Critical Chain - Eliyahu M. Goldratt [95]
They didn't go out for lunch. Johnny arranged for sandwiches.
Don is not entirely pleased. What he heard this morning dealt with only one aspect of projects. An important aspect, but not the most important one. In Don's opinion the most costly mistakes are made before the execution starts. They are made in the decisions; the decisions about which project to choose, the decisions defining the scope of a project. What he heard this morning was good, exceptionally good. But everything presented was geared to the work of the levels from the project leader down. What about helping the decision process of top managers?
He hesitates. He thinks about how to bring it up, if at all. These people have done an exceptional job, and he doesn't want to say anything that will be interpreted as criticism.
Besides, he already found what he wanted. This group can be trusted to develop new know-how. It would be nice if they were not restricted to just the logistical arena, if they were capable of covering also the financial aspects. Nice, but not mandatory. He decides to raise the issue of investment justification, but if they try to defend conventional methods, he is going to drop it.
"I'm going to spend the rest of the week with the team putting up our new facility here. I certainly can and will use what you have taught me," Don prepares the stage. "Let me ask your advice. Knowing project team leaders, they are going to ask for additional investments."
"Without a doubt," Rick agrees.
"Suppose they ask me for an additional ten million dollars for something that will help us start operations three months earlier. How should I evaluate it?"
"I'm sure that by adopting what we've talked about you can cut more than three months, without any additional investments," Rick says confidently.
"You are probably right," Charlene agrees, "but the question still holds. Suppose that an additional investment can bring forward the completion time of a project, how does one go about evaluating whether or not to invest?"
Don nods. Charlene, being a financial professor, is familiar with this problem, but he doesn't expect much. He has been involved in numerous discussions about investment justification, and nothing came out of them. As a matter of fact, he sometimes found himself frustrated by the inability of financial experts to recognize why he is not satisfied with the conventional methods.
"Why not judge by a payback calculation?" Rick asks.
Don is preparing to answer when, to his surprise, Charlene does. And she hits the nail right on the head. "Payback calculations do not properly take into account the most important factor, the scarcity of money."
Rick is puzzled. So are Jim and Johnny. Don just smiles to himself, waiting for Charlene to continue.
Charlene, being a good teacher, first clarifies the problem. "Rick, when do we face the problem of choosing between two projects? If one of the two alternatives, or both, don't eventually bring more than the investment there is no problem making a decision. So the difficulty is choosing between two good alternatives."
"Correct."
"Now, if both alternatives are good, why do we have to choose? Why not do them both? You see, the need to choose arises only when availability of money is a constraint." Don is pleased with Charlene's clean explanation. He leans back in his chair waiting to hear more.
"Back to payback period," Charlene continues. "Rick, suppose that you face two alternatives. Both will give you two years' payback, but one requires an investment of one million dollars and the other ten million. Judging by the payback period, these two alternatives look the same, one is no better than the other. But when money availability is the constraint we know that the two alternatives are vastly different." "For me they aren't," Rick jokes. "One million dollars is out of my reach to the same extent that ten million is." And then, without a smile, he adds, "And I think that for a conglomerate like UniCo, it also