The Goal

by E M Goldratt

  Yesterday, in the heat of discovering the amount of free ca- pacity that we have, I looked only on the bright side. Now I wonder if I'm not just asking for miracles.

  I recheck the numbers in my head. In order to fill our capac- ity Johnny will have to come up with over ten million dollars of additional sales. It is totally unrealistic that he holds so much up his sleeve.

  So, squeezing, begging, and pleading techniques will not help. We'll have to come up with some innovative ideas. Well, the truth is that so far I haven't been able to come up with any. Let's hope Johnny has some clever ideas; he's the one who is supposed to be the expert in sales.

  "I want you to meet Dick Pashky," Johnny Jons says as we enter the small conference room. "He's one of my best people. Dedicated, professional, and above all he's full of innovative ap- proaches. I thought it would be a good idea for you to get to know him. Do you mind if he joins us?"

  "On the contrary," I smile. "We need some innovative ideas. You see, what I want is for you to get my plant additional business -ten million dollars' worth."

  Johnny bursts out laughing. "Jokers, all of you in production are wonderful jokers. Dick, what did I tell you? It's not easy to deal with plant managers. One is asking me to persuade his client to pay a ten percent increase in price, another wants me to get rid

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  of a pile of old junk for full price, but Alex, you're the best-ten million dollars!"

  He continues to laugh, but I don't join in.

  "Johnny, put on your thinking cap. You must find more or- ders for my plant, ten million dollars more."

  He stops laughing and looks at me, "You are serious. Alex, what's happened to you? You know how tough it is to get more business these days; it's dog eat dog out there. Everybody is cut- ting each other's throats for the smallest order and you're talking about ten million dollars more?"

  I don't hurry to respond. I lean back in my seat and look at him. Finally I say, "Listen Johnny, you know that my plant has improved. What you don't know is to what extent it's improved. We're now capable of delivering everything within two weeks. We've demonstrated that we never miss an order, not even by one day. Our quality has improved to the extent that I'm sure we're the best in the market. We are very responsive, very quick, and above all, very reliable. This is not a sales pitch, it's the truth."

  "Alex, I know all this. I hear it from the best source, from my clients. But that doesn't mean that I can immediately turn it into cash. Sales take time, credibility is not built overnight, it's a grad- ual process. And by the way, you shouldn't complain; I'm bring- ing you more and more sales. Be patient and don't press for miracles."

  "I have twenty percent spare capacity." I say, letting this sentence hang in the air.

  From the lack of response I understand that Johnny doesn't see the relevance.

  "I need twenty percent more sales," I translate for him.

  "Alex, orders are not apples hanging from trees. I can't just go out and pick some for you."

  "There must be orders that you decline, because the quality requirement is too high or because the client is asking for unrea- sonably short delivery times or something. Get me those orders."

  "You probably don't know how bad the economy is," he sighs. "Today I accept any order, anything that moves. I know that a lot of dancing will be required later, but the current pres- sure is simply too high."

  "If the competition is so fierce and the economy is so bad,"

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  Lou says in his quiet voice, "then it must be that clients are press- ing for lower prices."

  "Pressing is not the word. Squeezing is much more appropri- ate. Can you imagine, and this is just between us, in some cases I'm forced to accept business for practically zero margin."

  I start to see the light at the end of the tunnel.

  "Johnny, do they sometimes demand prices that are lower than our cost?"

  "Sometimes? All the time."

  "And what do you do?" I continue.

  "What can I do?" he laughs. "I try to explain the best I can. Sometimes it even works."

  I swallow hard and say, "I'm ready to accept orders for ten percent below cost."

  Johnny doesn't hurry to answer. His peoples' bonuses are based on total sales dollars. Finally he says, "Forget it."

  "Why?"

  He doesn't answer. I persist, "Why should I forget it?"

  "Because it's stupid, because it doesn't make any business sense," he says in a hard voice, and then softer, "Alex, I don't know what tricks you have in mind but let me tell you, all those tricks have a very short life span before they explode in your face. Why do you want to ruin a promising career? You've done an outstanding job, why go and mess it up? Besides, if we lower prices for one client, it's just a matter of time until the others find out and demand the same. What then?"

  He has a point. The last argument shows that the light at the end of the tunnel was just a train.

  Help comes from an unexpected side.

  "Djangler is not connected to our regular customers," Dick says hesitantly. "Besides, with the quantities he's asking for, we can always claim we gave him a volume discount."

  "Forget it," Johnny is practically shouting. "That bastard is asking us to give him the goods for basically nothing, not to men- tion that he wants us to ship to France at our expense."

  Turning to me he says, "This French guy has chutzpah, it's unbelievable. We negotiated for three months. We established each other's credibility, we agreed on terms and conditions. It all takes time. He asked for every technical detail that you can imag- ine, and we're not talking about one or two products, it's for almost the entire range. All this time not even a peep about

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  prices. At the end, just two days ago, when everything is agreed, he faxes me that our prices are not acceptable and sends his counter offer. I was expecting the usual thing, asking for price reductions of ten percent, maybe fifteen percent considering the large quantities that he is willing to buy, but no, these Europeans probably have a different perception. For example, Model Twelve, the one that you pulled such a miracle on. Our price is nine hundred and ninety-two dollars. We sell it to Burnside for eight hundred and twenty-seven dollars; they're a big client and they consume very large quantities of this particular product. The bastard had the nerve to offer seven hundred and one dollars. Did you hear that! Seven hundred and one dollars. Now you understand?"

  I turn to Ralph, "What's our material cost for Model Twelve?"

  "Three hundred thirty-four dollars and seven cents," Lou answers without any hesitation.

  "Johnny, are you sure that accepting this order will not have any impact on our domestic clients?"

  "Not unless we go out, and sing it from the rooftops. On this point Dick is right, no impact. But the whole idea is ridiculous. Why are we wasting our time?"

  I look at Lou, he nods.

  "We'll take it," I say.

  When Johnny doesn't respond, I repeat, "We'll take it."

  "Can you explain what is going on?" he finally says, between gritted teeth.

  "It's very simple," I answer. "I told you that I have spare capacity. If we take this order, the only out-of-pocket cost to pro- duce these products will be the cost of the materials. We'll get seven hundred and one dollars, and we'll pay three hundred and thirty-four dollars. That's three hundred seventy-eight dollars to the bottom line per unit."

  "It's three hundred sixty-six ninety-three per unit, and you forgot the freight," Lou corrects me.

  "Thank you. How much is the air freight per unit?" I ask Johnny.

  "I don't remember, but it's not more than thirty bucks."

  "Can we see the details of that deal?" I ask him. "What I'm particularly interested in is the products, the quantities per month, and the prices."

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  Johnny gives me a long look and then turns to Dick, "Bring it." "

  Once Dick is on his way, Johnny says in a puzzled voice, "I don't get it. You want to sell
in Europe for a price that is much less than what we get here, even less than the production cost, and you still claim that you'll make a lot of money? Lou, you're a controller, does it make sense to you?"

  "Yes," Lou says.

  Seeing the miserable expression on Johnny's face, I jump in before Lou has a chance to explain. Financial calculations, show- ing the fallacy of the 'product cost' concept won't help, it will just confuse Johnny even more than he's confused now. I decide to approach it from another angle.

  "Johnny, where do you prefer to buy a Japanese camera, in Tokyo or in Manhattan?"

  "In Manhattan, of course."

  "Why?"

  "Because in Manhattan it's cheaper, everybody knows that," Johnny says confidently, here he's on solid ground. "I know a place on Forty-seventh Street where you can get a real bargain- half price compared to what they asked me to pay in Tokyo."

  "Why do you think it is cheaper in Manhattan?" I ask, and then answer my own question, "Ah, we know, transportation prices must be negative."

  We all laugh.

  "O.K. Alex. You've convinced me. I still don't understand but if it's good for the Japanese, it must be profitable."

  We work on the numbers for almost three hours. It's a good thing that I brought both Ralph and Lou.

  We calculate the load that this large deal will place on the bottlenecks-no problem. We check the impact on each of the seven problematic work centers-two might reach the dangerous zone, but we can manage. Then we calculate the financial impact -impressive. Very impressive. At last we're ready.

  "Johnny, I have one more question. What guarantees that the European manufacturers won't start a price war?"

  "What do you care," Johnny brushes the issue aside. "With such ridiculous prices I'm going to lock in Monsieur Djangler for at least one year."

  "Not good enough," I say.

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  "Now you're really getting difficult. I knew that this was too good to be true."

  "That's not the point, Johnny. I want to use this deal as a beachhead to penetrate Europe. We can't afford a price war. We must come up with something else besides price, something that will make it very difficult to compete with us. Tell me, what's the average supply time in Europe?"

  "About the same as here, eight to twelve weeks," he answers.

  "Good. Promise your Monsieur that if he commits to the quantities per year, we'll deliver any reasonable quantity within three weeks of receiving his fax."

  In astonishment he asks, "Are you serious?"

  "Dead serious. And by the way, I can start to deliver immedi- ately. I have whatever's needed for the first shipment in stock."

  "I guess it's your neck," he sighs. "What the heck, in any event you will have full responsibility very shortly. If I don't hear from you, I'll fax him tomorrow. Consider it a done deal."

  Only after we pull out of the parking lot do we let ourselves go; it takes us more than fifteen minutes to settle down. That is, Lou and Ralph dive into polishing the numbers. From time to time they come up with a slight correction, usually not more than a few hundred dollars. Compared to the total deal it's not signifi- cant at all. But Lou finds it relaxing.

  I don't let it bother me. I sing at the top of my voice.

  It takes us more than half the way home until they are satis- fied. Lou announces the final number. The contribution to the net profit of the plant is an impressive seven digits, a fact that doesn't deter him from specifying it down to the last cent.

  "Quite a profitable deal," I say. "And to think that Johnny was about to drop it... What a strange world."

  "One thing for sure," Lou concludes. "You can't rely on marketing people to solve the marketing problems. They're cap- tured by old, devastating, common practices to an even larger extent than production.

  "Try to imagine," he continues, "the reaction of people when I start to explain to them they are the ones who believe too much in cost accounting."

  "Yes, I sigh. "Judging from today I shouldn't expect much help from these guys. Even though, you know, there might be something in Dick."

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  "Hard to tell," he comments. "Especially when Johnny is holding him so tightly under his thumb. Alex, how are you going to do it?"

  "Do what?"

  "Change the entire division?"

  That puts an end to my euphoria. Damn you Lou, why did you have to bring it up?

  "God have mercy on me," I say. "Yesterday we were talking about inertia. We were complaining about the inertia that we have. Compare it to the inertia that we are going to face in the division."

  Ralph laughs, Lou groans, and I feel pity for myself.

  This week, even though we made such impressive progress, one thing was definitely proven-I'm still managing by the seat of my pants.

  Take yesterday, for example. If it weren't for Ralph's instinct that something was missing, we wouldn't even have noticed the huge, open opportunities. Or today. How close was I to giving up? If it hadn't been for Lou putting us on the right track...

  I must find out just what are the management techniques I should master. It's simply too risky not to. I must concentrate on it. I even know where to begin...

  Maybe I was holding the key all along. What did I say to Julie in the restaurant? My own words echo in my head: "When did Jonah have the time to learn so much? As far as I know he never worked one day of his life in industry. He's a physicist. I can't believe that a scientist, sitting in his ivory tower, can know so much about the detailed realities of the shop floor."

  And then, the idea of 'scientist' came up again, when Lou and Ralph were arguing about the usefulness of classifying data. And I myself supplied the answer: How does one go about re- vealing the intrinsic order? Lou asked it as if it is a rhetorical question, as if the obvious answer is that it is impossible. But scientists do reveal the intrinsic order of things... and Jonah is a scientist.

  Somewhere in the scientific method lies the answer for the needed management techniques. It is obvious. But what can I do? I cannot read a book in physics, I don't know enough mathe- matics to get through even the first page.

  But maybe I don't need it. Jonah stressed that he wasn't

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  asking me to develop the methods, just to determine clearly what they should be. Maybe popular science books would be sufficient? At least I should give it a try.

  I should go to the library and start digging. The first modern physicist was Newton, that's probably the place to start.

  I'm sitting in my office, my feet up on the desk and staring blankly into the room.

  The entire morning, I got only two calls-both from Johnny Jons. First he called to inform me that the deal with the French is signed. He was very proud of the fact that he negotiated a better deal than expected; in return for the flexibility and immediacy of our response to their future requests, he succeeded in squeezing slightly higher prices.

  The second time he wanted to know if he could approach our domestic clients with the same concept. That is, to shoot for a long-term contract where only the overall yearly quantities are fixed, and we promise three weeks' delivery for any specific re- quest.

  I assured him that we don't have any problem responding, and encouraged him to go ahead.

  He's excited. I'm far from it.

  Everybody is busy. Launching this huge new deal has made them really busy. I'm the only one who has nothing to do. I feel redundant. Where are the days of the telephone ringing off the hook, when I had to run from one important issue to the other, when there were not enough hours in the day?

  All those calls and meetings were fire fighting. I remind my- self. No fires, no fighting. Now, everything is running smoothly- almost too smoothly.

  Actually, what bothers me is that I know what I should be doing. I need to guarantee that the current situation will con- tinue, that things are thought out in advance so fires will not break out. But this means finding the answer to Jonah's question.

  I stand up and leave. On
my way out I say to Fran, "In the unlikely event that anyone needs me, I'll be at the public library."

  "Enough for today," I say and close the book. I stand up and stretch, "Julie, join me for a cup of tea?"

  "Good idea, I'll be with you in a minute."

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  "You're really into it," I comment as she joins me at the kitchen table.

  "Yeah, it's fascinating."

  I hand her a steaming cup. "What can be so fascinating about ancient Greek philosophy?" I wonder aloud.

  "It's not what you think," she laughs. "These dialogues of Socrates are really interesting."

  "If you say so," I don't try to disguise my skepticism.

  "Alex, your perceptions are all wrong, it's not at all like what you think."

  "So what is it?" I ask.

  "Well, It's hard to explain," she hedges. "Why don't you try to read them yourself?"

  "Maybe one day I will," I say, "but for the moment I've enough reading to do."

  She takes a sip from her cup. "Did you find what you're looking for?"

  "Not exactly," I admit. "Reading popular science books doesn't lead you directly to management techniques. But I've started to see something interesting."

  "Yes?" she says encouragingly.

  "It's how physicists approach a subject; it's so vastly different from what we do in business. They don't start by collecting as much data as possible. On the contrary, they start with one phe- nomenon, some fact of life, almost randomly chosen, and then they raise a hypothesis: a speculation of a plausible cause for the existence of that fact. And here's the interesting part. It all seems to be based on one key relationship: IF... THEN."

  Somehow this last sentence causes Julie to straighten up in her chair. "Keep going," she says intensely.

  "What they actually do is to derive the unavoidable results logically from their hypothesis. They say: IF the hypothesis is right THEN logically another fact must also exist. With these logical derivations they open up a whole spectrum of other ef- fects. Of course the major effort is to verify whether or not the predicted effects do exist. As more and more predictions are veri- fied, it becomes more obvious that the underlying hypothesis is correct. To read, for example, how Newton did it for the law of gravity is fascinating."