Thursday, October 30, 2014

Focus and Leverage Part 388

As a result of my last several posting on Demand Driven Performance Using Smart Metrics written by Debra and Chad Smith, I received several emails wanting me to write more on this subject.  At least for the senders of these emails, what I presented really resonated to the point that two of them truly believed that I was writing about their companies.  The fact is, most companies in the world are being run using a cost -centric strategy, so it doesn't surprise me one bit that there was an interest in hearing more about Debra and Chad's methodology they presented.  I responded to these emails by telling them that they truly need to purchase this book as well as Orlicky's Materials Requirements Planning 3rd Edition written by Carol Ptak and Chad Smith.  This will definitely be my last posting on these two books, at least in this series of postings.

On Orlicky's Materials Requirements Planning 3rd Edition  jacket Carol and Chad wrote the following:

"Building on the pioneering work of Joseph Orlicky, this new edition of the classic text on materials requirements planning (MRP) reveals the next revolutionary step for materials and supply chain synchronization in the modern landscape."

"Orlicky's Material Requirements Planning, Third Edition reviews the poor business results embedded in many of today's manufacturing systems, discusses the core problems causing these results, explains an alternative pull structure for planning and controlling materials flow, and presents results from actual implementations."

"This thoroughly updated edition offers comprehensive coverage of MRP, describes the current state of the MRP application, and identifies the fundamental changes required to achieve sustainable success given the current global circumstances and technology options.  This state-of-the-art guide articulates the next generation of MRP logic - demand driven MRP (DDMRP) - and provides a roadmap for the next and distant future for this critical manufacturing management tool."

Throughout this series of postings I discussed two completely different schools of thought on how a business should be run.  On the one hand, most companies focus on its monthly profit through Cost of Goods Sold (CoGs) dollar credits or as Debra and Chad referred to it as a cost-centric strategy.  On the other hand, the new way being proposed by Debra and Chad (and Carol Ptak) is to focus on and protect demand flow, or a flow-centric strategy.

This is a conflict facing many companies and as we have learned from the Theory of Constraints, we are not looking for a win-lose or even a compromise, but rather a win-win solution.  The tool we use to resolve conflicts is referred to as a Conflict Cloud or Conflict Resolution Diagram.  In their book, Debra and Chad have created a Conflict Cloud, so let's look at it now.

For those of you new to TOC, let me explain how a Conflict Cloud works. 

In the conflict cloud there is a common objective that both sides are striving to accomplish (A).  This common objective is fed by two prerequisite needs which must be achieved for the objective to be met.  These needs may not be sufficient in and of themselves, or even together, to make the objective occur; however, if even one of them does not occur, the objective will not occur, which means that these needs are not in conflict with each other.  What is in conflict are the two modes of operation needed to achieve each of the two needs.  The hashed arrow crossing from one mode of operation to the opposite side's need is meant to check that a conflict exists.  In other words, Mode of Operation 1 compromises our ability to achieve Prerequisite Need 2 and vice versa for Mode of Operation 2 and Prerequisite Need 1.  But again, the conflict exists between the two modes of operation and is characterized by the lightening symbol.  The ultimate purpose of the conflict cloud is to develop a win-win solution thus avoiding both a win-lose and a compromise solution.  The conflict can be resolved by inserting an "injection" or idea that satisfies both sides of the conflict resulting in a win-win.
In their book, Debra and Chad lay out examples of conflicts that exist within an organization on a routing basis,  Actually, this diagram originated in a third book, The Measurement Nightmare: How the Theory of Constraints Can Resolve Conflicting Strategies, Policies and Measures (CRC Press, 1999, Page 25) by Debra Smith.  In her book, Debra illustrates these conflicts in what she refers to as a "Spider Web Conflict Cloud." I encourage everyone to check out Debra's book which I believe is the best one ever written on Throughput Accounting.

Here's an example of a conflict that frequently arises when both sides are attempting to successfully manage their supply chain.
The figure above is the conflict cloud which uses necessity based logic and is read as follows:  In order to successfully manage our supply chain (A) we must manage cash effectively (B).  In order to manage cash effectively (B), we must lower inventories (D).  On this side of the conflict cloud the emphasis is on cash management.  (A) is the common objective.

On the other side of the conflict we have:  In order to successfully manage our supply chain (A) we must maintain high customer service (C).  In order to maintain high customer service (C), we must raise inventories  (D').  This side of the cloud is focused on making sure orders are shipped on time, so they increase their inventories..

As I said earlier, the lightening symbol is the conflict that exists between the two pathways to successfully manage the supply chain which are drastically different.  This conflict cloud summarizes the chronic unresolved conflict above, demonstrating that the conflicting actions to satisfy both prerequisite needs.  This conflict clearly shows how the unresolved conflict puts managers in a no-win set of compromises that compromises their ability to successfully manage their supply chain.  It's called a compromise because we end up cutting short on one or both of the necessary conditions for the overall objective of the organization.  The authors explain that "this tends to produce an oscillating effect between the two sides - a continuous set of trade-offs.  The following figure demonstrates the effect when the organization lives on one side of the conflict."

This figure demonstrates the negative effects of trying to satisfy both D' and D and as you can see, this oscillation between two sets of strategies has devastating effects on overall system performance.   So what is the solution to this conflict? The authors tell us that conflicts often produce competitive actions and these actions can waste both money and time.  At some point in time one of the prerequisites becomes more important than the other one.  In this figure we see that on one side of the conflict there is an effort to raise inventories to protect service levels while on the other side we are forced to lower inventories to manage our cash effectively.  This oscillation creates a state of chaos within the organization and as we change from one mode of operation to the other.  Everyone was following the current directive from leadership and as a result, everyone loses.  In this figure we see the negative effects of each mode of operation.  Does this look familiar?  So what is the answer?

You can find the answer to these conflicts and many other conflicts in Debra and Chad's book.  Go buy it and learn how to resolve these conflicts!  I mean, you don't expect me to tell you everything in my blog do you??  :)
Bob Sproull

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