Clarke Interviews Eli Goldratt about Isn’t It Obvious
(Transcribed by SAW1 11/30/2009)
CC – Clarke Ching, EG– Eli Goldratt
Summarized by Utkan Uluçay, only EG is presented
I’m flabbergasted by the fact that retail still believes that the key is to find a better way to forecast! And they are spending an enormous amount of money on these– I’ll call them crystal balls, though today they are disguised as computer programs – to get a better forecast. And this is a huge industry! And nobody is doing even the most obvious check before they buy another module of forecasting. Let’s just take the past data of, let’s say, two years ago, load it in the computer, and see what the computer’s forecasting module will tell you about what should have happened a year ago, and check it with what really happened, just to find out that all these new forecasting modules are as bad as the previous ones. And it’s about time to realize there is no way to accurately forecast consumption on an SKU level. It’s theoretically impossible. So the only way out is to reduce dramatically our dependency on forecast. And this is the solution that I have been talking about for so long in distribution. So what I’ve tried to portray in this book is almost obvious. How clear is this solution, how well it works, and, more than that, that the results that are coming when you implement this solution is not a small improvement and it’s not a 10 per cent improvement. It’s really propelling the performance of retail to a new level. The way that I wrote it is a little bit different than what I’ve done in ‘The Goal’, which is, in this book there is no Jonah. In other words, people are learning it from their own experiences. There is no smart, wise man who gives a solution. You’re learning the solution directly from experience, and that’s why I believe that if ‘The Goal’ had the impact on manufacturing as it was, this book will have an even bigger impact on retailing. An even bigger impact, hopefully. So, one message of the book is a retail solution. A solution for retail in a way that I hope that people cannot ignore anymore.
The other two points are a little bit more subtle. One point that I wanted to bring across – and I think that I’ve already started to do it in ‘The Goal’ and in all my books, but in this book we put so much more emphasis on it – is that in the formal text books, and certainly in the universities, I think that there is not enough emphasis on the role of the informal system. And to what extent the informal system is not just an integral part of running a business, but to what extent it is important in running a business. And I’m talking about the fact that there are relationships between people that allow them to not follow the formula system and, because of it, to improve the performance so much. I’m talking about family relationships and I’m talking about friendship, and to what extent this is key in running a business. And such things do exist in reality, in every company. Why don’t we pay enough attention to it? Why don’t we understand how important it is to encourage it, to support it. So that was the other thing that I put throughout the book; I wanted to show that the informal system is almost as important as the formal system.
And the third message, which I hope that everyone that reads it will get, is to what extent, if you are implementing a good solution and it works and you get now much better results, to what extent your mind should be not on continuing to polish it – because then you will reach diminishing returns – but to realize that this solution that you’ve implemented is really elevating the company into a new level. It gives a much bigger and better platform to do the next jump, which, by definition, since the platform is bigger, the next jump is bigger than the previous one. And not to fall into the trap of saying “We’re already the best in the industry. We are umber one, so we’ve reached it.” No! The opposite is true. Which is: the better you become, the bigger the next jump can be, if you just allow yourself not to be trapped in the box that you put yourself in. So what I’ve done in this book is: I’ve done three such jumps. Every time you think “That’s it!”; no, no, no, no, it’s just the beginning, And that’s why the last sentence of the book is ‘Even the sky is not the limit’. And the reader understands that that’s correct.
The idea is, my idea is to write six such books. As a matter of fact, those who know TOC know very well that what I’ve done here is nothing but taking one of the standard S&T trees and to turn it into a novel. Now, there are six S&T trees for the various segments of the industry. So this one is for retail. But there are five more, which my intention now is to find excellent writers and to write them one at a time. So the next book will be called, most probably, ‘Isn’t It Obvious 2?’ and then ‘Isn’t It Obvious 3?’ Each one covering a totally different section of the industry, but with the same ideas, which are every huge step, that really changes and really elevates the company to another level of performance is just the platform for another jump, for another jump which never ends. And that’s what I want people to realize.
It’s not just the less cash. As a matter of fact, if you are talking about the current situation, this financial crisis that’s after this super sophistication that was so stupid and created the financial meltdown, it turned into an economical crisis only because there were too many inventories in retail. If there were not these mountains of inventories in retail, we would have passed through it without any trace of economical crisis. But no, this was not my intention, because, when I’m writing such a book, I’m not writing it for this year.
The first one is: how do you invent? Invent powerful solutions to your real problems, to your environment. And most people think that, maybe, you have to be born with this ability to invent. What I’ve tried to show here is that every good manager is a fantastic inventor. But you don’t pay attention to it, and you waste all the inventions. Let me explain a little bit what I mean, okay? Every manager faces emergencies. And he reacts to emergencies. What can he do? As a matter of fact, a good manager will react quite well to emergencies, and he solves the problem. And what we have to realize is: whenever we react to an emergency we actually deviate from the standard rules. Always! What people do not pay attention to is that you don’t just deviate from the standard rules, you are actually following a different set of rules. And the point is: after the emergency is over, why won’t you take the time to verbalize the new set of rules that you just followed? Then think on the following; if I would have used this set of rules not just in emergencies, but in the normal day to day, what damages will happen? What undesirable effects will result, and how can I prevent them? Because, if you will now augment this new set of rules with what should be happening, in order that, when I’m using them in day to day life at the normal time they do not lead to anything negative, what you are ending up with is a set of rules that is so much better than your current rules. So much better, that even emergencies are handled as if there is no emergency. And that’s what I’ve shown in this book, if you notice. Okay, a pipe is broken. Emergency. Fine, you react to it. But then what is even Paul saying? He’s dying to go back to normal! Wait a minute, pay attention. Look at how much the situation is better now. Think, how can you use it on a daily basis, because then you get this huge improvement. And that’s what’s happening in this book. But what I’m saying is: this is always the case. So, if people would just pay attention to it, everyone becomes an inventor.
But there, distil the new rules that you are actually following in the emergency. Trim the negative ramifications of them, and then you have the new system. This always works. Everybody will just want to go back to normal. Well, this is the second message which I’ve tried to show: that, even if you do it once and as long as you don’t fall into the box, the sky is not the limit, because there is only one emergency in the whole book! We have tried this idea in dozens of companies, so the knowledge, the detailed knowledge of exactly how to do it and so on, was evolving through the years. So this book is just the accumulation of this knowledge. But it’s not any particular company. The experience here is enormous. And, by the way, the numbers in the book are accurate, but conservative relative to reality. Those are the minimum numbers that we ever got. Anyhow, nobody will believe the numbers!
The second one is much, much different. It’s different, but in many senses it’s broader, which is the whole subject of resistance to change. You know that I was adamant against ‘People resist change!’ and all this mumbo jumbo. Yes, of course people resist change when they have to resist it. And people embrace change when they have to embrace it. As a matter of fact, look at the usual thing like, people want to get married even though they know that this change will change all their life, they still want it. So they are not born resisting change. As a matter of fact, what people are doing is looking on the proposed change, and they evaluate for themselves if it’s good or bad. And, remember, a major part of the good or bad is the risk involved, the unknown involved. This influences the decision dramatically. But, when they come to the conclusion that it is good, they embrace it, and when they come to the conclusion that it’s bad, they resist it! What is important to realize is that, when we come to judge any suggestion if it’s good or bad, we are judging it according to some patterns that we have in our minds. Patterns that came from our own experience. These patterns, many times, are not correct. And if you notice, in the book, what I’m trying to show is some very important things like: the first one to resist change is the inventor himself. Paul is resisting his own change. He just wants to go back to normal. And, if you read very carefully why, there are patterns in his head that say “Ah! All the good results that I’m seeing are just a fluke.” Now, where is it coming from? And, as a matter of fact, our own patterns are coming from two different things.
One is that, when we have a major problem that really hurts us and we’ve tried and we’ve tried, and we cannot rectify it, protective mechanisms are coming into the game. And these protective mechanisms are actually that we’ve become blind to the problem. We accept it as part of life, it’s not a problem anymore. These are very wrong patterns. Now, if you notice, the first one that I’m talking about is: how much sales are lost due to shortages? Paul knows very well that about 25 per cent of the SKUs that were supposed to be in his shop are missing. But how many sales are lost? And, if you notice, he’s totally convinced that it’s only two or three per cent. And this is not just Paul, this is almost every retailer that I’ve talked to. Now, when you start to analyze, it’s crazy to think that it’s only two or three per cent. Because: why are these items missing? Because they are not selling? Or because they are selling more than the average that are missing? So if 20 per cent of the better running items are missing, how can you say that sales were impacted only 2 per cent. That’s the defensive mechanism patterns that exist in people’s heads, which block them from judging the value of the change. This is one type of pattern.
The other type of pattern is that, when you are used to some environment, you will draw patterns from it. And you will not pay attention to the fact that there are other environments. For example, the second pattern that blocks Paul is that he says “If sales are going up by so much, how much did the profit go up? I know that I’m making six per cent profit and this means that, if sales went up by X, my profit went up by this X times the profitability that I have, which is only six per cent of it.” What is it based on? It’s based on the fact that usually, when sales go up, all the expenses that are associated are going up at the same rate. What happens when sales go up and expenses stay exactly the same? Then the impact on profit is huge. But he doesn’t see it anymore, because the pattern is there. “He can’t think.”, “If he would think about it.”, and so on. Or, somebody will highlight it to him.
We are not stupid. Nobody is stupid, so, when the fallacy of the pattern is highlighted, then he has a base to evaluate his own invention and then he becomes almost zealous about it. But this is not just Paul. This is every person. What is important to realize, and that’s what I’m showing in the book: that when you go below, to people below you, they are blocked by patterns as well. But different patterns. And, as long as you don’t address it, they will fight you to the hilt. If you identify these patterns and show the fallacy of them, then immediately they are in favor of the change.
Look at the people who are working for Paul. There is the pattern: if inventory goes down and we don’t bring more inventory, this means the shop is about to be closed. This is a pattern. As long as this pattern exists, they will resist the change and they will even take actions that will kill you. You have to identify it, you have to take the action to show them that the pattern is false, and then they are all for it. Likewise, after that, when Paul talked to his peers, they are blocked by the same patterns that he was blocked with. But there is a huge difference. Paul went through an experience that enabled him to be more open to evaluate the change. They had not. Which means that the amount of work which is needed in order to verbalize these erroneous patterns much better, and how to prove that they are false, is much bigger. You do it, everybody is with you. You don’t do it, you will never change people.
How to identify the patterns and how to go about exposing their fallacies; if you look, there are two chapters devoted to it. One is a chapter where they are preparing the presentation and the other one is the chapter where they give the presentation. Follow this chapter, this is a recipe, a generic recipe of how do you identify the wrong patterns and how do you overcome them. And then everybody’s with you. Then you have to realize that, above you, the people are blocked by different patterns. It’s not the patterns that blocked you and your peers, it’s not the patterns that have blocked your people – there are different patterns that block the top management. And, again, the same thing: you have to identify them and to show that they are false, and then everybody is with you.
And that’s the real message throughout the book. I’m showing that the only resistance to change is coming from erroneous patterns that cause people to judge the change as not good, as too risky, and so on. And, when you identify the patterns and you show the fallacy, how quickly people change their attitude! To the extent that the whole change has happened in nine months. And everybody’s for it. This is generic. This is what I’ve seen again and again in reality. My problem is to what extent we don’t understand it, and then we are trying to use force or incentives and all of that, rather than addressing the real thing! And that’s the real message of the book.
They are so far from stupid. The problem is that the wrong patterns are causing their conclusions to look stupid sometimes. They are not stupid at all! Which brings me to the last message of the book, which is: if you recognize that the resistance is coming from patterns and you learn to overcome them, then, actually, you can change a company from anywhere that you are in within the company. You don’t have to go from top down, you can go from bottom us as well. And almost at the same speed. If you notice the whole change in this book is starting from bottom up. Because Paul’s in the store manager position. And what I’m trying to show people is that it doesn’t matter where you are in the organization. It doesn’t matter how big the organization is. If you just approach it in this way, you can change the whole organization.
They’re there all through the book, and, if you are keeping them in mind and you read the book again, you will see how clearly they are coming out, and to what extent in this book. It’s not just about retail, it’s a recipe about all these comments.
If you are really comparing the speed in which TOC is accepted by business, I don’t see anything in parallel. TOC is moving much, much faster than anything that I’ve seen. Let me give you an example. The first article on critical path was written in 1906. Now, this is a real paradigm shift. Here you have a PERT of, let’s say, 3000 tasks, and here comes a person who says “Forget it, just look at the critical path that is composed of maybe 30 tasks. That’s the key, on that you have to focus; everything else is just supporting.” Huge paradigm shift. Now, the first real articles that start to refer to it are – you have to wait until 1936. PERT implementations you have to wait until 1950. Only in the 70s it started to become the norm, and everybody is taking critical path as the norm. This is 60 years.
Now look at Critical Chain, which is a bigger paradigm shift. Along the same lines, but much bigger. That book was published in 1997. It’s only 12 years! And look to what extent it’s used now, in so many of the largest companies in the world, by ministries, by everybody. 12 years only! So can we complain on this slow adoption? That’s why it’s still flabbergasting to me. To what extent TOC is accepted! And I’m very grateful, to tell you the truth. By intuition, they have used critical path for it, for sure. By intuition. But I’m talking about the verbalization of it. And even then, how much time it takes. They had a very, very strict deadline.