption: In order to “Arrive at good

decisions” we must “get reasonable product margin” because any sale
which has negative product margin reduces company’s profitability.
Let us take an example to validate this assumption.
Turning Around a Threatened Business
Company ABC Corporation has $140 million sales, the majority coming
from its major product line P where they sell 10 million units every year at
$10. Gross Earning for product P is 30%, material and purchases account
for 40% of sales. Installed line capacity for product line P is loaded to 75%
of maximum capacity. It is an automatic assembly line requiring no direct
labor – just operators to maintain the equipments.
Overall, ABC Corp is making a loss of 3.6 million per annum. The General
Manager has asked his first line to come up with ideas to turn around the
business or they will have to close the plant.
The Sales Director turns up with a business opportunity to sell 2 million per
annum more of product P (which is well within the available capacity). The
downside is that the price would be 40% below the going price – in other
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words, $6 per unit. As it is a segmented market, there is no fear that the

price in the main market will be affected.
Summary:
Annual Sales $140 million

Material Cost 40%
Overheads 30%
Gross Earnings 30%
Capacity Utilization 75%
Loss incurred 3.6 million
Product Price $10 per unit
New Order Details:
• Order quantity 2 million
• Price demanded $6 per unit
What should ABC Inc. do?
Conventional Approach
Decline the additional business!
Current rules forbid accepting a business at negative margin:
(30% Gross Earnings – 40% price decrease = –10% Gross Earnings).
Common business sense clearly says that we have to decline that business,
as it will drive us deeper into the losses. After all, we are expected to sell
at a price which is below our product cost and it will cause negative
margin.
Consequently, ABC Corp will go bankrupt, all jobs will be terminated and
the plant will be closed.
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TOC Approach
If we take the business we will have additional sales of $12 million (2

million units * $6).
Material cost continues to be at $4 per unit. So, this additional business

consumes $8 million, but gives us an additional throughput of $4 million.
What about the rest of the operational cost? We have enough capacity. If
we keep it running, the only additional cost will be energy and
consumables such as oil, compressed air and some similar type of cost.
Usually, this does not account for much and so we assume that 0.1 million
is sufficient to cover all our additional operating expenses.
Now, here is what we get:
12.0 million Sales

-08.0 million Material and purchases
-00.1 million Additional operating expenses
---------------------------------------------------------
+ 3.9 million Additional profit (bottom-line!)
There is no question! We have to take the business and ABC Inc. will be
out of the red immediately.
So, the assumption “any sale which has negative product margin reduces
company’s profitability” is invalid.
However, in order to make money, we must cover our expenses and

investments. So, let us change the conflict diagram for suitable wording as
shown in Figure 7.2 below.
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Figure 7.2: Conflict – Pricing Decision
The conflict still remains. We are stuck between the rock and the hard
place, i.e., between the supplier’s perception of value and market’s
We need to find a way to break this conflict.
Why do we say that acting upon the client’s perception of value is in

conflict with acting upon the supplier’s perception of value?
We claim it only in one case where the market is not willing to pay us
enough. If the client’s perception of value is much higher than the
supplier’s perception of value, we don’t have any conflict.
However, if the market’s perception of value is lower than the supplier’s

perception of value and we cannot raise it sufficiently, then the conflict
arises. We will keep oscillating between the market’s perception of value
and supplier’s perception of value.
So, the assumption is that we cannot sufficiently raise the client’s

Can we not challenge this assumption?
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What is the Job of Marketing?
It is now clear. The job of marketing is to raise the client’s perception of

value at least to the level which is higher than the supplier’s perception of
value.
The core problem is to find out how to raise the client’s perception of value.
Most people may say that if we want to do it, we will have to come out with
innovations for new products. May be, however, it is not necessary. What
most of us don’t realize is all that there is a way to do it for existing
products.
The market’s perception of value can be increased by solving the problems

created by your and the competitors’ policies and thereby meeting the
clients’ significant need and (by way of carrying out internal
improvements) creating a Decisive Competitive Edge which benefits your
clients and you as well.
Once you create a sustainable Decisive Competitive Edge, you can create
suitable offers for different market segments. Let us understand them in
detail.
7.3 DECISIVE COMPETITIVE EDGE AND UNREFUSABLE

OFFER (URO)
What if you don’t have a Decisive Competitive Edge (DCE)?
When you don’t have a DCE, – one that is good enough to persuade
prospects to take their business away from existing suppliers and give it to
you - the price inevitably appears to be the key, and your “value
proposition” becomes irrelevant and meaningless.
You know your products, service, quality and price are highly competitive,
but your customers want all the performance advantages and to pay less,
year after year.
How are you supposed to respond? Offer improved performance? If you do,
they’ll simply make that performance as a “standard” and still demand the
price reductions!
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So, do you cut your selling price? Beware! Your competitors can match you
in no time. You can trigger a price war and everyone loses.
So do you resort to cost-cutting? Look at the past and tell how successful
have your efforts been, unless you took the path of lay-offs? And how long
is it before cost-cutting of this kind reaches bone, and actually translates
into lost profits?
The problem can also take another, disturbing shape: even though you only
own a small part of the marketplace, if you don’t have a DCE then a
downturn in the market becomes a downturn for you.
You perhaps own 5% of the total market (but probably less) … so a dip in
overall demand still leaves the total market demand as being many, many
times the volume your plant could ever produce. So why should your
demand go down?
Because without a DCE, you can’t take some business away from your
competitor. Not without cutting your price – which is usually the world’s
worst tactic.
Winning Offer
What should you do? You should create a DCE and create a winning offer
for the market.
The Marketing needs to come out with a winning offer – the offer has a win
for both – for the company as well as for the client.
What such a winning offer needs to do?
• The offer must satisfy a significant need of enough clients.
• The offer must be difficult for competitors to imitate.
• The offer should bear minimal risk for the company and not require
excessive investment.
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What is different about the reality of a company that has a winning offer?
Let us understand that having a winning offer (having a DCE and breaking
the conflict) means a new reality for the company:
• We do not need to chase every opportunity.
• We choose clients, they don’t choose us.
• We set the pace of growth.
• We don’t need to care about every competitor’s action.
• We afford to be less sensitive to price.
• We don’t need to change our offer for each client request.
Decisive Competitive Edge (DCE)
We need to create a DCE for this purpose.
The term "decisive competitive edge" describes itself well; but it will help if
we define it clearly. A clear definition is mandated if one is to know when
you have arrived at your objective. Many times, we are incorrectly labeling
many nice "competitive advantages" as if they are "decisive competitive
advantages." This may lead to disastrous effects from a false base
assumption.
Let us evolve the definition.
Competitive
If you are "competitive” means you have little, if anything, to distinguish
yourself from your competition and often have to resort to "bribery" to win
the business (i.e., discount, additional service that is a true cost,
something very special for a specific customer, lunches, tickets to sporting
events, etc.).
Competitive Advantage
A "competitive advantage" affords you the ability to gain market share
when the advantage is presented to the target client. However, this too can
be offset by a significant price reduction by your competitors. But the price
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reduction is very damaging to the competitors’ real profit and viability in

that market space. You can grow your company very quickly with a
"competitive advantage." And will almost assuredly find the need to quickly
improve your support systems (business system processes, speed of
management decision- making, not to be confused with computer systems)
to sustain this growth.
Decisive Competitive Edge

In order to achieve an important improvement in the financial performance
of a company, it is necessary to have a Decisive Competitive Edge – DCE,
which satisfies a significant need of the clients until achieved a point in
which almost any competitor can’t satisfy.
We need to build a DCE and the capabilities to capitalize on it, on big

enough markets without exhausting the company's resources and without
taking real risks.
A significant need of the clients is one that, when satisfied, the client
improves (in order of magnitude) his level of performance.
When a DCE is reached and has been prepared and sold as an appropriate
offer, the expected result is a significant increase in sales.
It can generate an extremely dangerous cycle, if the increase of the sales

exceeds the operative capacity of the system, deteriorating the DCE and,
therefore, the reputation of the company. Because of this, the increase in
sales will be done until the point where there is no deterioration of the
operative response. This deserves a system of synchronization between
Operations, Marketing, Sales, Distribution, Finance etc. In order to have a
sustainable growth, it is necessary to identify the actions so as to know
when it is the correct time to elevate the capacity of operations. Therefore,
all the strategic planning must include three important aspects:
• Build a DCE.
• Capitalize over the DCE, designing and selling an Unrefusable Offer

(Marketing and Sales).
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• Sustain in time, the DCE and capitalize continuously over it, identifying
the few projects that increase the operative response of the company
(synchronization between Operation, Marketing, Sales and Finance).
We need to build a "Decisive Competitive Edge”:
• In a big enough market,
• Without exhausting your resources,
• Without taking real risks,
• By improving the market’s perception of value and getting the market to

desire your product/service,
• By implementing TOC solutions for Operations, Distribution and Projects,

so that the competition cannot quickly match (to an extent that no
significant competitor can or competition can’t or won’t do),
• By combination of your products, services, and how you deliver them,
• By offering something of equal or greater value than the price you are
charging,
• By changing policies, not products,
• By finding ways to segment the market,
• By creating flexibility – same resources different products/services –

versus segmenting the resources,
• By not taking an entire market segment,
• By not entering into segments where the probability of many of them

dropping at the same time, is very high.
A DCE cannot be offset by the competition with a price reduction. The Post
Office could not give away free postage to compete with "absolutely,
positively overnight anywhere in the world" offer by FedEx. The market
receives a tremendous value that is not provided by anyone else. A true
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decisive competitive edge should allow you to significantly increase your

price in the marketplace in many conditions.
If you struggle to increase your price and sustain business, your offer
should be examined to see if you are solving your market's problem at the
level of "decisive." Maybe you have a competitive advantage, but not a
DCE. You may be the most reliable vendor in the world, but if that
reliability only converts into minimal pain relief for the market, then you
still only have a "competitive advantage" and can be subject to losing
business on price competition.
Unrefusable Offer (URO)
Such winning offer is called “Unrefusable Offer” meaning the offer is so

good that the clients cannot refuse it. The important aspect of it is that is it
not based on lowering the price.
We not only have to identify what are the problems of our market but we
will also have to identify what is the core problem of the market vis-à-vis
our industry.
If we can solve the core problem of the market – the problem that leads to
other problems – we will bring in excellent value.
Most companies offer solutions that solve their customers’ various

problems or symptoms. With an UNREFUSABLE Offer (URO), we are
addressing our customers’ core problem as it relates to doing business with
our industry.
An URO is an offer so good that your customers can’t refuse it and your
competition can’t or won’t offer the same.
An URO is an offer you make to your market – your prospects and

customers – to make them desire your products or services and something
that your competition cannot quickly match. And, of course, the offer you
make is a combination of your products, services, and how you deliver
them. Moreover, for your offer – the solution you’re selling – to be
UNREFUSABLE, you are most likely offering something of equal or greater
value than the price you are charging.
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An URO typically requires that you do something different (make internal

operational improvements to establish a DCE) to address your prospect’s
core problem. These operational improvements allow you to actually
deliver something unrefusable to your customers and something that your
competition can’t or won’t do because they are not willing to or don’t know
how to make the same improvements.
This means, you have to establish an operational advantage and this is

crucial for the success of the offer. TOC paves the way for such operational
advantage through its applications for Operations, Distribution and Projects
as discussed in earlier chapters.
An URO is a sustainable market offer built on this advantage. URO can only
be created by satisfying a significant need of the market to the extent that
no other significant competitor can.
You will have to collect all such problems – the Undesirable Effects (UDEs)
– and connect them to your products (and your competitors’ products) to
see how they get generated.
This is very uncomfortable situation since we have to find out how we

create problems for our clients.
Such an URO helps us to answer the question “Why should we buy from
you?” and the answer is different than what our competitors would give.
The typical answers are:
• We have world-class quality.
• Our reputation in the market is superb.
• We get great results for our customers.
• We are very responsive.
• We are high on innovation.
• Our employees are highly knowledgeable and we have low employee

turnover.
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• We are trustworthy.
This is what most people will say, maybe with some variation depending on
your industry.
However, it typically does not vary much between you and your
competitors. And that’s really the point. After you create such an offer,
your answer will be different than that of your competitors and you will be
providing compelling reasons for your customers to buy your products.
After all, the list above does not explain your offer in the sense that these
are not the qualities of the offer. Your competitors say the exact same
thing. All good companies have these qualities or they wouldn’t be in
business for long. An Unrefusable Offer is not a list of strengths,
subjective, or offered by the competition.
An URO is not based on price reduction; it is not based on an innovation

too. It is developed for a regular company for its existing products in
existing markets. The company has no particular competitive advantage or
innovation – no patent, no unique technology, the same equipment as
competitors, and similar employees.
When Should We Create an URO?
More often than not, this question comes up.
Should we improve operations or create an URO first? Either way works.

But it may be better to start by developing the URO. Once you have the
offer, you know to what degree you need to improve operations. It gives
you a real good target for the improvements needed in near future and
helps to bring together various functions in the company since it is going to
impact them all.
More importantly, it gives you a very good reason to change. You are more
motivated to make the operational improvements. The operational
improvements occur faster.
It is generally observed that when you have already implemented TOC in

operations, you are tempted to give away some or all of the improvements
you have made. This is particularly true in cases where you had very bad
due date performance. You improve operations and then you give away the
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shorter lead times because you feel guilty about your past performance.
Therefore, it may be worthwhile to create your URO first, and then make
the operational improvements necessary to deliver your offer.
However, before you make your offer to your clients and prospects, there
are some things you must do. Getting your operations in shape is
paramount. The fastest way to kill an URO is to not be able to deliver it.
So, make sure you can deliver your offer by doing a couple of dry runs.
Pretend that several of your orders are for your offer and see how you do.
Alternatively, if you are going to guarantee a shipping date, determine how
much you would be paying in penalties if every order were guaranteed.
Making sure your operation is ready for the offer is straightforward.

However, you should also predict what could go wrong from both your
perspective and your customers’ perspective. This will help you to
determine if you’ve missed anything and to create some of the details of
your offer. The objective is to predict negative branches and to trim them.
When in doubt, do not add ambiguous words; instead favor your
customers’ position.
Protecting yourself and looking out for your interests is what caused the
negatives for your customer in the first place, so don’t back track. But at
the same time, don’t put your entire business at risk.
The DCE can be different for different companies based on their significant
needs. The following is a list of some significant market needs:
• Reliable Rapid Response.
• Inventory Turns.
• Vendor Managed Inventory (VMI).
• Very high Due Date Performance (DDP).
• Pay Per Click.
• Let us have a look at them in detail.
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7.4 RELIABLE RAPID RESPONSE
There are industries where reliability of supplier is a significant need. A

Decisive Competitive Edge (DCE) can be gained by letting the market know
that you are extremely reliable in your promises to the extent that you are
willing to pay hefty penalties if at all there is a delay.
As a second phase, further DCE can be gained by offering surprisingly

lower quoted lead time at premium.
It is possible to make such an offer by carrying out internal improvements,

i.e., by applying Drum-Buffer-Rope solution discussed in earlier chapters.
The purpose of Reliability offer is to ensure that enough clients grant
business for ensured reliable supply.
The Reliability offer is not used merely to get specific orders, but mainly to
get “Business” – being the preferred supplier, getting volumes of good
Throughput orders etc.
The following are the direct and indirect consequences of frequent late
deliveries for the clients:
• Frequent late deliveries from suppliers cause late deliveries to their

clients.
• At times, the clients need to pay penalties to their clients.
• Many times, clients need to reschedule their production.
• Clients may have to spend money on expediting.
• The clients may end up in losing their clients and may lose sales
opportunities.
• The clients may have to hold excess inventories to protect their interests.
• It may reduce their flexibility (responsiveness to changes).
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• If the product is such that it needs to be installed or used within certain

time else the quality of product deteriorates. In such case, it may cause
reduced quality in client’s products.
Reliability is a significant need of the clients when some of the following

statements are true:
• Forecast is the basis for the clients to place orders.
• The consequences of the products being unavailable are really significant

for the client.
• Clients have real difficulty in finding alternative solution when the

product is out of stock. Typically, the product is not a commodity and not
readily available in the market. In addition, there is no alternative
product that can be easily adjusted or modified.
• The product is highly customized and not typically sold again or the
customer purchases a high number of products.
• The purchase price is negligible relative to the selling price, e.g., about 5
per cent.
• The standard lead time in the industry is relatively long say about six
weeks or so.
• The standard Due Date Performance in the industry is relatively poor say
less than 80%. The meaning of good Due Date performance (DDP) is:
• Supplying in the original due date promised,
• Supplying in full (full quantity and all the different products included in
the order),
• Supplying with the expected quality.
And this performance is less than 80% which is not really good. So, what
does it tell us? It only tells us that the Reliability is the significant need of
the clients.
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The key parameters to be considered when devising the Reliability offer

are:
• Regular prices.
• Standard lead times.
• Commitment to pay significant penalties.
• Same quality.
It is important to understand clearly that we are trying to be the same as

other suppliers (assuming there is no additional differentiator in the
product itself) but stand out as the only true reliable supplier. We are not
offering any other improvement. In other words, the Reliability service we
offer is not compensating lead times, quality, prices. We commit to deliver
exactly the same product, in exactly same lead time, with exactly same
price and quality. The only differentiator is that we will keep the date
committed by us and whenever we fail to do so, we are willing to pay hefty
penalties. (The penalties are not meant for compensating the client’s loss
due to late delivery; it is to demonstrate our seriousness and commitment
with our promise).
What is the DCE here? We are benefitting from the internal improvements
carried out by us which has reduced our lead time significantly. Now, it is
much lower than our competitors. We are capitalizing on this advantage,
which is not easy for our competitors to copy, and establishing ourselves as
the most reliable supplier. This will be a great reputation and we will be
profiting with it.
There are some pitfalls while making such an offer. Let’s look at them.
Pitfall 1: Charging Higher Prices
We are often tempted to charge a premium for ensuring reliability. After

all, we are satisfying a significant need and we feel that should be
adequately rewarded for it.
However, it may dilute the power of the offer, and make it more difficult to
sell. The power lies in reliability. We would like to stand out as the most
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reliable supplier. For this, unless there is an additional differentiator in the

product itself, we would like to be equal in other parameters to
competitors. Quoting higher price than competitors, most likely, will
jeopardize the perception we would like to create.
Caution: If the current prices are already higher, it may dilute the power
of the offer, except of course when there is an additional justification such
as product quality or market position (brand).
Here the assumption is that either there is a justification, or that the prices
are not consistently higher. The offer will lose some of its strength if this
assumption is invalid.
While making this offer, we do not tamper with the current pricing. Again,
the assumption is that our prices are already acceptable to the market.
However, if we have reason to believe that our prices are too high which is
supported by low hit ratio, consistent drop in sales etc., we need to re-
examine the pricing policies. Most likely these include cost factors that
unnecessarily inflate the price.
Once we implement the second phase of the project (charging premiums

for rapid delivery), we will reexamine the pricing policies and set them to
maximize the profit generated by the rapid service.
Pitfall 2: Reducing Quoted Lead Times
Since we have drastically reduced our lead time, often, there is a

temptation to offer it to the market. Obviously, it will give better value to
clients and we can gain good business faster.
However, by doing this, we will be diluting our focus on the significant need
of the clients. If we have identified reliability is the significant need, we
should just solve that problem rather than offering something more. (If
rapid response is also a significant need, we will address it in the second
part of this offer – by charging a premium.)
Further, if we offer shorter lead time, it will increase the load on operation
and we may struggle to remain reliable. If it causes us to quote longer and
longer lead times for other clients (which actually defeats the purpose), we
will be forced to elevate capacity earlier than needed.
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If reliability is the significant need of the clients – they are suffering a lot
due to the failure of the suppliers to supply within committed time – do we
really need to digress from it and divert client’s attention to such a thing
that the client will not believe?
We know that almost all of our competitors are taking much longer than
what they promise, i.e., the standard quoted lead time. In view of this, will
it be advisable for us to quote little longer lead time (so that we are
absolutely safe)? Absolutely not. If we quote longer lead time, it may dilute
the power of the offer and make it more difficult to sell. We intend to stand
out as the most reliable supplier while being equal in all other promises
that our competitors make (unless there is an additional differentiator in
the product itself). Quoting longer than industry lead time will jeopardize
the perception we would like to create.
Also, due to our internal improvements (such as DBR), we would have

reduced our lead time significantly. It will not take too long to reach 99%
DDP on the industry Lead Times. So, we do not need to extend the
standard quoted Lead Times to clients in order to meet this performance.
Note: Having slightly longer than industry standard Lead Times will be
accepted by clients (who know competitors are promising shorter Lead
Times but regularly miss deliveries). However, the company should not
take the initial position of quoting longer than industry standard Lead
Times. This might happen with selected clients only when the load
increases.
One may perceive that it may be difficult to determine industry standard

lead time. It does vary across products and customers.
Different categories of products are produced in different facilities or on

different production lines and likely to have significantly different Lead
Time. By examining the normal Lead Times of the current products that
you produce, it is easy to assess the standard Lead Times.
At times, some clients are given preferred service by their current suppliers
and therefore typically enjoy shorter than industry standard Lead Times.
Quoting reliable standard Lead Times to these clients will not create the
desired DCE. However, we need to examine the reality to know whether it
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regularly gets delivered in such shorter time. Because if this is the case,
the industry standard Lead Time will reduce.
If there are preferred clients that do normally get shorter Lead Times, we
should first check if we want to get their business by examining the
volume, Throughput etc. If so, check how short is the normal Lead Times
that they require relative to the industry Lead Time. If it makes sense to
offer this Lead Time as our standard offering, then consider such clients.
Note: In some environments (repetitive consumption of same products),

there are preferred strategic clients who enjoy a semi Vendor Managed
Inventory service from their suppliers. You may not choose such clients
because such service will place a huge burden on operation and will defuse
the focus of the management from selling the Reliability offer. Remember,
having a DCE enables the company to be selective in choosing clients.
Pitfall 3: Confusion over Paying Significant Penalty
What should be the size of penalty? Should we try to cover the client’s
damage?
We are building a DCE based on Reliability and therefore the penalties

should be substantial. Of course, we are not going to launch the offer to
the market until we obtain 99% DDP, so the risk is limited.
The penalties have three considerations:
• Offer to pay high enough penalty to build the confidence of the client in
our commitment.
• It should be high enough that no other competitor would dare to offer

the same.
• Caution, since Murphy’s Law can cause delays at times, it should not be
high to the extent that it risks our business.
Typically the penalties are set as a percentage of order value. Penalty is not
set to cover the damage caused by the late delivery. It is not needed to
build the confidence of the client and block competition.
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The penalties should be set to be per time interval (depending on the Lead
Time, usually the penalties are per day). This creates the impression that
in case the delivery is delayed, the company will do its best to deliver as
fast as possible. It also enables to reduce the size of the penalty for the
first day or two of being late. Usually, the penalties are caped at full order
price.
Pitfall 4: Overlooking Quality Issues
Bad quality could be a significant hindrance in executing the offer.
Use the risk of penalty to minimize the quality issues and thereby minimize
the risk. If our current rate of defects (and therefore rejection) is high, we
need to fix it before we launch the offer and this is not easy.
If the rate of defects per order is negligible, we can do either of the

following:
• In case it is usual in the industry to have a clause in supplier’s agreement

with clients permitting certain rate of defects, we make sure this clause
remains.
• Produce more than the order quantity to create a buffer against defects.
Pitfall 5: Partial Deliveries
There is a penalty even if we deliver the order partially. The partial delivery
may happen for any of the following reasons:
• Cannibalization – Other orders take some of the needed parts and

therefore, we could not deliver the order in full.
• Some parts may get rejected due to defects/scrap and hence our delivery
is partial.
• Many times, we start the production process before having all required
material in place. This may result in producing insufficient quantity for
some of items in the order.
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• Packaging lapses – not package the entire quantity or redirect some of

the parts to another location.
• Shipments priorities – allocating some of the products to another more

important client.
• It is a common practice that an order that has several items is broken

into several work orders. Such practice may result in treating each
product produced for a client as a separated order and complete only
some products of the client’s full order list. The client needs the entire
set of products and therefore until receiving the entire order list (basket)
regards the order as not delivered.
We need to examine how often we deliver partial orders and determine

whether it is really worth investigating and solving. Depends on the causes
of partial delivery we need to take different actions to minimize the
recurrence.
There is yet another reason for late/partial delivery. Often, the client
makes changes in his requirements. The changes may be in the nature of
changes in quantity/time/scope and may risk DDP. We need to examine
how frequently the client makes changes and choose to communicate
clearly that any change introduced by the client may trigger a new delivery
due date.
Pitfall 6: Ignoring Transportation Delays
Another reason why we may not be able to be reliable is the transportation

issues and ignoring them while building an offer can have serious impact
on reliability.
Depending upon the industry practice, we need to decide whether our offer
is for guaranteeing “to the door delivery” or for guaranteeing “ready to
ship”. Should the due date be considered as the date the shipment arrives
to the location of the client? Or should the due date guaranteed be
considered as the date the order is ready to be shipped from our plant?
Obviously, the first option enhances the power of the offer; however it
carries the following risks that should be mitigated:
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• We are guaranteeing something that is not within our control but

something that may be outside our control – the carrier performance.
The risk is not so high if the carrier is highly reliable, or we ship the order
ahead of time to create a buffer. Sometimes transportation includes
customs clearances that elongate the lead time and have variability.
• Another risk of guaranteeing “to the door delivery” is having the client
not willing/unable to accept the order (for reasons like warehousing
policies). If this risk is valid, it should be dealt with by the terms and
conditions of the offer.
In most cases, it was found that the offer is strong enough when the due
date is set to be “when order is ready to be shipped”.
There are industries where the client arranges for transport. In this case,
“ready to ship” is the norm and any transportation delays are not treated
as delays on our part.
Pitfall 7: Ignoring Design, Engineering, Client Authorization Delays
Many times, there is some designing and engineering work for which some
development time and client’s approval before producing is needed. We can
produce only after such work is completed and approved by the client.
Ignoring this fact while creating an offer may cause problems.
We need to have a clear answer to the question: when do we start

counting the Lead Time? Do we include engineering when determining the
guaranteed Due Date?
It depends upon the industry practice. Does the Reliability offer apply only
to the production Lead Time enough to generate a DCE?
If it is enough, it is preferable not to include engineering in the guaranteed

lead time avoiding the risk of engineering variability. The offer needs to
clearly define that the due date guaranteed is given upon clients’ approval
of drawings/sample/prototype/purchase order.
Even when engineering is not included in the Lead Time guaranteed, you
still need to take measures to ensure fast engineering process otherwise,
when sales grow fast it will quickly become a bottleneck.
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Depending upon the industry, if the Reliability offer applied only to

operation is not sufficient to create a DCE, engineering should be included
in the guaranteed Lead Time.
Pitfall 8: Not Accounting for the Delays on Account of Outsourced

Work
At times, we outsource certain work and if those vendors are not highly
reliable, it could jeopardize our reliability. While creating the offer, we need
to consider the reliability of such vendors.
We need to consider the variability in the process and how long it is as

compared to the total Lead Time. We also need to look at what is the
percentage of orders (in number and in money) that require outsourcing.
We need to determine whether it is really a major factor leading to poor
DDP.
If it is a major factor, we need to solve it by buffering or by designing an

offer for such vendors to accelerate the process and make it more reliable.
Despite all this, we should remember to include “Force Majeure” (waiving a

penalty on many orders if catastrophe occurs) clause to protect our
business.
Adding “Rapid” to the Reliability Offer
It is important that enough clients grant business for ensured reliable

supply and occasionally pay more for ensured rapid delivery.
The meaning of “ensured rapid delivery” is:
• Delivering in much shorter Lead Times,
• On time,
• In full,
• To specs,
Or else pay hefty penalties.
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The assumed significant need of enough clients is Rapid Delivery, and they
would pay a premium for it when they suffer from unavailability and are
willing to pay a premium to cover the damage.
We can say that clients suffer from unavailability when:
• DDP of suppliers in the industry is relatively poor,
• Supply Lead Times in the industry are relatively long,
• Clients operate to forecast,
• Unavailability has major consequences for the client.
Unavailability can be caused by suppliers not delivering on time. It can also

be caused by the clients needing the product much faster than they
normally require. The scenarios under which clients need the product much
faster are:
• There is sudden, unexpected peak in demand.
• There is some urgent request or order by an important client.
• There is already some delay and the client is trying to recover a delay in
the client’s project.
• There is some event or a due date that the client is chasing.
• There is an urgent need of an alternate supplier when the current

supplier has not delivered to spec/on time.
• The client is in a situation where he may have to pay heavy penalty on

being late.
• Client is going to lose an order.
• Client is losing money/suffering other consequences every day his

product is not delivered.
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The conditions discussed so far most likely mean clients occasionally suffer
from unavailability. But to make sure this is the case, one more condition is
needed, i.e., “Difficult to pursue alternative solution”.
“Alternative solution” is defined in this context as a way to minimize or

prevent the damage caused by unavailability.
It is difficult to pursue alternative solutions in the following situations:
• The product is of such a nature that it is not readily available in the

market. It is not regularly held by suppliers in stock.
• It is not likely that there is always a supplier that can produce it rapidly.
• Increasing inventory levels is highly costly because of:
• High price per unit and since the client needs relatively high amount of
quantity, it calls for a significant investment.
• Having many products. Keeping adequate levels of inventory across

many products is highly costly.
• Not repetitive products.
• Highly variable usage.
In environments of repetitive consumption, clients find it difficult to ensure

100% availability by holding high levels of inventory. This is due to the
high cost of total inventory required to buffer against misalignment of
forecast to actual demand.
In non-repeated business or highly variable usage, the solution of holding

inventory is obviously not considered.
Adjusting substitute product is difficult because of:
• Quality risk.
• Being more expensive.
• Takes too long to amend or to find.
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Note: In custom-made products environments (which also drive up the

lead times), adjusting an alternative product is rarely an option.
However, the fact that the clients suffer from unavailability does not yet
mean that they would be willing to pay a premium to receive it rapidly.
There are two criteria when clients will be willing to pay premium:
• The damage of unavailability (or gains of availability) is much higher than

the size of the premium.
• The cost of the alternative solution (if exists) is higher than the size of
the premium.
The Rapid Option
• For standard lead times at regular prices, we add the commitment to pay
significant penalty for missed delivery.
• If client requires, we offer rapid deliveries (assured by high penalties) for

a premium.
7.5 INVENTORY TURNS DCE (FOR CONSUMER GOODS)
A manufacturer or distributor can create a DCE to make an Unrefusable

Offer to a set of consumer goods retailers.
A DCE is gained by providing a kind of ‘partnership’ that delivers superior

inventory turns along with better availability and substantially reduced
inventories, when all other parameters remain the same.
And, as a second phase, a decisive competitive edge is gained by providing

a partnership that secures the clients an increase in TPS (Throughput per
Shelf) and provides a realistic chance of sharing the increase in revenues.
This offer may fit in situations where at least some of the following
statements are valid:
• The retailer frequently faces out-of-stock situation for fast-moving items.
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• The shelf space and/or storage space is limited with the retailer.
• Forecast is the basis for the retailer for placing orders on the
manufacturer/distributor.
• Most of the shelf space is occupied with relatively large quantities of slow
movers.
• Slow movers are discounted after holding them for some time.
• Often, retailers are in a situation where their customers do not find a

product that they need and are disappointed. This severely erodes the
consumer’s (the retailer’s customers/prospects) impression and may
cause the customers to go away and not come back again and choose to
go to some other retailer, in future.
• A long replenishment time causes shortages and high inventories that

block the shelf space and impair the ability to adjust the offering to the
actual market preferences.
In other words, this offer may apply if:
• A retailer is experiencing slow inventory turns and
• Margins are eroding due to discounting of slow movers.
Operational improvements required: If you are a manufacturer, you

need to implement DBR/SDBR. If you are a distributor, you need to
implement TOC’s Distribution solution to replenish consumer goods as they
are sold. Switching to a mode of operations that is based on actual
consumption ensures very high availability coupled with surprisingly high
inventory turns and will minimize slow movers and the need for
discounting.
It is important that enough clients grant business for much higher

inventory turns at good prices.
The assumed significant need of enough clients is high Inventory Turns.
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When clients suffer from surpluses and shortages, Inventory Turns become
a significant need of enough clients.
What is the meaning of “Grant business”? There are three conditions:
• Clients are willing to buy and sell our products,
• Clients are willing to buy more variety and volume and
• Clients are willing to pay more.
What does the term “Inventory Turns” mean?
• Sales divided by inventory (typically average level for the measured

period). This is commonly measured by the top management.
• Cost of Goods Sold divided by inventory (typically average level for the
measured period). This is commonly measured by middle level to top
management.
• Number of units sold divided by inventory units (typically average level

for the measured period). This is commonly measured by logistics people
at middle and lower levels of management.
• Throughput divided by Average Inventory
where, The Average Inventory = (Inventory at the beginning of the period

chosen by you + Inventory at the ending period chosen by you)/2.
This definition can be used by all levels of management.
Basically, Inventory Turns become a significant need when clients suffer

from surpluses and shortages.
The following conditions determine whether clients suffer from surpluses

and shortages:
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• When Order lead time is significant.
❖ Order lead time means the time from receiving an order to re-ordering
the same product.
❖ Determine the order lead time by the frequency of orders of the same
product.
• When clients place orders and maintain stocks based on their forecast.
• When clients deal with many products.
• When cash and/or space is a serious limitation.
• When new models/designs are introduced, the clients find it difficult to

get rid of the existing high level of inventories and often need to resort to
discounts etc. and by that way cannibalizing the sale of new models/
designs. They even need to scrap the existing inventory of old models/
designs.
If…
Order lead time is significant;
Clients stock for forecast;
Clients deal with many products; and
Cash/space is a constraint…
Surpluses and shortages are bound to exist.
The level of surpluses is clearly visible. However, it is difficult to judge the

level of shortages and people tend to underestimate the level and therefore
the impact of shortages.
Why the Level of Shortages is Greatly Underestimated?
• When customers do not find what they are looking for, they may not
always ask for it. So, the shortage goes unnoticed.
• Even if customers ask, the salesperson may not always report the stock
out.
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• Even when the store reports the stock out, it may not always get
registered in the system.
• Stock outs are rarely considered as lost sales.
• One cannot really assess the lost sales of not stocked items (limited
range).
So, the level of shortages is much higher than what people consider it to
be. It would be safe to say that about 20% to 30% sales are lost due to
shortages.
The Inventory Turns Offer
• Based on actual sales data, and, if applicable, decoupling of stock holding

points, we manage the client’s inventory, significantly improving
inventory turns (remarkable availability achieved by holding less than
half the normal inventory).
• Clients pay bonuses based on significant improvement in inventory turns.
Let us discuss some important factors to gain more understanding about

the offer:
We need to set the initial inventory levels. Too high will dilute the offer, too
low will risk availability.
The inventory must be set according to the formula: “Maximum”

consumption during the replenishment time factored by unreliability of re-
supply. Consider the following while setting the initial inventory levels:
• We take into account the replenishment time to the site. If we have a

Central Distribution Center (CDC) or Regional Distribution Center (RDC),
this is only transportation time (delivery time + shipment frequency).
• The variability of demand considering the upside is another important

factor that we go into initial setting of the inventory levels.
• While considering the variability of transportation (considering the

upside), look at the following:
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• Explore all options to reduce the replenishment time and understand

clearly the cost associated with reducing it, so that we can choose
suitable option.
• Hold more than necessary inventories if it is a new product or a new

client.
• The cost of transportation may limit the frequency of replenishment. If

we have several retailers on the same shipment route and have many
products, sending full trucks/containers frequently is feasible.
• There are three types of changes in demand that we need to

accommodate:
i. Gradual change in demand: Buffer Management will handle this

well.
ii. Sharp increase in demand (spikes): The characteristic of this kind

of a change is that despite our shorten replenishment time we will
not be able to accommodate it, an example of which can be a
promotional or a specific meaningful event that promotes very high
demand in a relatively very short period of time. Buffer management
system will not be able to deal effectively with this phenomenon as
the replenishment time is not short enough to react during the peak
in demand. The way to deal with spikes is by asking the retailer to let
us know in advance when such a peak in demand is expected.
Typically, spikes in demand are expected as they are triggered by a
planned action (promotion), a calendar event, or a competitor’s
action. Therefore, although it is based on forecast and we cannot be
sure of the actual height of the spike, we are able to increase
inventory beforehand.
• It is not possible to accurately assess by how much sales will grow and
we will certainly not commit to it with the retailer.
• We need to remember the four reasons we deal with that currently drive
sales down:
i. Shortages (mainly of fast movers).
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ii. Slow movers diminishing sales of fast movers (display, sales

attention, delaying replenishment of fast movers due to cash).
iii. Limited range.
iv. New product sales jeopardize by high inventory of older versions in

the market (discounted or delaying introduction).
• The more we have reasons to suspect these reasons exist, the higher the
likelihood sales will grow due to our solution. We assess it by verifying
the existence of the conditions:
i. Order Lead Time is significant;

ii. Clients stock for forecast;
iii. Clients deal with many products;
iv. Cash/space is a constraint;
v. Lifetime of products; long supply times.
• It is difficult to seek answer to the question, by how much inventory will

reduce? (Cutting it too much may have severe implications). Because:
i. It highly depends on the level of reduction in replenishment time.
ii. Based on the reduction in replenishment item and the current

replenishment time, we can easily get a good enough estimation of
the reduction in inventory for the client.
iii. It is possible that the client will hold the same and possibly higher
number of units in inventory, if there is an increase in sales and
variety. The reduction in inventory should be measured in days or
inventory turns not in terms of units.
• It is of prime importance to gather sales data, preferably every day.

Usually, this is not a problem. In most cases, the information can be sent
automatically from the client’s system. In cases of small “not automated”
stores, more creative solutions might be needed to incentivize the
retailer to collect and send the information (e.g., give him a cell phone/a
computer/further discounts based on reports).
• We must do everything that is needed to minimize the Order Lead Time.
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7.6 INVENTORY TURNS DCE [FOR VENDOR MANAGED

INVENTORY (VMI)]
A Vendor Managed Inventory (VMI) is a process whereby a supplier

maintains an inventory, for a retailer or for another manufacturer in a
supply chain, by generating orders for the retailer/manufacturer based on
its demand/consumption information. In this relationship, generally, the
supplier is responsible for maintaining the retailers’/ manufacturer’s
inventory levels and transportation and transaction costs.
VMI is a family of business models in which the buyer of a product provides

certain information to the supplier of that product and the supplier takes
full responsibility for maintaining an agreed inventory of the material,
usually at the buyer's consumption location (usually a store or a factory).
A third-party logistics provider can also be involved to make sure that the
buyer has the required level of inventory by adjusting the demand and
supply gaps.
VMI makes it less likely that the client will unintentionally become out of
stock of a product and while simultaneously reducing the level of inventory.
Furthermore, supplier representatives in a store benefit the supplier by
ensuring the product is properly displayed and store staff is familiar with
the features of the product line, all the while helping to clean and organize
their product lines for the store.
If it is a factory, the supplier representatives will be well aware of the

increase/decrease in consumption, how their products are used etc. and
they can use this information to manage the inventory levels and also to
suggest improvements in product design.
A manufacturer or distributor creates a decisive competitive advantage to

make an Unrefusable Offer to another manufacturer or retailer.
A DCE is gained by providing a ‘partnership’ that guarantees remarkable

availability coupled with reduced inventories and much less hassle, when
all other parameters remain the same.
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As a second phase, “In mature partnerships, the company has the ability to
command higher prices or at least to successfully defend against pressures
to lower the prices.”
This offer may fit in situations where at least some of these statements are
true:
• Customers/prospects are producing and ordering essentially to a

forecast.
• Repeat orders are placed for the same products.
• Customers/prospects order the exact same product relatively

infrequently.
• There are emergency orders (e.g., 3 per cent).
• Customers/prospects are not completely satisfied with the current

balance between availability and inventory.
• The value of the product is not negligible.
In other words, this offer may apply if your customers/prospects are

holding a significant amount of inventory and, despite that, they are
experiencing surpluses and shortages.
Operational Improvements Required: implementing S-DBR and the

Replenishment (Distribution) solution to replenish raw materials and
finished products as the customers consume the product.
The objective is that the manufacturers grant business for proven excellent
availability coupled with lower inventory and less hassle at good prices.
The assumed significant need of enough clients is inventory alignment.
When does inventory alignment become a significant need of enough

clients? – When the manufacturers/retailers are not completely satisfied
with the current balance between availability and inventory.
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VMI is not an invention of TOC. It existed even before. Many large

companies had forced their vendors to implement it and it turned out to be
win-lose.
VMI can be managed well and be a real win-win by following TOC

principles.
The suppliers need to implement DBR and improve their manufacturing

ability. The client/retailer need to be a partner and share the relevant
information.
The VMI Offer
Based on actual consumption data (no orders), we manage the client’s

inventory, guaranteeing 100% availability with less than half the inventory
(or no inventory – client owns the products only when it is released to the
floor).
One of the keys to making VMI work is shared risk. In some cases, if the
inventory does not sell, the supplier will repurchase the product from the
buyer (retailer/manufacturer). In other cases, the product may be in the
possession of the retailer/manufacturer, but is not owned by the retailer/
manufacturer until the sale or consumption takes place. The retailer simply
houses (and assists with the sale of) the product in exchange for a
predetermined commission or profit (sometimes referred to as
consignment stock) or a manufacturer allows the supplier to use his space
for keeping the inventory.
This is one of the successful business models used by Wal-Mart and many
other big retailers. Oil companies often use technology to manage the
gasoline inventories at the service stations that they supply. Home Depot
uses the technique with larger suppliers of manufactured goods. VMI helps
foster a closer understanding between the supplier and manufacturer by
sharing timely information.
Suppliers benefit from more control of displays and more customer contact
for their employees; retailers and manufacturers benefit from reduced risk,
better store staff knowledge (which builds brand loyalty for both the
vendor and the retailer/manufacturer), and reduced display maintenance
outlays.
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Consumers benefit from knowledgeable store staff that is in frequent and

familiar contact with manufacturer representatives when parts or service
are required. Store staff has good knowledge of most product lines offered
by the entire range of vendors. They can help the consumer choose from
competing products for items most suited to them and offer service
support being offered by the store.
7.7 VERY HIGH DUE DATE PERFORMANCE (DDP)
A company that delivers projects can create this Decisive Competitive Edge
(DCE) and capitalize on it.
A DCE is gained by making it known to the market that the company’s

promises are remarkably reliable, when all other parameters remain the
same. In the multi-projects arena, remarkably reliable (very high DDP
without compromising on the content) is defined as delivering well over 95
per cent on (or before) promised due date, while in cases of late delivery
the delay is much smaller than the prevailing delays in the industry.
And, as a second phase, on a considerable portion of the projects, bonuses

(for early delivery) are gained.
This DCE may fit in situations where at least some of these statements are
true:
• The standard DDP in the industry is notoriously poor.
• Late delivery of the overall project has major consequences for the client.
• A delay in delivery is very likely to cause a delay in the completion of the

overall project.
• The benefits of early delivery are significant and customers/prospects can

afford to pay a premium to gain benefits of earlier deliveries for second
phase. Moreover, customers may have even asked for or impose late
delivery penalties.
In other words, this offer may apply if customers/prospects frequently

suffer from late deliveries and may gain substantial benefits from earlier
deliveries.
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Is it important to finish your projects on time, within budget and delivering

full scope? If the answer is yes, this offer will suit you.
Operational Improvements Required: Critical Chain Project

Management (CCPM) can bring projects to have DDP of almost 100 per
cent. Moreover, a mature implementation can cut project lead times to be
as short as 50 per cent of regular lead times.
7.8 PAY PER CLICK OFFER
This offer is made by manufacturers of equipment or capital-intensive

goods to their clients.
When a good investment is regarded as too risky, eliminating the risk is a

client’s significant need. The company gains a DCE in large markets by
providing its equipment in a way that does not involve (almost) any risk for
the client.
In order to make this kind of offer, some of the following statements need
to be true:
• The initial investment that is required to purchase the equipment is

significantly high.
• The level of usage that the customer/prospect needs is highly uncertain

and varies significantly from time to time.
This offer may apply if customers/prospects need the equipment but

regard the investment in the equipment as too risky. They are not certain
about the benefit that may arise out of investment needed for purchasing
such equipment.
It is important that enough clients grant long-term business in return for

aligning their payments for the equipment with their use of the equipment.
Eliminating risk is the significant need that causes this offer to exist. There
are some equipments, machines that are available in the market and many
companies desire them to use. It is not only nice to have them; but their
usage helps in their work. However, these equipments are costly and
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companies are not able to justify the investment in terms of impact on

bottom-line.
A common example of this kind of offer is the offer made by a

photocopying machines’ company to its clients. Photocopying machine is
expensive and it is not a part of the core business of companies. Yet, they
need to copy several documents which facilitate their business. Typically,
they are weighing the options between outsourcing the work and doing it
in-house by acquiring the machine. This offer gives them the third option.
Most equipment suppliers put all the risk of purchase of their costly
equipments on their clients. At best, they might offer a lease or rental
agreement. This URO may reduce your risk only to say 5 per cent of the
purchase price and the clients pay as they use the equipment. Since the
clients pay per use, it serves as an incentive for the manufacturers of such
equipments to maximize the equipment uptime and quality. This enables
the clients to focus on their business instead of worrying about when and
what to buy.
7.9 FOR WHOM CAN YOU DEVELOP OFFERS?
URO can be developed for every product or service and for every market
segment that you service. Some companies will have an offer for each
product, while others will have offers that vary by market segment.
It is common to have one or two offers for the products or services the
company sells in the markets in which they participate. However, there is
no right number. If you need to decide which product or service and which
market with which to start, you can use the following questions:
• What markets/segments do you want to grow?
• Which market has the best margins?
• Do we have too much business with one customer or in one market?
• Which customers or types of customers do we dread? (If our competitors

also dread these customers, they may be more easily acquired.)
• Which markets have enough scope for us to grow?
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URO can be aimed at others besides your customers and prospects. You
can create UROs for your vendors, your employees, your bank, your
partners or affiliates, or for whomever you choose to target.
Once you start thinking along the URO lines, you will also find it useful to
ask, “Why should anyone you interact with, do business with you?” This
line of thinking will help you to make sure that all the interactions you have
are as good as they can be.
There is no limit to the number of offers you can develop or to the amount
you can increase your sales. In addition, UROs are possible for the majority
of companies. The reason that most companies don’t know that they have
one or know what it is, is because they just don’t know how to develop
them.
7.10 MARKET SEGMENTATION
Segmentation today is almost synonymous to finding a niche in the

market. TOC challenges this thought.
As you know, there are two perceptions of value; one is the supplier’s
perception of value which is according to the investments in the product.
Due to that, we believe that there is one fair price for our product or
service. This price is typically based on the cost of the product plus some
reasonable margin. The margin is decided based on what the market is
willing to pay or what your competitors are already charging. But there is
one fair price for all and it is amazing how many people think like that.
And the other perception of value is market’s perception of value which is

according to the benefits the client expects to get by acquiring your
product. The benefits come from the extent to which our product satisfies
the client’s need. Even if you look at what you call a uniform market, do all
the clients have exactly the same needs? And even if they have exactly the
same needs, do they have the same magnitude of the needs? If not,
different clients have different needs and because of it they have different
perception of value. This is a reality.
Without making any surveys, we do know the distribution of the different

needs and magnitude of the needs of the market.
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If you were to chart a graph, it must start with zero meaning there is a
section of the market that perceives no value for your product or service.
They are definitely not your prospects.
So, we know one point on the graph. There is some percentage of market
that believes that your product or service is highly valuable. That is the
peak in the graph. There is a percentage of market which falls on both the
sides of the peak. We also know that when we go to larger and larger
amounts of value, the perception must decay to zero. Somewhere far
ahead in the graph, it must hit zero again. See the Graph 7.1 below.
Graph 7.1: Market Segments
As long as you are selling your product in the market, there is some
percentage of market that believes that your product has some value;
otherwise, you will not be able to sell. However, the value is different for
different portions of the market. Nobody knows what the graph really looks
like. What we know is that the graph must start from zero, must peak to
some positive value, remain in a positive range and then again decay to
zero.
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This is the spread of your market – the market that you call a uniform
market is not really uniform.
Now, look what happens when we are superimposing a fixed price on the
graph. By virtue of putting a fixed price, you divide the market in three
parts as shown in the above graph. On the extreme right, there is a section
of market that is willing to pay you more than the price you asked for. For
them, the perception of value is higher than the price that you are asking
for. So, even if you ask for more money, they will be willing to pay. So, you
are not exploiting this section of the market at all.
Then look at the middle section in the above graph. These are the
customers who are buying from you but are always complaining about your
price since their perception of value for your products is somewhat lower
than the price. Since your competitors are not offering lower price and
since they need the product, they are buying it. These are the people they
don’t like you. They think that they are paying little too much. If your sales
people are saying “our prices are somewhat higher”, be sure that you have
such clients. This is a dangerous section since they are not happy. If you
give them opportunities to nail you about your product quality or
something else, they will start bitching. If your competitors lower the price,
they will start buying from them.
But there is a bigger segment that resides on the left side of the graph.
Their perception of value of your product is so low that they simply don’t
buy it.
When different clients have somewhat different undesirable effects and

therefore, different perceptions of value, the unavoidable consequence is,
the market is inherently segmented. If they have a large variety of
different needs, it means the market is enormously segmented. The only
thing that effectively prevents the segmentation is… your offer!
Segmentation means, clients with high needs pay high price for your
product and at the same time, for the same product (from your point of
view), the clients with low needs will pay low price.
But that’s not enough. You must guarantee that when a client who pays a
lot talks to the client who pays little (don’t fool yourself; they will talk, no
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matter what), the client who paid a lot will say “what you have bought with
much less money is not what I need. No wonder you paid much less”.
On the face of it, it looks impossibility. But, whenever a market is diverse,

whenever the needs are different, there is always a way to do it. What you
are selling them is not your product; you are selling them the capabilities
of your product! More the capabilities needed more the price. In case of
many products, it is feasible to configure the product and limit or enhance
the capabilities (downgrade or upgrade) without segmenting your
resources for production and maintenance capabilities. After all, your
clients are paying for the capabilities; isn’t it?
The strategic rule that comes out is “segment the market; not the
resources”. This rule is an absolute key because when you are dealing with
strategy; your basic assumption must be “I do not know how the market
will behave in the future. Nevertheless, I must have a company that is
flourishing, now as well as in the future”. This is one of the keys in building
a new strategy.
A market is effectively segmented when an organization can sell exactly

the same product at two different prices to two different markets, without
having either market affected by the other. The perfect example is airline
seats. The same seat can sell for a whole variety of prices depending on
how far in advance it is booked, whether or not an individual flies over a
weekend, the privileges needed, cancellation facility, return journey etc.
To properly segment the market:
• The sale of a product in one market segment should not have a negative
impact on the sale of a product in another market segment;
• Each market segment must use the same resources; and
• The segments should be flexible, so when demand in one market is

down, the organization will still have adequate business from the other
segments.
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7.11 SUMMARY
The thing that you must chase out from your mind is “the perception that I
have about my product is the correct perception. My perception is more the
investment in the product, more the market should pay. If they are
refusing to pay me, I will bitch and moan about unfair competition”.
Instead, what you have to tell yourself is “the perception that really is
important is not my perception; it is the perception of the clients which has
nothing to do with how much money and effort that I am putting in
developing, producing and distributing the product. The perception of the
client is to what extent they are going to benefit from buying the product.
That’s what really counts! So when I do marketing, I have to go out of my
way to find how I can bring more value to my clients. And the way to bring
value to the clients is by solving their problems – problems that my
competitors do not solve.”
You need to find out not only the undesirable effects (UDEs) caused by you
and your competitors; but you also need to find out a way to minimize – if
not eliminate – your policies that cause it.
That’s the way to create an Unrefusable Offer (URO). If you are able to
identify your policies that create most of the problems, it is easier to
construct an URO. But for that purpose, you need to change your policies
and that’s not easy. It is far more difficult than deciding to spend $50
million!
Once you have decided to change your policies, you need to write down as
to how these new policies will turn the UDEs of the market into desirable
effects (DEs). A word of caution – the new policies may cause some UDEs
for you. Taking care of them is what will enable you to polish your offer.
Segment your market based on the diversified needs of the market.

Remember, the market segmentation needs to be associated with less
internal segmentation and more external (market) segmentation. You
segment the market, not your resources. Otherwise you will complicate
yourself to death.
If your competitive edge is based on price, your competitors will catch up

very fast and you will end up in a price war. If your competitive edge is
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based on technology, your competitors will catch up in some time

depending on what the technology is.
But if, your competitive edge is based on changes in your policy, the
policies that the whole industry is using for several years if not decades it
will take many years before they can catch up.
1. What is the job of Marketing?
2. Explain the terms Decisive Competitive Edge and Unrefusable Offer.
3. Explain “Reliable Rapid Response” offer.
4. Explain “Inventory Turns” offer.
5. Explain “Vendor Managed Inventory” offer.
6. Explain “Very High Due Date Performance” offer.
7. Explain “Pay per Click” offer.
8. Define the term “Market Segmentation”.
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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USING TOC TO IMPROVE SALES
Chapter 8
Objectives
• To understand the TOC way of selling.
Structure
8.1 Introduction
8.2 The Dilemma
8.3 Even Win-Win Offers Do Not Sell Themselves
8.4 Sales Management
8.5 Sales Process
8.6 Summary
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8.1 INTRODUCTION
Let us recap Goldratt’s image of Marketing.
“Marketing is spreading the corns for the ducks to come and sit. Sales is
taking a gun and shooting a sitting duck. If the duck is not sitting and
moving like a mosquito, don’t blame the sales person; blame the fact that
you don’t have Marketing.”
– Dr. Eliyahu M. Goldratt
The subject of Marketing was discussed in the earlier chapter and let us
assume that the Marketing steps have been done. Sales is a subset of
Marketing. It is the personal promotion function within the company’s total
business strategy and the operational arm of Marketing.
Let us remind ourselves that the job of the Marketing is to generate

demand. The job of the sales is to convert demand into money by directly
dealing with specific prospects.
Marketing has done its job – the company has a winning offer. The
Operation’s improved capabilities are in place and the Marketing work has
generated a winning offer to a large enough target market.
Does it mean the company “enjoys” a Decisive Competitive Edge (DCE)?

Will it be so easy to sell the offer to the extent that we don’t need to care
about it?
8.2 THE DILEMMA
Typically, salespeople like to show their products to begin their sales pitch.
However, the prospect starts raising objections as soon as he sees
something and the whole discussion becomes defensive. Therefore, often
there is a conflict in the mind of a salesperson as to whether he should
show the product early or not.
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Look at the following Figure 8.1:
From one hand, in order to bring a prospect to see your product or service
as the best value for his/her money, you must show value to the prospect.
In order to show value to the prospect, you must show your product or
service, because the prospect understands his/her needs and can evaluate
how much your product/service satisfies these needs. The prospect is the
best person to see and evaluate how good your product is since he knows
exactly what his needs are.
On the other hand, for not to cause the prospect to object, you must not
show your product or service, because the prospect always raises
objections to salesperson’s praising of his/her product or service.
Salespeople believe that more the objections are raised by the prospects,
more the dialogues and better the chances of selling. However, according
to Neil Rackham (creator of SPIN selling)
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“There is a direct relationship between objections and sales success. The

MORE objections a sales person receives the LESS likely they are to make
a sale”.
Allowing raising more and more objections put the client into a negative
frame of mind. Neil Rackham further said that
“Sales people create objections generally by presenting too much or closing

too soon.”
So, you start presenting your product and it backfires on you.
Rackham concluded that
“The fundamental selling disease – jumping in too soon with solutions”.
Showing product allows raising objections. However, you believe that you
must show the product so that the client can see the value. So, on one
hand, you must show your product and on the other hand, don’t even think
about it. A dilemma.
Dr. Goldratt believes that the assumption “the prospect understands his/
her needs and can evaluate how much your product/service satisfies these
needs” is false. Customers know only the symptoms of their problems and
they do not understand the true causes of their problems and are not
usually able to identify the causes themselves.
To break the conflict, the salesperson has to bring the prospect to agree on
the magnitude of his/her problems or needs, and that they all stem from
one source – the source which the seller knows can be addressed by his/
her product or service. It should be done in a way that does not build
resistance, but builds trust. Then, and only then, is the seller in a position
to show that the way to address the prospect’s needs, and to get the
benefits, is by using the seller’s product.
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8.3 EVEN WIN-WIN OFFERS DO NOT SELL THEMSELVES
Have you ever proposed a great idea but the other side turned it down? If
you reflect on your experience, you may think it is only because the other
person is stubborn/idiot/had something personal against you… or maybe it
had to do with the way the idea was presented.
What could be wrong with the way the idea was presented? You need to
understand that winning offers do not sell themselves! Knowing how to
present the offer is not trivial, but it is not the only challenge relating to
sales.
It takes time (long time) until a winning offer generates leads by itself.
When salespeople know very well how to sell the offer and there is
constant stream of leads to sell to, can we finally stop worrying about
sales?
Sometimes the negative effects of success are our biggest enemy. When
one has a winning offer – the major cause for lost sales is not dealing
effectively with all of the opportunities. Selling an offer is not a trivial task.
There are three common challenges in the field of sales:
• Knowing how to generate leads.
• Effectively addressing significant number of opportunities.
• Knowing how to sell the offer.
Possible objections for the Reliability offer:
• Will your lead time be high? (Are you taking more time to be reliable?).
• You appear to be charging higher price and thereby cover the possible
penalty.
• I may consider you for future business; right now I’m very pleased with
my suppliers.
• I am reluctant to make any changes in my supply base.
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• I need much shorter lead times.
• My existing suppliers have shorter lead times.
• I am protecting availability by holding more inventories.
• I am protecting availability by having multiple suppliers.
• How can I trust you to be as reliable as you claim?
• I have to cut cost – can you do something about the price?
• Every supplier claims he is reliable only to disappoint me later.
• My suppliers are typically delivering on time.
Possible objections for the Inventory turns offer:
• Providing sales data daily is a huge hassle.
• As a policy, I cannot share sales figures.
• Wouldn’t transportation cost go up?
• I have very few shortages, one or two per cent.
• Unavailability actually stimulates demand – client buy today because

they know it might not be here tomorrow.
• We do not have such high inventories as you claim.
• Your prices are too high.
• If customers don’t find your product, they buy an alternative one – so I

don’t lose sales.
• The bonus you ask for is too high.
• How can I know for sure you will not starve me after you reduce my
safety inventories?
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• What if sales do not improve as you claim?
• What about the discounts I got when placing large orders?
• We are in the process of implementing a new strategy so come back to

us in the next quarter.
For each reservation, try to think why it was raised.
• Is it because of erroneous assumption (lack of knowledge, partial

perception of reality) the person has? Example: When the person claims
levels of shortages is very low, or when he claims the current suppliers
supply on time (although not in full, or not in the original date).
• Is it because of his local measurements and area of influence? Example:

When a buyer asks for reduction in price.
• Is it because we poorly selected the wrong company to target? Example:

If it is really the case, his current suppliers give him very good service or
prices.
• When discussing the reasons for the objections, identify when the
objections refer:
❖ to disagreement on the problem

❖ the direction of the solution
❖ the validity of the solution
❖ a negative effect stemming from the solution
❖ an obstacle preventing the implementation of the solution.
This will build the base for further improvement in the way you sell the
offer.
Different types of reservations can be raised by the prospects. It is

important to address these potential reservations in a particular order
when conducting the buy-in process.
There are “Layers of Resistance” as the prevalent buy-in process used in

TOC selling techniques. Analogy, “look at an onion”:
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• People can have different types of resistance – just like an onion has
different layers.
• Not always people (even the same person) have the same number and
type of reservations – just like not all onions have the same number of
layers.
• Trying to address an “inner” reservation without addressing first an

external one will only increase the resistance – just like with onions
trying to peel an “inner” layer without first peeling the external one.
• Dealing with resistance to change, like peeling an onion, stinks and

makes you cry…
Here are the different layers of resistance:
Layer #1: Disagreement on the problem (there is no problem or our

problem is different).
Layer #2: I have a different direction for a solution!
Layer #3: The solution does not address the whole problem!
Layer #4: Yes, BUT the solution has negative outcomes…
Layer #5: Yes, BUT there are obstacles to implement the solution.
Layer #6: Unverbalized fear.
Selling Business Deal
Knowing what to say, how to say it and to whom to say it is extremely

important in the context of selling a business deal (Offer).
What do we sell when we have an URO? We no more sell our products; we

sell business deals. We don’t expect our clients to do an impulse buying –
the way one may buy something when he is moving around in a shopping
mall.
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Here are some of the characteristics of a business deal sales that makes it
different from a regular sale:
• A longer sales cycle.
• The prospect would prefer to consult with others, prior to making the
decision.
• The significant debates about the purchasing considerations occur

between the meetings, when the salesperson is not present.
• A major sale means a major decision – if the decision is wrong, this also
means a major mistake.
• The sales person must be knowledgeable of the environment of the client

and know how to overcome resistance to change.
• There must be a sale process tailored to prospects.
• Thorough preparations of salespeople before meetings is important.
In most cases, a business deal sale is not closed in one meeting. This is
because there is a need to convince several people from the prospect's
company and the prospect would like to check many aspects of the offer
and the supplier before the deal is closed.
We cannot simply present the offer, prove its value, and demonstrate the
capabilities to implement the offer in one meeting.
Considering this, we need to develop a sales process with details like what
the company should do, at which step, with whom, by whom, in order to
bring a specific prospect from ignorance to closing a deal.
Most of the meetings should not aim to close the deal. A longer sales cycle
with many opportunities calls for proper management of the sales pipeline
(making sure opportunities are not delayed in a specific step due to
improper attention).
It involves a change impacting more than one area in the company;

therefore, the person would like to share accountability for making the
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decision. Since it is something new, the person would like to check the
offer from different perspectives. He may need approval, if he is not the
decision-maker.
We need to make sure the person with whom we talk, really understand
the offer to the level that he can deal with the reservations that other
people in his company may raise.
8.4 SALES MANAGEMENT
There is a need to set the base to manage the sales pipeline.
When the structure is not set to deal with a quantum increase in number of
opportunities, what are the unavoidable ramifications?
• Poor conversion rate (an opportunity that was not dealt with properly is
very difficult to recover).
• Longer sales cycle.
• Closing relatively bad deals.
• Frustration.
• Reduced number of leads.
• Damage to reputation.
• Poor customer service.
Managing the Flow of Opportunities
We must understand that steps must be taken to ensure constant flow of

leads/opportunities.
This is not something new as it is very basic marketing and sales concepts.
The main thing is to stress two points:
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• Having a DCE does not mean that leads will be created by themselves (it
may happen in the future when the company’s DCE is branded in the
market).
• Reaching the goal requires more and more clients enjoying the offer.
Usually, it means a much more active role on behalf of the company in
getting new clients.
An “Opportunity” is a qualified prospect in the sales process. A “Lead” is a

potential prospects not yet introduced to the sales process. You need to
assess the number of leads and the number of opportunities currently in
process.
If the numbers are relatively low – which is usually the case as the
company does not yet have a DCE. If the numbers are quite high (mainly
because they count already lost leads and opportunities as real ones) –
estimate how many of them will actually turn to good contracts. The low hit
ratio is not surprising given the fact the company does not have a DCE.
To get where we want to, we need to be highly active in generating leads

and opportunities. It will not happen by itself.
Managing the flow of sales opportunities essentially involves the subject of

managing the sales pipeline and it is not so trivial.
It is important to understand that steps must be taken to ensure proper

management of opportunities in the sales pipeline.
Our DCE will result in much higher hit ratio than earlier and the salespeople
will have many more opportunities to manage. This may lead to chaos and
result in lost sales.
What is the unavoidable conflict? Look at the Figure 8.2 below:
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On one hand, in order to “ensure salespeople have enough opportunities”,

we must “give salespeople as many leads as we can generate”, because if
we identify a hot lead – it may cool down if we wait before dealing with it.
Also, in each step, there are fall-outs making it difficult to predict as to
what is the total amount of business that will come. Opportunities may be
delayed in each step and the salespeople may have capacity to deal with
more opportunities.
On the other hand, in order to have “proper attention is given to every

opportunity”, we must “limit the number of leads we provide to
salespeople”, because otherwise, salespeople will be forced to do
multitasking and it will delay all the opportunities and may cause losing
some good opportunities.
The direction for a solution is to limit the number of leads, have a buffer of
leads and monitor progress of leads. This will help to maintain the
workload of the sales people to a reasonable extent so that they can pay
enough attention to each opportunity and they can convert many
opportunities into sales.
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What should we measure?
For every salesperson, we should measure the following:
• Number and size of opportunities.
• Duration of each opportunity in each step.
• Duration of each opportunity in the overall process.
• Hit ratio per step.
• Size of buffer (number of leads and potential size).
• Hit ratio of first steps in the sales process (if we have high fallout, it may
indicate bad qualification).
• Reasons for delays (in which steps opportunities get stuck and why).
• Reasons for dropouts (in which steps opportunities drop out and why).
8.5 SALES PROCESS
What are the actions that a sales person needs to take to increase his hit
ratio?
Let us start with the assumption that you have a real URO. But it will not
sell itself. It is difficult to sell even a win-win solution. Why?
Usually, clients don’t trust what the sales person says about how great his
product is. This is reality. Also, many clients do not have very happy
memories about the suppliers. The suppliers have not been excellent to
their clients in the past. Sometimes, they may have caused a major
problem. So, it means you not necessarily start from zero; on the contrary,
you may have to start from some negative.
Also, many times, the buyers pretend that they are not interested in
buying at all! They are actually trying to play safe.
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The unavoidable ramification of all these is that, when you present your
win-win offer, the buyer is not going to appreciate it immediately; on the
contrary, he is going to criticize it, pointing some small things here and
there and saying “this is not good…”, “I don’t like that…” etc.
On the other side, the salesperson is convinced that his offer adds a great
value for the client. At the same time, the salesperson is not so much sure
that this new generous offer is good for his company or himself.
In this situation, the salesperson does not expect any criticism, not even a
minor objection, from the client. After all, he believes, it is a great offer for
a client and not so great for his own company. So, he expects that the
client will actually be very happy to listen and will give red carpet
treatment.
The better the offer, the client is likely to be more skeptical and the
salesperson is not ready to hear anything negative about it.
This is a sure recipe for collusion and salesperson is highly likely to show a
negative body language.
If this is the case, what is the chance to win the sale? Not really high, isn’t
it?
After all, win-win solutions do not sell themselves!
What does this suggests? It suggests that presenting a win-win offer is not
the way to start.
The way to go is to first build a rapport. How do you do that? Of course,

not by taking the client for dinner or something. Here is the way.
Building Rapport with the Client
The salesperson starts presenting his analysis of the problem – the client’s
problem. He does not start presenting the product; he does not start
talking about his company background, history, other clients and such
usual things.
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Now, when the salesperson starts talking about the problems faced by the
client and points out that the causes are the policies of his (supplier’s)
company and the competitors, the client is very much interested in
listening. He is amazed to know that the salesperson is not blaming the
client for his problems; the salesperson is not talking about how good his
product is; but he is talking something that no other salesperson has
talked before. He finds that here is a person who not only knows what the
problems are, but also willing to openly accept that they are created by the
policies of the suppliers.
Do you think when a salesperson presents this, will there be any client who
is not interested in listening?
The result is that the buyer realizes that there is, at last, somebody, who
understands his problem. The rapport is built.
Achieving the rapport this way is far better than what you can achieve by
taking the client for dinner several times, or by giving some gifts etc.
You have achieved the real rapport and this is the way to achieve it. This
way you are overcoming the first layer of resistance by establishing what is
the real problem thereby getting an agreement on the problem.
This is good, but not good enough. Rapport by itself will not start selling
things for you. So, should you start showing your offer? Not yet. It’s time
to set the stage for it.
Setting the Stage
This is agreeing a priori as to what the client wants; an agreement on the

direction of the solution of the problem. The salesperson summarizes the
connection between the supplier’s policies with the undesirable effects
(UDEs) of the client. He states that as long as these are the policies, the
client will unavoidably suffer from the UDEs. When he does that, the
reaction is “we need to do something about it”.
Then comes the real action that really sets the stage. There comes a
declaration that the salesperson makes it on behalf of his company “my
company now realizes that as long as you are not selling, we are not
selling”. He indicates that he is willing to change the policies. With this
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statement, the client understands that there is a chance to have a

breakthrough and possibly solve his problems vis-à-vis the supplier. The
direction of the solution is not “give me the products cheaper”; the
direction of the solution is “change these policies that you have and have
imposed them on me”.
At this stage, the client is likely to ask, “Are you going to do something
about this?” he is actually asking you to present the offer.
The stage is set! Now we can move to the next step.
Bringing the Buyer to Want Your Product
What does this mean? It means, don’t talk about the product; talk about
the features of the product/offer that will remove the UDEs of the client. It
means talk about the major ingredient of the offer and go step by step,
showing how it will remove the undesirable effects of the clients. The buyer
follows the rigorous cause and effect and is astonished!
However, this astonishment is not going to bring you sale. This is because
the client has not forgotten the past. He does not have exactly a great
relationship with the supplier in the past. That makes him to seek “the
snake in the grass”. He suspects that you have something hidden in the
offer and that could prove to be devastating for him.
What is the best way to continue? Can you tell the buyer that there are “no
snakes in the grass”? You can promise, but he will never believe. And then
he will hesitate to accept the offer.
The best way to overcome the fear of the “snakes in the grass” is to show
the snakes!
What does this mean? The salespeople will say something like “Of course,
this is not the whole story. There are things that we want from you in
return”.
Then the salesperson will show him negative branches, i.e., what is that his
company going to suffer if they give the client what is being offered and
what he needs to mitigate that.
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For example, if you are a manufacturer or a distributor and you are making
an offer to a retailer you may say something like this: “Since the inventory
you hold will be reduced substantially, some display space will get released
and we do not want to lose that. Therefore, we want you to secure for us
the same display space. And in case our sales increase as expected, you
will consider granting us more display space so that we can increase our
variety.”
The salesperson will clearly tell what will happen and what he wants from
the retailer. He should not say something like this “Since we are giving you
this, this and this, in return we want from you that, that and that”, because
it does not tell why you want or what you want. The salesperson needs to
tell the reason why.
When you show this, the client sees two things:
• One, you are taking care of yourself and therefore he becomes less
suspicious about the snakes in the grass.
• The second thing is, your demands from the client become very
reasonable. You get so much because of the actions of the supplier and
you give so much since it sounds reasonable and logical. A win-win deal.
The client sees the offer as “a dream come true”, particularly when he is
not used to such fairness from the suppliers.
This is the meaning of “Bringing the client to want your product”.
This removes the third layer of resistance; it helps to see that the solution
will solve the problem. It also peels the fourth layer of resistance inasmuch
as the client knows that the offer will not cause any negative effects for
him. He knows that you have not suddenly become generous and you are
taking care of your business and at the same time creating excellent
results for him. So, he understands well as to why this offer is good for
both the parties.
Closing
Though it is a necessary condition to get the client to want your product, it
is far from sufficient. At this stage, typically, salespeople try to talk about
how good the product is and thereby they frustrate the client. Because
358
that’s not something that blocks him. What blocks him is something else.
There may be some obstacles that prevent the client to buy. So, it does not
help showing him more and more of how beautiful your product is.
This is like trying to open an open door!
Now, the client is dying to buy your product but there are obstacles in his
way. And the salesperson now needs to address that.
This is the time for role reversal. The salesperson has met several clients
and is well aware of the obstacles that generally prevent them to buy. Now,
he talks like the client and says “You cannot buy this product because…”
and gives a long list of possible obstacles. “You need permissions; you
need to look at your computer system…” There are obstacles standing in
the way.
The client is the best person to evaluate which obstacles are real and which
are not. So, by giving him such list of generic obstacles, the salesperson is
putting the client in his role where the client weeds out the obstacles that
are not real.
Typically, when the salesperson presents such a list of obstacles, the client
says “This is not a problem; for that I can do this; yes, this is a problem…”
so on and so forth.
So, you get a shortlist of the client’s obstacles and then the client consults
with you as to how to overcome these obstacles. And that’s the best thing
in the world that you can have.
It is you and him against the problem now, rather you against him.
The result is, he signs the deal!
There is a possibility of another result. Due to certain obstacles, even

though he loves your offer, he is unable to buy and you know why because
while discussing the obstacles, you have done an in-depth analysis with
your client and that helps you to improve your offer further or improve
your sales process.
359
If you have identified the need correctly and taken the correct action, you
must get the predicted result. If you don’t get the predicted result, it only
means either you did not take the action correctly or you need to improve
this process.
So even if you don’t win few selling opportunities, you are the ultimate
winner.
360
8.6 SUMMARY
The process of sales is actually the process of overcoming the resistance

for change. The change in this case is asking the client to buy a product.
First, you bring the client to agree on the problem.
With that, you build the rapport.
Don’t just show your solution or your product. Bring the client to agree on
the direction of the solution.
Once you achieve that; only then present your product/service. There is
only one way to present the product/service: how the features of your
product/service solve the problems faced by the client.
Once you have done that, you move to negative branches. Use it to
remove the suspicion of the client to believe that the offer is so good.
Then start talking about the obstacles.
A good salesperson does his homework well. A good salesperson does not
say “Let me take you for a dinner” but he says, “Let me understand your
problems”. He listens; not just what the client is saying but also to “Why”
the client is saying what he is saying.
1. Why win-win offers do not sell themselves?
2. How do you do sales management?
3. Explain the sales process in detail.
361
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
362
 

RADICAL BUSINESS PERFORMANCE IMPROVEMENT – REVISITED
Radical Business Performance

Improvement – Revisited
At the beginning of this book, I tried to establish that using TOC helps
causing a radical improvement in business performance. But then, since I
had not taken you through the knowledge about TOC, I could not go
beyond a point.
Now that you have studied the most of the aspects of TOC (I am saying
“most of the aspects” and not “all the aspects” because I have not covered
some important aspects such as Thinking Process, Resistance to Change,
Managing People, Building Strategy and Tactics Tree, How TOC can work
well with Lean, Six Sigma etc.), perhaps this is the correct time to consider
how TOC can cause radical improvement in your business performance.
Let us ask a basic question: What do we mean by improving business

performance? Or How do we know that our business performance has
really improved?
Yes, you are right. You will look at how profits are growing year after year
keeping the customers/suppliers/vendors and employees happy. Isn’t it?
So, you will look at the red curve. There are good measurements for it,
i.e., Net Profit and ROI. There may not be a way to know about the
stability that the green curve represents; but by now, you know that there
in one process – the Process of Ongoing Improvement (POOGI), the
process which is linear and circular, i.e., you go through step 1 to step 4
and then again go back to step 1– people will know what management is
doing and how consistent it is. So, the main process is stable and
repeatable.
The idea of identifying the Constraint and exploiting it, gives immediate
benefits. If you subordinate well, it gives you another jump in
performance.
This provides a rapid business performance improvement.
The next jump comes in when you decide to elevate the Constraint. This
step gives you the ability to go beyond your current horizon and achieve
363

greater results. This is really radical improvement. It takes the company to

the level which was not imagined before.
The repeated cycles of the Five Focusing Steps makes “Radical Business
Performance Improvement” an habit!
It is TOC that brought your attention to “Policy” constraints. Policy

constraints are not physical. Physical constraints merely become the
expression of deeper underlying policy constraints. Goldratt considers that:
"We very rarely find a company with a real market constraint, but rather,
with devastating marketing policy constraints. We very rarely find a true
bottleneck on the shop floor; we usually find production policy constraints.
We almost never find a vendor constraint, but we do find purchasing policy
constraints. And in all cases, the policies were very logical at the time they
were instituted. Their original reasons have since long gone, but the old
policies still remain with us.”
If most constraints are, in reality, policy, then this should be incredibly

powerful. It means capacity in reality already exists, we are simply holding
ourselves back based upon some internally held assumptions, convictions
and paradigms.
If you manage to identify such erroneous policies and get rid of them, your
business performance improves radically.
Now let us look at the various TOC applications and see how they help in
this process.
All these applications are based on the essence of the Five Focusing Steps.
If it is so, why did Dr. Goldratt felt the need to create these applications?
The answer is simple. In absence of these applications, every company will
have to reinvent the wheel.
TOC is simple to understand but it is not easy to implement. Since there is

a generic need to implement the same thing over and over by most
companies, it is imperative that we should have something that is well
thought of, based on real experience, simple to understand and relate. This
is precisely what Dr. Goldratt did when he created TOC applications.
364

Now, let us look at each of these applications.
Well, it is important to note that TOC actions are counter-intuitive. Many

times, they are just opposite of what we have been doing for ages.
Therefore, Dr. Goldratt had to make a very bold and aggressive statement:
“Cost Accounting is enemy number one of productivity”
and he went ahead and proved it. He wrote: “…When I met Dr. Ohno, the
inventor of KANBAN, the JIT system of Toyota, he told me that cost
accounting was the number one thing that he had to fight against all his
life. ‘It was not enough to chase out cost accountants from the plants, the
problem was to chase cost accounting from my people’s mind’…”
What do managers do day-in and day-out? They take decisions and actions
to implement them. We have seen the conventional way of judging various
actions and decisions and have realized that most of them are not likely to
improve business performance since they are based on erroneous
assumptions. We have dealt in depth in the relevant chapter and have
suggested the new TOC approach. Throughput Accounting is based on the
considerations that will exploit the Constraint better and hence the actions
and decisions based on the impact on the Constraint certainly lead to
improvement in business performance.
What happens in manufacturing? The TOC way helps in reducing the lead
time substantially. It also helps in simultaneously improving the due date
performance. What is the impact of this on the business performance?
What does TOC recommends to achieve this? It provides a simple

mechanism to release the material based on the Constraint. It takes us
away from the devastating practice of measuring “Utilization” and
“Efficiency”.
If we are consistently able to produce much faster than the competition

and keep our delivery time commitments, we are certain to get more
orders. So, more business, more money.
In Distribution, we believed that the only way to serve the customers

better is to keep inventory closer to them. More the inventory, better the
chances of selling. The logic is based on “Push” mentality. TOC has proved
365

it to be wrong. The counter-intuitive idea is “If you want to service your

customers better, keep the goods away from them”.
With TOC, we are able to dramatically improve the availability (and sales)
while simultaneously, minimizing shortages and surpluses as well as
substantially reducing the level of inventories and pave the way to increase
the variety.
What is the impact of this on business performance? Of course, more

money.
TOC shows us the way to reduce the cycle time of the projects and
dramatically improve the due date performance. It shows the way to
balance the workload while simultaneously minimizing multitasking. It also
shows us as to how to use safety for the benefit of the projects which
otherwise gets wasted.
We routinely release the projects as they come, we take pride in

multitasking and we pad our estimates to protect each task. TOC has
proved that all these things cause delays in project execution.
We believe that “Earlier we start a project, earlier we will finish it” and TOC
says “If you want to finish your projects early, start them late” because “it
is not important how many projects we start; but it is critical how many
projects we finish”.
What is the impact of reducing cycle time and dramatically improving the
due date performance? If we are taking projects from customers, we are
very likely to get more projects. If we are doing internal projects say for
creating new products or design, we are likely to be the first in the market.
And this will result in substantial jump in profits – a radical improvement in

business performance.
TOC teaches us how to develop a Decisive Marketing Edge and how to

create an unrefusable offer. This helps to solve significant problems of the
market and thereby attract more and more customers.
The TOC way of selling helps us win more and more customers and thereby
increase the sales.
366
What is the impact of all this? Unprecedented growth in business!
Therefore, TOC is the correct management philosophy to achieve “Radical

Business Performance Improvement” because it helps us to “FOCUS” rather
than trying to improve everything, everywhere and everyone.
367

BOOKS BY THE AUTHOR
BOOKS BY THE AUTHOR

TOC Do It Yourself (DIY) Series of eBooks
1. Theory of Constraints – Do It Yourself Kit for Small and Medium Size

Enterprises for Manufacturing.

Enterprises for Distribution.

Enterprises for Projects.
These eBooks are meant for Business Owners, Managers, Consultants and
Implementers.
If you are a business owner or a consultant or a manager in Manufacturing

business and you have problems in delivering orders on time, your lead
time is increasing over a period of time and you have high inventory on the
shop floor, the eBook for Manufacturing can certainly help you.
If you are a business owner or a consultant or a manager in Distribution

business, and you have frequent shortages and surpluses and are carrying
high inventory, the eBook for Distribution can certainly help you.
If you are a business owner or a consultant or a manager engaged in

Projects, and you are struggling to deliver the projects on time, within
368

BOOKS BY THE AUTHOR
budget and with full scope, and your project lead time is increasing over a
period of time, the eBook for Projects can certainly help you.
If you are a consultant or an implementer, implementing one or more of

these applications, these eBooks will serve as a handy guide or checklist
for the steps to be followed.
These eBooks have been translated in the following languages:
• To French …..….. by Joel-Henry Grossard

• To German …..….by Juergen Kanz
• To Italian …....….. by Carlo Buora
• To Spanish …..….by Alejandro Fernandez
• To Portuguese …. by Luís Cristóvão
Echoes of TOC
• Echoes of Theory of Constraints (TOC) Volume 1.
• Echoes of Theory of Constraints (TOC) Volume 2.
369

BOOKS BY THE AUTHOR
“Echoes of Theory of Constraints (TOC)” is a carefully selected anthology of

the most valuable TOC Articles contributed by well-known and respected
TOC authors from all over the world.
It’s ideal for the TOC enthusiast, whether new to TOC or an expert in TOC
practice.
We’ve all found seams and traces of TOC gold scattered all over the web –
echoes and extensions of the magnificently simple and profound concept so
well-articulated and conveyed by Eli Goldratt.
“Echoes of TOC” gathers some of the best of these echoes together into a
single easily accessible resource that you can refer to when you want to be
reminded of an insight or to browse occasionally to refresh and extend
your own mastery.
It contains articles from the following TOC authors (List in alphabetical

order):
Adail Retamal, Alejandro Cespedes, Bill Dettmer, Daniel Walsh, David

Burch, Dr. Alan Barnard, Dr. James R. Holt, E.R. “Tuck” McConnell, Eli
Schragenheim, Etienne Du Plooy, Frank Patrick, Gary Bartlett, Henrik
Martensson, Henry Camp, Jake Dell, Jerry Hahn, Joseph Pangilinan, Justin
Roff-Marsh, Kevin Fox, Kevin Kohls, Martin Powell, Oded Cohen, Orion
Avidan, Ravi Gilani, Robert Newbold, Rudolf Burkhard, Stefan Van Aalst,
Ted Hutchin, Tony Rizzo.
370
REFERENCES AND BIBLIOGRAPHY
References and Bibliography

1. “Theory of Constraints Self Learning Program (SLP)” – It is a set of eight
parts – two CDs each, created by Dr. Eliyahu M. Goldratt.
2. “TOC Insights” – Dr. Goldratt has explained certain TOC applications

using animation.
3. The Goal – Dr. Eliyahu M. Goldratt and Jeff Cox.
4. The Race – Dr. Eliyahu M. Goldratt and Robert E. Fox.
5. It’s Not Luck – Dr. Eliyahu M. Goldratt.
6. Critical Chain – Dr. Eliyahu M. Goldratt.
7. Production – The TOC Way – Dr. Eliyahu M. Goldratt.
8. The Haystack Syndrome – Dr. Eliyahu M. Goldratt.
9. Necessary But Not Sufficient – Dr. Eliyahu M. Goldratt, Eli Schragenheim

and Carol A. Ptak.
10.Isn’t It Obvious – Dr. Eliyahu M. Goldratt, Ilan Eshkoli and Joe Lee
Brown.
11.The Choice – Dr. Eliyahu M. Goldratt.
12.Essays on Theory of Constraints – Dr. Eliyahu M. Goldratt.
13.What is This Thing called Theory of Constraint – Dr. Eliyahu M. Goldratt.
14.Manufacturing at Wrap Speed – Eli Schragenheim and H. William

Dettmer.
15.Reaching the Goal – John Arthur Recketts.
16.Viable Vision – Gerald Kendall.
17.Throughput Accounting – Thomas Corbett.
371
REFERENCES AND BIBLIOGRAPHY
18.The Theory of Constraints and Its Implications for Management

Accounting – Eric Noreen, Debra Smith and James T. Mackey.
19.Ever Improve – Oded Cohen.
20.The Path – Dr. Shridhal Lolla.
21.Mabin, V.J. and Balderstone, S.J., ‘The Performance of the Theory of

Constraints Methodology: Analysis and Discussion of Successful TOC
Applications’, International Journal of Operations and Production
Management, 23, 6, June (2003), pp. 568-595.
22.www.goldratt.com
23.www.goldratt-toc.com
24.http://toc-goldratt.com
25.http://www.vancouver.wsu.edu/
26.http://www.dbrmfg.co.nz/
27.www.focusedperformance.com
28.www.ciras.iastate.edu
29.www.thedecalogue.com
30.http://www.advanced-projects.com/
31.Youtube.com
372

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Radical Business Performance

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition Jan 2014 2nd Edition, July 2021

When attempting to improve an organization, one should embrace a

To ensure a holistic view, one should consider Undesirable Effects (UDEs)

Here is an example from Steel industry.

Aspect Undesirable Effect

Since it is not clear how to proceed holistically, almost always, each

Logistics Inventories are too high Implement a computer system

Rearrange the customer service

Finance Too long payback period Mergers, downsize…

People Bad internal relationships Hire organizational psychologist

Average Performance Average Performance in

Lead time (plates) ~ Six weeks ~ Six weeks

Due date performance ~ Sixty per cent ~ Sixty per cent

Payback period ~ Seven years ~ Seven years

Write the improvement initiatives undertaken in your organization to

Aspect Undesirable Effect Common Improvement Initiative

How much do these initiatives have to do with other?

But what is a strategy?

Strategy is a direction in which you want your company to move now as

This suggests that it is necessary to put your company on a process of

But, what do we mean by the “Process of Ongoing Improvement”? As the

It is necessary to improve the performance of your company radically.

In the figure above, “Time” is represented on X-axis and “Business

In contrast, the red curve, which is a parabolic one, indicates an initial

Beware of the green curve; get on to red curve, as fast as possible.

What is meant by “ever flourishing?”

Stability in processes is, no doubt, necessary. However, there is one more

Factor of 10 requires enormous break of many things that we take for

Is there a good solution to help businesses to bring about a Radical

Is there such a good solution?

Before answering this question, let us understand what is really meant by

A solution is a “Good Solution” if it meets all of the following criteria:

• Results in excellent benefits.

Theory of Constraints (TOC) is the new management philosophy that

TOC Results in Excellent Benefits

One of the most comprehensive studies on TOC was done by Professor

• Lead Times: Mean Reduction 70%

Win-Win-Win for all whose collaboration is needed

TOC considers that the risk (multiplied by damage) involved in its

TOC solutions are simpler than what we do currently

TOC is easy to understand; it is a common sense; not a rocket science.

TOC gives immediate significant results

TOC does not self-destruct

TOC protects us against such situations. TOC provides a mechanism – a

TOC’s process of ongoing improvement

This is the key for radical and sustained business performance

TOC and Strategy

TOC provides a systematic way to build a lasting business strategy that