Critical Chain: A Business Novel

by Eliyahu M. Goldratt

Moreover, not like fashions of the past, all these philosophies are not contradicting each other. On the contrary, in many ways they are complimentary.

Many started to believe that they all are just pieces of the same puzzle. Now that I have been intimately exposed to TOC, I think I know. They actually are. And in a much more fascinating way than we suspected. I'm going to demonstrate it."

"The second, and most important breakthrough of TOC, at least in my eyes, is the research methods it introduces. Methods that were adapted from the accurate sciences, adapted to fit systems that co...

"And the third breakthrough is, of course, the one TOC is known for the most, its broad spect...

"New management philosophy, new research methods and robust applications. I think the best way to demonstrate them all is by raising the question, ‘What is the biggest problem managers are facing today?'

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."

"What I would like to show you now is that each implies a different mode of management. So different that there is no acceptable compromise between the two. To demonstrate it let me use an analogy. Let's view your company as a chain. A physical chain. It's not difficult to see why such an analogy makes sense."

"What typifies cost? Cost is drained by each and every department. We pay money to and through our purchasing department, our production departments, and so forth. No department is free. And if we want to know the total cost of the organization, one way to find it is to sum up the cost drained by each department."

"In our chain, the closest thing to cost will be weight, each link has its weight. And if we want to know what the total weight of the organization is, one way to find out is to sum up the weight of all the links.

"Suppose that you are the president in charge of the entire chain. I'm working for you. I'm in charge of a specific department, a specific link. Now you instruct me to ‘improve!' And I am obedient. After some time I come back to you and tell you that with ingenuity, of course with ingenuity, and also time and money, I improved my link. I made it one hundred grams lighter. You are not interested in my link, you are interested in the whole chain. But when I tell you that I reduced the weight of my link by one hundred grams you know that the entire chain becomes lighter by that amount. Do you know what that implies?"

"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."' He pauses.

"What is not common knowledge is that ‘protecting throughput' implies a contradictory philosophy. It implies the ‘throughput world.'

"First, let's clarify to ourselves the essence of throughput." Pointing to the chain on the screen, Johnny explains: "One link is purchasing, another starts production, another finishes production, another assembles, still another ships to clients, et cetera. If one link, just one link, drops the ball, what happens to the throughput of the company?" "Drops," many answer. "When we deal with throughput, it is not just the links that are important; the linkages are just as important."

"What is the equivalent of throughput in our physical chain? What is determined not just by the links, but by the fact that they interact with each other? It's not weight. If we remove all interaction, all linkages, and we are left with just a pile of links, the weight is still the same. So what property typifies a chain? It is the strength of the chain. If one link breaks, just one link, the chain is broken; the strength of the chain drops to zero. "Now, I have some seemingly trivial, but very...

"And how many weakest links do we have in a chain?" Johnny stresses the word ‘weakest."' "One." Rick doesn't like Johnny's style. He would never stress such trivialities. But he must admit that ...

"now, let's see what that implies. You are still the president in charge of the entire chain. I'm still in charge of just one department. Since there is only one weakest link, let's take the more general case, the case where I'm in charge of a department that is not the weakest link. And . . . and once again you tell me to improve. To improve the strength this time. And once again I come back and report to you that with ingenuity and time and money I improved. I strengthened my link. I made it three times stronger. Give me a medal." He pauses and smiles. "Remember, you are not really interested in my link. You are i...

"Most of the local improvements do not contribute to the global!" he almost shouts. "And we do want the global, we do want the organization as a whole to improve. Now we know that since any improvement requires attention and time and money, the way to improve the total organization is definitely not through inducing many local improvements, the more the better. That's not the way."

"What happens? At the beginning of the month these companies are managed according to the cost world, at the end of the month according to the throughput world.

"But let me prove to you that there is no compromise between the cost world and the throughput world. Not even theoretically. Do you want to see the proof?" "Yes," the auditorium echoes.

"For that, I first have to direct your attention to another topic. That of focusing."

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.

"What about the throughput world? Since in our organizations we do have many more than five links, it's obvious that improving twenty percent means that many of these improvements will not contribute to improving the performance of the organization as a whole. Linkages are important, the variables are dependent. The Pareto principle is not applicable. "So how can we find out on what to focus? What process can we use?"

"Just think about the chain and the fact that its strength is determined by its weakest link. If you want to strengthen the chain, what must your first step be?

At this stage everybody has probably figured it out. Johnny gestures to a volunteer in the first row to say it out loud, "First thing is to find the weakest link."

So let me write the first step as: IDENTIFY the system's constraint(s).

When we move back to organizations we can easily see that there are two different cases. The first one is the case where we identify the constraint as physical, like a bottleneck, a type of resource that does not have enough capacity to meet the demand. In that case, strengthening the weakest link will mean to help the bottleneck to do more.

"But we shouldn't overlook the other case. The case where it turned out that the constraint we identified is an erroneous policy. In that case, strengthening the weakest link cannot be interpreted as helping the erroneous policy to do more. We have to replace the policy.

By the way, this fork of physical constraints and policy constraints caused a lot of confusion about TOC. All the early publications concentrated on physical constraints. It's no wonder that when articles and books first appeared about the applications to policy constraints, it ...

I would like to highlight that there are two different ways to strengthen a bottleneck. One is to simply add more capacity, by hiring more people or buying more machines. But there is another way. To squeeze the maximum from the capacity we already have.

"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).

Let's not forget that in the throughput world the linkages are as important as the links. Which means that if we dec...

we have to examine the ramifications on t...

Now let's suppose that when you try, really try, you can produce ten units an hour. No more. Okay?" Johnny picks another victim. He picks Pullman. "And suppose that you are a non-bottleneck. You can easily do twenty units an hour. But whatever you do, before we can sell it, it must be further processed by our bottleneck. On an ongoing basis, how many units per hour should you produce?" "Ten units," Pullman says without hesitation. Johnny repeats the description of the scenario and asks again, "Everybody tell me. How many units an hour should this gentleman produce? Everybody!" "Ten," comes the roaring answer.

"Step three: SUBORDINATE everything

else to the above decision. If we can squeeze only ten units from the bottleneck there is no point in doing more on the non-bottlenecks. Now, 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....

"We have found the process to focus. This is the focusing process of the throughput world. But at the same time, do you agree with me that these steps are also the ‘process of on-going improvement'?" Fascinating, isn't it? In the throughput world, focusing and process of on-going improvement are not two different things, they are one and the same."

Understanding starts to spread on Pullman's face. "Low," he says. Then, clearing his throat, "My efficiency will be fifty percent." "And if your efficiencies are only fifty percent, what will happen to your head?" And smiling, he moves his hand across his neck.

"And there is no compromise. If this gentleman produces fifteen, both worlds will kill him."

"So what will he do? He will slow down. He will claim that he cannot produce more than, let's say, twelve, which he will. We forced him to lie, because if he doesn't, his job security is threatened."

"Everybody knows that the first step in solving a problem is to define it precisely. The strange thing is that in spite of this realization, we didn't bother defining what we mean by ‘defining a problem precisely."' He notices that not everybody understands, so he clarifies. "When do we know that we have defined a problem precisely? When we have already solved it, and looking back we agree that the stage when we defined the problem precisely was a major step forward. But how do we know that we defined the problem precisely before we solved it?"

"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."

"For example," Johnny tries to clarify his point, "suppose that they try to measure the height of a building. Using one method they find that the height is ten yards, and using another the answer comes out to be twenty yards. A conflict. Do you think that they will try to compromise? That they will say that the height of that building is fifteen yards?"

"In the accurate sciences, what do they do when they face a conflict? Their reaction is very different than ours. We try to find an acceptable compromise. This thought never crosses their minds. Their starting point will never allow it; they don't accept that conflicts exist in reality.

"No matter how well the two methods are accepted, a scientist's instinctive conclusion will be that there is a faulty assumption underlying one of the methods used to measure the height of the building. All their energy will be...

In a conversational tone he continues, "This is probably the most daring assumption of TOC. One of its foundations is that whenever we witness a conflict, it is a clear indication that someone has made a faulty assumption, a faulty assumption that can be corrected, and by doing so the conflict removed.

"We claim that in order to control cost, managers must try to manage according to the cost world. Why? Because we assume that the only way to achieve good cost performance is through good local performance everywhere."

"And why do we claim that in order to protect throughput managers must try to manage according to the throughput world? Because we assume that there is no way to achieve good throughput performance through good local performance everywhere."

To control cost. What does that tell us about our upper assumption? "The only way to achieve good cost performance is through good local performance everywhere. Baloney! Speaking slowly, stressing each word, he concludes, "We are chasing compromises, degrading our performance, making our life miserable, because of an assumption that is apparently wrong."

After a short while he repeats, "The only way to achieve good cost performance is through good local performance everywhere. The fact that so many managers and almost all our systems are based on this assumption is regarded by TOC as the current core problem of our organizations."