Of particular note in slide 4.11.1 is the wording of the strategy-"Flow is the number one consideration." Flow is measured by how many projects are completed each period. To achieve this, the tactic calls for controlling the number of active projects. Using the S&T viewer, you can view level 5 details, which call for freezing a substantial portion of the active project work. This is done before any critical chain plans are formulated or before any new software is used. This is how TOC seeks quick results.

To achieve results from the actions, the project S&T ties key elements together through a comprehensive cause-effect logic. For example, simply reducing active project work can easily result in no visible improvement. I know of an organization that cut their number of active projects in half, only to have the CEO remark that no one saw any effects. The reason is simple. All the resources were already so busy on the first 11 of their top 40 projects that no tasks on the other active projects were being worked on.

Therefore, if you view level 4 of the S&T (see Table 18-4) through the viewer referenced previously, you will see that immediately following the freezing of project work, the freed up resources are concentrated on remaining open projects, in order to speed them up. If, because of freezing projects, no resources are freed up, then the benefit of freezing is moot. This is an example of why the S&T between levels are inseparable. When an implementation team does not understand the full cause and effect of the entire process, the team and the strategy often fail.

TABLE 18-4 Projects S&T for 4.11.1 Reducing WIP One of the most significant understandings drawn from the past few years of CCPM experience is that the key to driving benefits is not in planning projects, but in execution. Critical chain has a unique way of taking safety out of embedded task time estimates and accumulating the safety into buffers (project and feeding). This approach results in a shorter project timeline. However, at the time that tasks are estimated, there is a lot of vital task and project information that is still not known.

Three strategic execution processes drive down task times during execution. Without execution processes, even with full top management support, it's likely that a critical chain strategy will produce disappointing results. All of these processes are highlighted in the project S&T. The processes that are essential to achieve the strategy are as follows: 1. Full Kit-A great deal of project rework occurs because detailed work is started too early-before overall design/definition is complete. Generic full kit points and templates are defined for project types, which are then custom defined for each project. Combine this with the appointment of one of the top executives as a "Full Kit Manager," and no follow-on work will be allowed to start until the full kit is reached. Unnecessary rework is driven down significantly. In a matter of a few weeks, resource time is freed up and costs (overtime, subcontracting, errors, etc.) are reduced.

2. Daily Task Management-The common practice in project management today is infrequent (weekly or longer interval) reviews of task progress. That is a long time to wait to find out that a task execution has a problem or is waiting for something to progress. Task managers, usually from within a skill set discipline, are given the full-time role of monitoring active project tasks daily. They prepare tasks in advance, ensure issues are resolved, and lend expert assistance to those executing the tasks. Their intuition and experience prevents over-engineering. Their practice of not assigning new work to a resource until a task is completely finished prevents multitasking-one of the biggest wastes of resources.

3. Fast Track Issue Resolution-A top manager is given responsibility to get all project issues resolved within 24 hours that could not be resolved below their level, either by project or task managers. This involvement of top management speeds up projects and brings the right level of executive attention to critical issues delaying projects.

Similar to the manufacturing rapid response S&T, the project S&T includes sales and marketing components to take advantage of the company's ability to execute projects more quickly and more reliably. A project company that can execute projects 25 percent faster than a few months ago must have a corresponding marketing and sales effort, in order to capitalize on this increased capacity.

The S&T also suggests that some clients are willing to pay premiums for faster project execution, even though the project company may not be willing to guarantee faster delivery. For example, if the project involves maintenance and repair of a very expensive asset (an aircraft or ship), the faster it's turned around, the less the revenue loss and the fewer the number of aircraft required in a fleet. Once the company has fully implemented CCPM, including its embedded POOGI, it becomes easier to beat the competition consistently on aggressive promise dates without taking risks.

In summary, CCPM processes in executing projects bring a level of cross-functional alignment, speed, and predictability that is very difficult for competitors to copy. Extensive top management support and discipline is essential to make this work. Once implemented, an organization capitalizes on the improved project execution capacity by value-oriented marketing and sales efforts. The impact on the bottom line becomes more and more significant, since some of the same project work can be done at a premium when it's executed much more quickly. Reading through the entire set of slides in the S&T several times will bring the full picture to light.

Distribution/Retail

The average life of a golf club is 9 months. In bowling, specialty balls have a life of less than 6 months. Many medical products, including surgical rubber gloves, have a life of less than 2 years. We are not talking about shelf life or the product physically decaying. What we are describing is the perception created by the entry of new or replacement products, making existing products seem obsolete or not as valuable. No wonder distributors and retailers hate carrying large amounts of inventory! At the same time, retailers and distributors have the opposite paranoia-not having enough inventory and losing a customer sale.

Handled correctly, shorter product life is an excellent opportunity to enhance everyone's sales and profits. However, attempts at optimizing cost encourage mountains of unneeded inventory in the supply chain while simultaneously perpetuating shortages.

The TOC strategy for distribution and retail increases Throughput of the entire supply chain in at least six different ways (described in the next section). Often, the potential impact on business volume and profits is greater from Throughput increases than from reductions in Inventory. Thank goodness, the distribution solution does not force a choice-increased turns, increased Throughput, and decreased Inventory occur from the same holistic approach.

The S&T free viewer, described previously, should now be used to view the consumer goods S&T.

The Current Supply Chain Frame of Reference

To understand what determines a good strategy for distribution and retail of consumer goods, it's critical first to understand traditional practices. Driven by local optima, manufacturers push inventory into the distribution channel as soon as it's produced. Cost accounting rewards them in the short term by reporting the inventory movement as sales and profits on their books, even though no consumer has bought the products.

The Inventory has moved from the manufacturer's docks to the distributor's warehouse. The longer the Inventory sits in the distributor's warehouse, the higher the risk of obsolescence, the greater the carrying costs for the distributor, and therefore the lower that distributor's profits. For the distributor, profit is directly tied to the number of times they can turn the Inventory. Therefore, the manufacturer, the distributor, and each subsequent link keep pushing the inventory until it reaches the retail shops (if this link exists) or the end consumer level.

In this paradigm, much or most of the Inventory sits at the retail level, while little or no Inventory is at the manufacturer's plants. At the same time, customers who visit a retail shop often cannot find the specific item for which they're looking.

Why do some retailers carry so much Inventory if it just sits in their store much of the time? Why do they tolerate costly obsolescence and high carrying costs and still have customers walk out of their shops without the desired goods in hand? To answer this question, consider common manufacturer and distributor practices.

Many manufacturers and distributors offer quantity discounts, on a per-order basis. In addition, many of these same manufacturers and distributors have freight policies and charges that penalize the retailer for smaller orders. Since most retailers compete with other shops close by selling similar goods, the retailer needs a similar cost basis to stay competitive in price and margins. Therefore, retailers place large orders with manufacturers (for much more than is needed to satisfy short-term demand) in order to gain better per-order discounts. As a result, retailers have much larger quantities of goods on hand than they need to cover immediate consumer demand and replenishment time. With this inventory on hand, even as consumer tastes are changing or as manufacturers replace existing products with new products, retailers are pushing their existing inventory on the consumer. You can see this phenomenon in the car market, computers, cell phones, etc.

Knowing the new product is coming, the retailers rush to get rid of the old products at fire sale prices or with special deals, anxious to avoid obsolescence. By doing these mass promotions, the retailers kill the market for the new product and their profit margins. Many of the consumers who might have bought the new product are now in possession of the older one.

There is another devastating effect to a supply chain that operates this way. By pushing most of their inventory to the retailers, the manufacturers and distributors have distanced themselves from changing trends in their markets. In many cases, with several months of inventory tied up at the retail and wholesale level, it takes manufacturers and distributors several months to see consumer demand changes reflected in orders to them. The lower the number of turns at each level in the supply chain, the longer it takes for manufacturers to understand and react to trends.

There is one other very negative effect. At the same time that excess inventory abounds in the supply chain, customers come to buy a product and often don't find it. Yet many times, the very product that is short in one store is sitting in abundance on a shelf somewhere else in the supply chain! This happens because of the practice of pushing large quantities of each product toward the retailers in a manner that does not match end consumer demand.

In this world of local optima, manufacturers keep on producing and shipping goods to distributors, sometimes "threatening" the distributor with higher prices or loss of exclusivity if the distributor will not accept the goods. Distributors do the same with their retailers, until the supply chain is completely clogged with goods that consumers are no longer buying. By this time, significant damage has been done. There is too much inventory in the system, and the part of the supply chain that has the most inventory suffers the greatest consequences. Retailers go bankrupt. Distributors lose money. Manufacturers-well, just look at what has happened in the great recession of 20082009. The auto industry is just one example of a whole supply chain exploding with too much inventory of what consumers don't want.

Distribution S&T

As discussed in the previous example of the 5FS, the biggest leverage point is typically "the customers who come to buy the product or service." There are not enough clients who buy.

We see distribution channels going adrift in Step 2, Exploit. Before spending money to attract more clients, don't waste the ones who already come to buy. It's a complete waste when clients don't buy because they cannot find a product in a given location, but the same product is on the shelf in another location. In order to avoid wasting a customer, we must dramatically increase the chance of matching the right inventory in the right place, at the right time to the end consumer demand. To achieve this, we must answer the following questions: 1. Where is the ideal place to have most of the inventory?

2. What are the correct logistics to replenish the inventory between manufacturers and distributors, and between distributors and retailers?

We will begin with the first question-where the inventory should be located. Consumer demand varies widely from one geographic location to another. In any one retail location, it shifts dramatically from day to day. There are time lags between changes in end consumer desires and the reactions of the supply chain. All of these factors make predicting demand for any product at the retail level a phenomenal challenge.

Manufacturers often try to react to the challenge by pouring millions of dollars into more sophisticated forecasting systems, only to find little, if anything, improved. After all, a forecasting system does not make the end consumer react more rationally or predictably. To exploit the constraint-the customer who wants to buy-we must move away from sophistication into a much simpler solution.

There are two steps necessary to solve service level, inventory, and obsolescence night mares permanently in a distribution environment: 1. Pool the inventory where there is the greatest predictability.

2. Implement a pull system to replenish individual items frequently based on what was sold during a short interval.

If you were the logistics manager of a large shoe manufacturer, what is the ideal way to distribute the inventory of size 8 brown shoes across the supply chain? In one week, you could not say that anyone will buy even one pair of those specific shoes in any given store. However, you would have much more confidence about the national numbers. The more macro the level you are forecasting, the greater the predictability. Predictability decreases as you move from national to regional and from regional to city and city to individual location.

Based on the characteristic of predictability listed previously, the logical thing to do would be to have more of the inventory at the manufacturing plant, less at the distributors, and even less at the retail level (see Fig. 18-6). Logically, you would also replenish with much shorter lead time. In this way, there will be less chance of stockouts at any given location and trends will show up much more quickly, with less waste.

For example, assume that a retail shoe store today is currently holding 3 months of inventory of each SKU. This inventory requirement is calculated based on the total replenishment lead time. The replenishment lead time is made up of: Transportation lead time Production lead time-the time it takes the manufacturer to produce the product Order lead time-the time between when the retailer sold the first item and the time they reorder While the supplier controls transportation and production lead time, the retailer controls order lead time. As it turns out, order lead time usually provides the biggest opportunity for improvement. In the old approach, retailers reorder when they hit a minimum quantity in stock (commonly called the min in a min/max system or reorder point in a reorder point/economic order quantity system because they will order sufficient quantity to bring their stock back to a maximum level). Under the exploit step, TOC implements a pull system that has the retailer order, every period (e.g., one week), exactly what they sold in the previous period.10 FIGURE 18-6 Inventory impact of TOC Distribution Solution. (Used by permission of E. M. Goldratt 2009. Distribution S&T E. M. Goldratt.) In our new system, assume transportation lead time stays the same. With finished goods inventory now being held by the manufacturer at the plant warehouse, production lead time is 0-the product should be in stock in the plant warehouse. The biggest difference is usually in the order lead time. Instead of waiting 2 to 2.5 months for the stock level of each item to hit a minimum, and ordering a 2 to 3 month supply of that item, the new pull system has the retailer order only the SKUs that moved the previous week, in the exact quantities sold the previous week. The order lead time has now been reduced from months to a matter of days.

This means that the amount of inventory of each item that the retailer or distributor needs to carry to cover their replenishment lead time is much less. It also means that their chance of running out of an unexpectedly popular item for weeks at a time is almost nil. Service levels, under this new system, move much higher, while total inventory in the supply chain typically drops by two-thirds! The system reacts much more quickly to the variability and uncertainty of consumer demand. It also greatly simplifies both the distributor's and the retailer's lives. Instead of worrying about ordering a 3-month supply and debating how much and which products the consumers might demand over that long a time period, the order items and quantities are automatically determined based on sales.

Wearing our marketing hat, with the additional space freed up in the store by reducing the overstocks, we would have the retailer carry a greater variety of our goods. More variety means more sales (see Fig. 18-7). The left side of the S&T focuses on TOC replenishment throughout the supply chain, from manufacturing through distribution and retail. The right side of the tree focuses on Throughput per square foot or meter of shelf space (abbreviated TPS-Throughput per shelf).

FIGURE 18-7 S&T for TOC Distribution Solution. (Used by permission of E. M. Goldratt 2009. Distribution S&T E. M. Goldratt.) As for transportation costs, in the real-life cases where this logistics solution was implemented, the configuration of each of the shipments was different, but the frequency and cost of shipping remained about the same. Instead of shipping 50 units (a 3-month supply) of 10 items, we are shipping 10 units (a 3-week supply) of 50 items. Of course, shipping more frequently in some industries may well be worth an additional cost (if there is any) with a disproportionate increase in sales and decrease in obsolescence.

For distribution chains that have changed logistics according to these principles, the statistics are astounding. Overall OEs (considering the combination of transportation costs, inter-warehouse transfers, inventory carrying costs, returns, and obsolescence costs) decrease dramatically while Throughput increases significantly.

Successful companies don't stop at the exploit step. By focusing attention on Step 3, subordinate, you substantially reduce any risk of failure.

Subordinate means that everyone in every part of the distribution supply chain, including the manufacturers, adopts the attitude that "As long as the end consumer has not bought, we have not sold!" Existing measurements must change to encourage pull rather than push. This is especially important for the manufacturer, who will now be carrying a significant portion of the total finished goods for the entire supply chain in the plant warehouse. See the S&T for consumer goods for a full insight into this approach and for the assumptions made at all levels of the supply chain. Figure 18-7 provides an overview of the structure.

In the subordinate step, the company puts the pull system software and procedures in place. The minimum inventory necessary to cover fluctuations in consumer demand and transportation time during a short time period are stocked at the retail level (or level closest to the end consumer). The distributor carries the minimum inventory necessary to cover fluctuations in demand from their customers plus the transportation time from the manufacturer to replenish the inventory. The manufacturer carries a larger inventory to cover fluctuations in distributor demand plus the cycle time to manufacture sufficient quantity to replenish their plant finished goods inventory. Of course, you must factor these numbers based on the reliability of the transportation and the manufacturer into these calculations.

Some of the most successful companies in the world are using such systems today-from computer manufacturing to super retail stores to luggage companies. Just look at the inventory turns of highly profitable manufacturers and distributors, and the numbers speak for themselves. They have implemented a true pull system.

What about Step 4, elevate? Distributors might need to elevate, for example, if they want to open up new geographic areas. However, with the cash freed up from the first three focusing steps, it's much easier to add new distribution locations. In addition, the cost of setting up each new distribution location is much smaller, due to the decreased inventory.

Six Ways That the Holistic Distribution System Increases Throughput

1. Having sufficient stock of each product at the right location in time to match demand increases the service level (the percentage of time the buyer finds the item in stock and therefore is able to complete a purchase).

2. With less inventory, and therefore less shelf space required per item, the distributor and retailer are able to stock a greater variety of items, thus increasing Throughput from the same physical space.

3. With less inventory per item, sales to get rid of excess inventory are required much less frequently. This means that both the margins and the sales revenue are increased. It also implies that sales of older products don't spoil the market for new products.

4. With less inventory per item, there is less obsolescence, leading to greater satisfaction among consumers and therefore increased sales. The products on the shelf are newer and therefore more appealing. This can have a huge impact on Throughput with items that have expiration dates.

5. Faster replenishment during out-of-stock situations means that there will be much less opportunity for a buyer to have to resort to a competitor's product.

6. The faster reaction to changes in consumer demand leads to fewer and shorter times of being out of stock of any given item.

In summary, many distributors fight hard with their manufacturers to carry smaller quantities of inventory on better terms. At the same time, the manufacturers are often trying to do the opposite-push larger amounts of inventory to distributors and retailers with more aggressive terms. Each link tries to push their inventory as quickly as possible to the next link in the supply chain. This creates huge gluts of inventory at the retail level. As retailers try to predict, months in advance, what their consumers will demand and order accordingly, it's 100 percent certain that retailers will have too much of some products and not enough of others during this long time period.

TOC changes this nonsense from a push system to a pull system. Inventory is kept where it makes sense (less at the retail level,11 more at the manufacturer's and regional warehouses). This is entirely feasible when the time to replenish goods at the retail level is significantly decreased. With these changes, total inventory in the supply chain decreases by two-thirds, while customer service increases.

Four Generic Prerequisites/"Injections" for a Lasting Competitive Edge

There are four prerequisite conditions to achieving any good strategy quickly: 1. A common, correct frame of reference for all management, including a global measurement system that induces and encourages holistic behavior across the supply chain. The TOC framework is driven by holistic measurements (Throughput, Investment, and Operating Expenses) combined with the 5FS.

2. Stable and predictable operations logistics that allow the organization to "turn on a dime." An organization must be able to meet their customer due date and lead time expectations. Further, as demand increases by large amounts, the organization must be able to respond quickly. If a company responds to a large increase in demand by temporarily extending lead times by a short factor, most customers will find this acceptable. By contrast, if a company extends lead times by more than 15 percent for more than a few weeks, it's predictable that many customers will start to look for another source, unless the phenomenon is industry-wide. To prevent extending lead times by a large percentage for a long time requires a focus on one or two variables-the leverage points in the operation that must be adjusted quickly. For example, within a forging operation consisting of dozens of production departments, the two leverage points might be in the heat treat ovens and at the forging press. In a labor-intensive operation such as building custom kitchen cabinets, the two leverage points may be in the spray booths, where it's difficult to train and retain labor, and in the hiring process. A logistics solution that includes quick capacity elevation preparation must be in place and in alignment with the valve to the market.

3. Correct and sufficient marketing. There must be recognition that scarce marketing resources must consciously focus on the few target markets where the company can excel. The implication of scarce sales resources is that lead generation and sales cycle management is a must in a value sale.

4. The ability to implement change quickly and predictably. This means superior project management execution. TOC's Critical Chain Multi-Project methodology provides the means to drastically cut project durations and increase predictability of successful completion. Critical Chain is not optional-it's a prerequisite to achieve a VV.

Once an organization has implemented these conditions, it's stable and can adapt very quickly to market changes. Here are four strategies (injections in a TOC FRT) that, in combination, are designed to lead to market domination for 10 to 15 years:

INJ. 1: Increase Customer Perception of Value that Competitors Have Difficulty Copying

The company implements modifications to current product/service offerings that substantially increase the customer perception of value for a sizeable market. This injection uses the concepts of the Mafia Offer. To create such an offer, you must really understand the customers and how they will benefit significantly from changes in: Options Packaging Service level Guarantees Response or lead times Removal of industry standard annoyances, such as freight charges, minimum order quantities, etc.

Don't make such an offer based on lower price. Price is the easiest attribute for any competitor to quickly copy. You should look at rooted industry policies first, before changing the physical product itself.

The result of implementing this injection is a significant advantage in a sizeable market. In addition, the marketing department must create marketing awareness/presentations that reposition their products with higher value to the market. The salespeople must learn how to sell value effectively. The operations people must have processes in place to manage significant increases in demand. These successes help to build the confidence of all of these functional areas in the strategy, a desirable condition before implementing injection 2.

INJ. 2: Implement Practical Segmentation

A market is considered segmented when the prices and quantities sold in that market segment have no impact on the prices and quantities sold in any other segment. Such segmentation gives you the opportunity to address the needs of different groups of customers in a unique way, with the same base product or service. For example, a manufacturer of expensive shoes enters the mass-market segment for less expensive shoes. A maker of original truck parts segments by entering the aftermarket for replacement parts. A distributor of advanced products in the wireless communications industry uses their knowledge to distribute basic consumer goods.

The result of the implementation of this injection is that the company is operating in several market segments in which it has a competitive edge. The company elects not to take 100 percent of any market segment that is not very lucrative. A company that owns 100 percent of a market segment has much less flexibility to improve. Being in a monopoly situation implies certain responsibilities. If you decide to get out of that segment, and you don't leave your customers with an alternative, those customers will hate your organization for a long time. Don't put a lot of energy into taking 100 percent of a market unless it's hugely beneficial. Conserve your resources for where they will do the most good.

The company is careful to enter only into new products that require almost the same resources (people) as it already has. A company that can shift its resources at will, easily, between different markets and opportunities is a company that has excellent flexibility. Such flexibility gives the company the ability to meet the necessary condition of employment security and satisfaction in a way that makes more money for the company. The key point to remember when implementing this strategic injection is that it's people, not machines, about which we are talking. A person who is a great manager of engineering airplane components, for example, also can manage many other engineering environments.

Because of implementing this injection, the company succeeds in segmenting its markets, not its resources, with flexibility to shift resources at will.

In choosing its overall collection of market segments, the company looks for segments where the probability of many segments experiencing economic downturns simultaneously is very small. When combined with injections 1, 3, and 4, this one provides the company with the insulation it needs for long-term stability. When a lucrative segment is up, by deliberately not taking 100 percent of any other market segment, the company has the flexibility to shift resources from less desirable segments. When a segment is down, the company can shift resources to other segments. Given this situation, the company rarely will find itself in a situation where it's forced to lay off people.