Critical Chain - Eliyahu M. Goldratt [79]
"Yes, it is. So much on its way that they started to get nervous that they are going to be late. I got a call to look into it; something has to be done to speed up the contractors. So here I am ready to learn anything you care to teach me about it."
It doesn't take as long as I expect. Johnny absorbs in less than half an hour what took me almost two sessions in class. This guy is like a sponge. When we finish, I summarize, "Remember, you have to offer money for lead time. On their own, construction companies will never do it. Shrinking lead times is against their interest."
That surprises him.
I tell him what I learned today from Ted.
Johnny listens. Intently. But then he says, "I don't buy it."
"Why?"
"I don't know."
That's not an answer.
When Johnny notices my expression he hurries to add, "There must be something wrong here, even though I can't put my finger on it."
And I thought that Johnny was all facts and logic. Now I start to suspect that he is as superstitious as the rest of us. "What possibly can be wrong?" I express my disappointment.
"You describe a situation where a win for the subcontractor is definitely a loss for the developer. According to the Theory of Constraints that is an impossibility. Win-lose situations do not exist."
What an argument. "So here goes your theory," I flatly say.
"No, Rick, every time it seems like a win-lose exists, it's only because we are looking at the problem too narrowly."
I don't respond. I'm not going to argue about ideology and I don't want to offend Johnny.
He leans his elbows on my table and covers his face. I keep quiet. It's embarrassing. What is he doing? Constructing cloud diagrams in his head? Exposing assumptions?
After what seems a long time, probably three minutes or so, he raises his head, and smiling, he says, "Here it is."
"What?"
"You talked about the impact delays have on the developer's cash flow. Rick, can we safely assume that finishing before time also impacts his cash flow?"
"Naturally."
"And usually cash flow is very important to a developer?"
"Yes."
"You also told me that Ted's market is very price sensitive. A three-percent price difference will decide which contractor wins the bid."
"Yup."
"How do you reconcile these contradictory facts?"
I'm puzzled. "I don't understand. What contradicts what?"
"If a month's difference in delivery is so important to the developer," Johnny starts to explain, "then promised lead time should be a major consideration in choosing a contractor. But you said that's not the case, that price is the overwhelmingly decisive factor."
"Yes, it is," I say, still not fully grasping where he's leading.
Johnny tries to explain it in a different way. "Rick, do you agree that shorter lead time is important to a developer?"
"No doubt."
"So the developer should press the contractor to shorten the lead time."
"How can they?"
"One way to ‘encourage' a contractor to reduce lead time is to attach big bonuses to early completion and big penalties to delays."
He raises his hand to prevent me from commenting. He wants to better explain this point. "Let's not forget," Johnny continues, "that most of the developer's investment is tied up toward the end of the project, so a three-month early finish can easily double the developer's return on investment. Why shouldn't he offer the contractor a big bonus for that?
"On the other hand, if a delay can put a developer into bankruptcy, he should try to put an enormous penalty into the contract with the contractor. As far as you know, are such big bonuses offered and huge penalties demanded?"
There are some bids that have small bonuses, but nothing like what Johnny is talking about. But the bonuses are not the problem; penalties are. "Show me a contractor," I say, "who would agree to penalties, even small ones. Their margins can't support it. What do you want? That they'll go bust?"
"Not at all. But Rick, imagine a contractor who knows he can deliver three months faster than anybody