It's Not Luck - Eliyahu M. Goldratt [61]
Now I have to prove that this conflict is what is preventing the objective from existing in reality. It doesn’t take long to complete the cloud. I check it by reading aloud, “In order for ‘Managers to arrive at good decisions,’ they must ‘Consider the need to get enough sales.’ ” This is correct at the top level.
No, it’s correct for all levels. I think it’s correct even when decisions are made at lower levels; in distribution, production or engineering.
“You are all set, sir. Eighteen dollars and thirty cents.” I hand him my credit card, and continue to read aloud.
“In order to ‘Consider the need to get enough sales,’ managers must ‘Make decisions and act upon the client’s perception of value.’ This is good.”
I turn to the bottom side of the cloud, “In order for ‘Managers to arrive at good decisions,’ they must ‘Consider the need to get reasonable product margins.’ ” Under the prevailing corporate culture, it’s a must. Actually, in most companies, even those people who understand that they shouldn’t do it, still have to. Unless, of course, someone wants to become a martyr.
I read the last connection, “In order to ‘Consider the need to get reasonable margins,’ managers must ‘Make decisions and act upon the suppliers’ perception of value.’ ”
I sign the slip, start the engine and find my way back to the highway.
I glance at the cloud. Once it’s written, it’s so obvious. Throughout UniCo, I see managers constantly vibrating on the conflict arrow.
“I don’t think we should accept the order.” “I think that we should.” “Don’t accept the order.” “Accept it.” “DON’T.” “Why did you accept it?” “We had to.” “No we didn’t.” “We did!”
Alex, I say to myself, you illustrated the point very clearly. Come on, continue.
Which arrow in this cloud makes me feel the most uncomfortable?
It’s very easy to answer that question. In order for “Managers to arrive at good decisions,” they must “Consider the need to get reasonable product margins.” In the last years I’ve proven, over and over, that when the market is segmented we can increase profits now as well as in the future—even if we sell for negative product margins. Especially when all the work is done by non-bottlenecks.
In my group, I hope that no one considers product margin as a criteria to accept an order. Orders are accepted only according to their impact on the overall throughput and overall operating expense.
We have broken the cloud.
So why are we still in trouble?
Then it hits me. We ignore product margin and it works. We have turned around all three companies from bottomless pits into break-even. It worked—but not enough. Every time we find a segmented market, we are happy to sell our excess capacity for prices lower than our average. It improves our bottom line but it’s a waste. A waste that we can’t afford anymore.
The real problem is we’ve run out of niches. We don’t dare sell below our prices in our core markets, and we don’t dare start a price war. It might ruin us. So now, in everyone of our companies, there is a lot of excess capacity.
Besides, the constant decline in prices is eroding the gains that we do get from our improvements. We must do something much more powerful. For us it’s not a matter of gradually increasing profits. To save our companies we must sell all our capacity at higher than average prices, not lower.
How?
That’s exactly what I’m trying to figure out. I have to find a much more effective way to break the cloud. I’d better look at the assumptions behind the other arrows in the cloud. If there is a better answer it must be different than what I’m already doing today.
The road is clear. I read the next arrow. “In order to ‘Consider the need to get reasonable product margins,’ managers must ‘Make decisions and act upon the suppliers’ perception of value.’ ”
Here the assumption is that product margin must be