Critical Chain: A Business Novel by Eliyahu M. Goldratt
Last annotated on September 20, 2014
If there is someone who can find us a much better way, it's a young person. Young enough to be rebellious, young enough to be unsatisfied with our rules.
"Mark will be your group leader," Levy adds. "We think he is open enough to handle constructive criticism, knowledgeable and sensible enough to reject impractical criticism, and pleasant enough to ensure harmony. Ruth is here due to her exceptional integrity. You are going to find out to what extent she is not afraid to ask questions. Fred is the rebel of finance. And at the same time the most respected project auditor that we have. Your mission is to find a way that will enable us to drastically cut our development time.
They say that smart people learn from their mistakes while wise people learn from others' mistakes. It's not any difference in substance, it's just the reputation.
Project is "A set of activities aimed to achieve a specific objective and have a clear start, middle and end.""Has anybody else come across a project that due to its overruns and its being overdue, compromised on its original specifications?" .The problems common to all projects are: the high probability of, 1. Budget overruns; 2. Time overruns; and many times, 3. Compromising the content."
"Select a project in your company. A project that has recently finished or is about to be finished. Interview the person running this project—the project leader. Interview the people who did the actual work, and interview the bosses of the project leader. Prepare two lists for class. One: the official reasons for the overruns. The second: the unofficial reasons.
"Payback is the time period from investing until we expect the fruits of our investment to cover the investment. Corporate mentality is always blaming the external world. All the explanations for all the problems have one thing in common. It's somebody else's fault. All that we've heard is just a long list of finger pointing. The lower the level of the person, the more the finger points internally, rather than externally.
Uncertainty is what typifies projects. We need to better manage the project.the uncertainties embedded in the projects are the major causes of what we called mismanagement. For every step in the project there is a time estimate; the length of time, we estimate, it will take from the start of that step until completion of that step.
The higher the uncertainty the longer the tail of the distribution. "This is the median of the distribution," I draw the line on the graph. "It means that there is only a fifty percent chance of finishing at or before this time." almost nobody will choose an estimate they have a fifty percent chance of blowing. "The difference between the median of the probability distribution and the actual estimate is the safety we put in. Don't forget, the bigger the uncertainty, the bigger the difference. Which means that for each and every step of the project we factor in a lot of safety.
Go back to the project you examined and pick, arbitrarily, at least three different steps from that project. For each of the steps you selected find out how the time estimate was arrived at. Don't just ask the project leader. Find out who gave him or her the estimate and interview the source." People do give their ‘realistic estimates' according to their worst, past experience."
"In production, most of the time parts spend in the plant they are waiting in queues in front of machines, or waiting for another part in front of assembly. Most of the lead time is not actual production, it's in wait and queue. "When you are in charge of an omelet you have to break eggs." the lower the position of the manager the more the finger points not just outside the company but inside as well.
The major, negative financial ramification does not stem from spending too much money." Companies are so immersed in the mentality of saving money that they forget that the whole intention of a project is not to save money but to make money. "The critical path," I remind the class, "determines the time it will take to finish the project. Any delay on the critical path will delay the completion of the project. That's why the project manager must focus on it."
"the decision of the planner when to start each path. Brian chose the late start for picking the vendors while Ted has chosen the early start." Concentrating on everything is synonymous with not concentrating at all.
"The first one, as we all suspected, is that TOC is actually a new management philosophy."
"The second, and most important breakthrough of TOC, at least in my eyes, is the research methods it introduces.
"And the third breakthrough is, of course, the one TOC is known for the most, its broad spectrum of robust applications."
"New management philosophy, new research methods and robust applications.
In order to manage well, managers must control cost, and at the same time, managers must protect throughput—they must ensure that the right products will reach the right clients in a way that they will pay for them." "It implies a management philosophy. It implies that any local improvement automatically translates into an improvement of the organization. Which means that to achieve the global improvement, the improvement of the organization, we know that we have to induce many local improvements. I call it the ‘cost world." We have managed according to the ‘cost world' probably since the beginning of the industrial revolution."
‘protecting throughput' implies a contradictory philosophy. It implies the ‘throughput world.'When we deal with throughput, it is not just the links that are important; the linkages are just as important. Most of the local improvements do not contribute to the global! Manager who does not know how to focus will not succeed in controlling cost and will not protect throughput.
But what is focusing for us? We have come to know it as the Pareto principle. Focus on solving twenty percent of the important problems, and you'll reap eighty percent of the benefits. This is a statistical rule. But those who teach statistics know that the twenty-eighty rule applies only to systems composed of independent variables; it applies only to the cost world where each link is managed individually. Linkages are important, the variables are dependent. The Pareto principle is not applicable.
TOC first step is IDENTIFY constraint. Since TOC accepts ‘controlling cost' as an absolute necessary condition, no wonder that it elects the second step to be: Decide how to EXPLOIT the system's constraint(s).
Step three: SUBORDINATE everything else to the above decision. If this first gentleman is still a bottleneck and we do want more throughput, we must lift some of the load from his shoulders. Even if it means buying more machines or hiring more people. When everybody agrees, he writes the fourth step: ELEVATE the systems' constraint(s). Step five: I have to avoid inertia and go back to step one.
Have you noticed something fascinating?
TOC adopts the definition accepted in the accurate sciences. A problem is not precisely defined until it can be presented as a conflict between two necessary conditions. We all asked the non-bottleneck to produce much less than he can, not in order to protect throughput, but in order to control cost.
"Tell me how you measure me and I'll tell you how I'll behave."
There was a real, true consensus that the core problem, the constraint of the company, was the fact that their prime operational measurement was tons-per-hour. It was very good news, because all their competitors suffered from exactly the same core problem. Correcting it would give this company a tremendous advantage.
In academia we don't call it compromise, we call it optimize. the higher the uncertainty, the higher the resulting safety.As far as we can tell, there are three different mechanisms by which safety is inserted into the time estimates of almost every step of a project.
The first one is that the time estimates are based on a pessimistic experience, the end of the distribution curve. The second is that the larger the number of management levels involved, the higher the total estimation, because each level adds its own safety factor. And the third is that the estimators also protect their estimations from a global cut. When you add it all up, safety must be the majority of the estimated time for a project.
A delay in one step is passed, in full, to the next step. An advance made in one step is usually wasted. If we could find a way to put the safety only where it's needed... Multi-tasking is probably the biggest killer of lead time. We found three mechanisms to put safety in. Now it seems that we also found three mechanisms to waste that safety. One we called the student syndrome, there is no rush so start at the last minute. The second is multi-tasking. The third involves the dependencies between steps; these dependencies cause delays to accumulate and advances to be wasted.
If we want to utilize even one resource to one hundred percent, all its feeding work centers have to have more capacity. Work-in-process inventory and lead time are twin brothers. In production we protect a work center with inventory, in projects we protect a step with safety time. If there is a stoppage, inventory does not disappear. In projects, time is gone, forever. In an assembly line one work center goes down and very quickly it stops the whole line. The only place that we want one hundred percent efficiency, the only place that needs protection, is the bottleneck.
If we tie the first soldier to the bottleneck, then the first row will be forced to walk at the rate of the bottleneck. That's good, spreading of the troop is prevented. All the other soldiers, being faster than the bottleneck, will jam pack, some behind the first row, the others behind the bottleneck. So the troop will spread over a distance that will be almost equal to the length of the rope we choose. That's neat. It will also guarantee that there is a gap before the bottleneck, so if one of the upstream soldiers stops, the bottleneck can still proceed. The inventory, the safety, accumulates there.
First you identify the bottleneck. Then you choose the length of the buffer. Usually a good rule of thumb is to take the current production lead time and cut it in half. A bottleneck is a resource with capacity that is not sufficient to produce the quantities that the market demands. In this way the bottleneck prevents the company from making more money.
It's one thing to agree that theoretically there is more than two hundred percent safety. It's another thing to commit to a trimmed estimate. Inertia. The ‘feeding buffer' protects the critical path from delays occurring in the corresponding noncritical paths. But when the problem causes a delay bigger than the feeding buffer, the project completion date is still protected by the ‘project buffer.'
"Sometimes everything is ready for a step on the critical path except for the appropriate resource, which is still busy doing something else." They invent the resource buffer. We changed the way we measure progress. Progress for us is now measured only on the critical path; what percent of the critical path we have already completed. That's all we care about. Eliminating the false alarm and actually shrinking the time it takes to perform a step contributed a lot to the reduction of multi-tasking. On the critical path, when everything else is ready we must make sure, in advance, that the resources will be ready.
idea of resource buffer: A week before the expected time we just remind people that their work on the critical path is coming. Then three days ahead we give another reminder. And then again, one day before, when we know for sure that everything else is going to be ready. The important thing is that people know that when the time comes they must drop everything and work on the critical path.
One. Persuading the various resources to cut their lead time estimates; Two. Eliminating milestones or, in other words, eliminating completion due dates for individual steps, and Three. Frequent reporting of expected completion times.
Most people involved in a project don't explicitly recognize the penalties associated with each month that the project is delayed. Most people involved in the project, often including the project leaders, are not fully aware of the magnitude of damage associated with a delay. No wonder that when we negotiate with vendors or subcontractors we do not pay enough attention to their lead time. "if in your request for proposals you write a sentence like ‘above X price don't submit, above Y lead time don't submit a proposal.'
So there is a way to trade lead time for money, The vendor is willing to commit to much shorter lead times, for money. The chance of a piece of bread falling with the butter facing down . . . is directly proportional to the price of the carpet. You have to offer money for lead time. One way to ‘encourage' a contractor to reduce lead time is to attach big bonuses to early completion and big penalties to delays. All our fast contractor has to do is persuade the developer to put, in the request for proposal, a demand for relatively short lead times and hefty penalties. The developer will get a much higher return on his investment with much less risk, and the fast contractor will make much more profit.
The longest chain of dependent steps, the longest in time. Don't ignore the limited capacity of X. Don't ignore the fact that dependencies between two steps can be because they are performed by the same resource that has limited capacity, so you cannot do both steps at the same time; you must do them sequentially rather than in parallel. That is dependency. Dependencies between steps can be a result of a path or a result of a common resource. Why are we so surprised that both dependencies are involved in determining the longest chain of dependent steps? In general, the longest chain will be composed of sections that are path dependent and sections that are resource dependent.
Let's leave critical path to be what everyone else calls a critical path, the longest path. But we know that what counts is the constraint, and the constraint is the longest chain of dependent steps. Since we must acknowledge that dependency can be the result of a resource, we better provide another name for the chain of steps that are the constraint.(=Critical Chain). It is a mistake to strive for accurate answers when the data is not accurate. Bringing up resource contention as something we must consider. There are projects where the contentions are too big for our feeding buffers to absorb.Formun Altı
But there is a difference between considering resource contention and fiddling around with optimizing the schedule of these resources. Since you changed the constraints, you must change the feeding buffers in accordance. Resource X is not loaded for the entire time of the project. If you examine the details of his work you might find that some of his activities can be done much earlier or later. "If there is resource contention, the critical chain might be very different than the critical path. Once all contentions are removed, and I promise not to spend too much time playing with the sequence, then we identify the critical chain. Resource contention means that the same resource is supposed to do two different steps at the same time. Every time there is a queue of tasks in front of a machine and the priorities are unclear, we have resource contention; a few tasks are fighting to be processed at the same time by the same resource.
Identify the bottleneck,
Then exploit it; schedule the sequence of work for the bottleneck. You have eliminated any contention on the constraint. You don't ask it to do two things at the same time.
And then subordinate. Subordinate all the other resources to it. You have removed most of the overloads from the other resources. And the sporadic peaks of load that still exist can be absorbed by the buffers.
every project we have steps done by digital processing," Fred elaborates. "The schedule of the digital processing gave specific start and finish dates for these steps. So, for each project we first did the work as if no other project existed. You know, removing any major contentions. Then we adjusted the project to fit the digital processing dictates. All the buffers that we've talked about so far, project buffer, feeding buffers and resource buffers, are all protecting the individual project. Here we have to remember to also protect the bottleneck, the overall performance of our organization. We had to insert another buffer, the bottleneck-buffer. It's not as big a deal as it sounds. We decided that two weeks is more than enough, for us it is, and every path that goes through digital processing we schedule to start two weeks earlier. If a resource contention starts to exhaust one feeding buffer after another, we'll know. But only then will we declare it as another resource constraint, not a minute before.
Payback calculations do not properly take into account the most important factor, the scarcity of money. Both will give you two years' payback, but one requires an investment of one million dollars and the other ten million.
Net-present-value is the way to translate future investments and income into terms of current money. This method takes into account that interest and inflation exist. To estimate the value of investment this method uses interest, but we just said that as long as availability of money is a constraint, interest is not the appropriate measure.
We think in terms of time or money. We are not used to thinking in terms of time-money. Payback period is trying to give the answer in terms of time—two-years, three-years payback. Net-present-value is trying to give the answer in terms of money, of dollars. The answer can only be expressed in terms of time and money, together, not separate."
"Physicists know that one of the most important rules is conservation of momentum. They know that the summation of the masses of all the parts in a system, each multiplied by their corresponding velocity, is conserved, no matter what happens inside the system.
Suppose you invest two dollars. After one day, you are invested for two dollar-days. Now suppose that at the beginning of day eleven you invest another three dollars. In total I'm invested for twenty-five dollar-days.
on the morning of day twelve you got your five dollars paid back. Assume no inflation or interest. Are you satisfied?
"No, I'm not. I tied up my money for a period of time, I got back my money, but I didn't get any value for the fact that the money was tied up. You invested twenty-five dollar-days. You got back your five dollars, but you are still twenty-five dollar-days in the hole. As long as this investment is not returned, you rightfully are not satisfied.
"I call it ‘flush,"' Charlene almost giggles. "To be satisfied, you must make sure that you at least flushed out your investment. I stress it because at the end of the payback period, when everybody tells you to be satisfied that you got your money back, that's exactly the point in time that you are invested the most, when you are the deepest in the hole in terms of dollardays.
Money is measured in dollars, investment in dollar-days.