The Goal

by E M Goldratt

  DW: It sounds like an impossible situation .

  PH: Well, it was, it was really awful. We had something like four or five thousand customers, 20 sales people. The only thing we could think of was to also lower prices, and do it only on items where we had to. That was not a long-term solution but that was what every- body else was doing. So the conventional way of doing business in office supplies was pretty soon completely gone. We got tenders for office supplies-which was unheard of-where you had to fight with three or four competitors. In the past, orders for office supplies were just given to a local good-performing company. Now everybody was focusing on price.

  DW: So what did you do?

  PH: We started to build, as Eli calls it, the current reality tree. And of course this time I didn't make the mistake of making it about our

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  company but I made it about the customers' situation: Why is this customer complaining so heavily about price? After long thought and a lot of discussions with my sales people, the only thing we could come up with is that he's thinking this is the only way that he can decrease the total cost of office supplies; that he can't do anything about the tremendous cost of having to stock supplies, and store them, and the cost of bringing the stuff to the right people in the building. Well, I know what kind of a mess customers can make out of it. In most of- fices where you open drawers, there's more stock in the office than anybody can imagine. While at the same time they are screaming for a specific item which has to be brought to them by taxi in crazy short delivery times. In Rotterdam we are down to four-hour delivery times! Not even 24, just four-hour delivery times, which is completely crazy for office supplies. I mean, we're not saving lives here.

  So this is what we offered our customers: That we would take over all this hassle of supplying everybody in the office with the right equip- ment, the right articles, at the right time. We offered them cabinets with office supplies in them. We owned both the cabinets and the contents. The supplies were for a specific working group. Whatever they took out was considered sold, whatever was left was still ours. We replenished these cabinets every week. We made it very easy for them to check on us. And more importantly, we could give specific data about each department, explaining that certain items were consumed fast. For instance you might need a new pair of scissors once in three months, but not every week.

  DW: So you could discover theft?

  PH: Well, we didn't call it theft, we called it overconsumption. But of course it was theft, yes. So suddenly this guy who was responsible for office supplies had much better tools to go after his dishonest personnel. He's not interested in how many pencils someone uses. Everybody knows that people take pencils home; you do that by ac- cident and it doesn't cost anything. Toner cartridges, that's a bigger problem. So when the theft of these ink-jet cartridges went up very much, we advised them to buy bigger printer machines, which we could also supply, to make them different than the machines people had at home. Things like that. But those cabinets were a big, big invention. While our customers might have paid 20%-25% more for

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  the actual articles, the total cost of providing office supplies for their workers dropped by 50% because they didn't have the internal hassle of misplacements, overstocking, and things like that. So they didn't care that much anymore about the original price we charged. When I sold my company a couple of years ago, the due diligence took a long time because they couldn't believe our added value.

  DW: What were the numbers?

  PH: Normal gross margins in the industry were very much below 20%. Above 20% was suspicious. We were above 30%, which makes a lot of difference. And we were not ripping people off. They were extremely satisfied with our service.

  DW: How did you go about selling the concept to your

  customers?

  PH: We had a department which was making appointments with financial directors, not the guy normally responsible for purchasing office supplies. That other guy was scared for his job when you came with this solution. And we made a short movie to show the current situation in their office and how people were screaming for office supplies and things like that, and how great it would be if we could take over their stock and their responsibility and solve this problem. And this worked really great. Something like 30% of the sales visits were successful sales. Again, the prices we were charging for supplies was no longer an issue

  DW: For anyone?

  PH: Not exactly. We still had some customers who were focused on price. We didn't chase them away. We just gave them completely different conditions. We told them that if price is what matters most, you have to buy big quantities and you shouldn't care about delivery times: "You can get the lowest price possible but you have to stand in line." Now a good thing for us about the cabinet system was that we had one-week advance notice on our purchasing needs. I mean, what the customer used last week I didn't bring the day I was checking. I would bring it the week later. So I hardly needed any stock anymore. My suppliers could deliver in a day but I had a week. So now I could

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  start buying on price. And I could combine my orders with those of the bigger customers who still wanted to do business just on price.

  DW: Those must have been a very satisfying couple of years for you as you explored this new way of doing business.

  PH: Well, yes, for a couple of years it's really fun. Because you're winning a race. Of course at the beginning I was relatively small; I was number four or five in the country. I was really afraid the bigger companies would copy my cabinet system.

  DW: Did they?

  PH: Yes, a little bit. But they didn't get the message. It was actually really funny. They were prepared to deliver cabinets but the customer had to buy the cabinet and the content as well. They were never willing to do it on consignment terms, which is what made it work. So that was a big difference to start with. Secondly, they didn't understand my replenishing system of stuffing the cabinets full enough that you could survive a couple of weeks. What they offered was so different that we could immediately show the customer that with our competi- tors, you'll still have to do it yourself, you'll have to take responsibility. Whereas in my case, when you change a printer, for example, and you don't tell me, I will find out you don't use this cartridge any more and I'll adjust. These cartridges are very expensive, do you want the responsibility? That's the main difference of consignment.

  DW: Later were you able to discover new constraints that opened the way to new growth?

  PH: Ultimately the constraint moved back inside the company. The new constraint became; how quickly can we measure or install a new cabinet? At first we could only do something like two or three cabi- nets a day. People were standing in line for cabinets. We had waiting lists for three months. So we put a second person on the job. Not a big deal. But we were fully in charge. We could grow at the pace we wanted to grow. That's kind of funny in a race where everybody was yelling about price! There are other businesses in that situation. For example, if you go to a really good restaurant, they don't care about prices. They are booked for the next three or four months; they be-

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  come arrogant. And we had the same situation! It was great! And to think that we had started with all those competitors, all the problems, and 20 sales guys who were really discouraged, they didn't know what to do. And here we came with this really simple solution. I'm amazed that to this day nobody's really copying it.

  DW: Would you have discovered this breakthrough had you not been exposed to Goldratt's theories?

  PH: First of all, I wouldn't have known how to attack the problem Since I was working at the printing company and my nephew was working at the office supplies company, I never expected that we would change roles. Nevertheless, I knew how much loss they made. And by then I was so convinced that just by applying Theory of Constraints, I would figure out a way to solve the problem. It took me something like three or four weeks to see the light and understand what was go- ing on a
nd how to solve it. I survived that month by sitting back and saying, "Okay, no panic, no panic, let's not be hasty. As long as we don't have a breakthrough idea I'm not going to make any changes " I was just sitting back and thinking and discussing with people how we could solve the problem, until we solved it. And that's one of the good things about theory of constraints. You know in these cases that eventually you will come up with a breakthrough idea.

  DW: You have only to find it

  PH: Yes, and I became better and better at it. It takes Eli about five minutes to find the constraint and how to brake it. In most cases, I can find the same within a week. Compare it to just doing more of the'same. I very often use this funny story about two guys on a safari. And after a couple of days they hear the first tiger and they think, well, great! So they go for their guns and discover they forgot their bullets. So one of them puts his pack down and grabs his running shoes, and the other guy starts laughing: "Do you think you can outrun the tiger?" He says, 'I don't need to outrun the tiger, I only have to outrun you!"

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  Interview with Eli Goldratt continued...

  DW: Can you give me another example? Of a service company that does not deal with physical products?

  EG: To demonstrate how different one type of service company is from another, I suggest you interview both a bank and a financial advisors company. Then interview another, obviously different, type of service industry, a hospital

  Interview with Richard Putz, A Midwest Bank

  Former CEO of Security Federal Bank.

  DW: How did you conceive of applying the principles outlined in The Goal to the banking industry?

  RP: I was flying back from Los Angeles one night. And I was re- membering my days as a consultant at Coopers Lybrand, working with the folks who were handling the manufacturing engagements. That's where I was first exposed to The Goal. And I began to think that when you look at how a bank operates-for example, how it moves through the process of putting loans together-it's really no different than manufacturing. Why couldn't I use something that worked in manufacturing and apply it to a bank? The process is the same, we just give it different labels. So I started testing that out.

  DW: How did that go over with the staff?

  RP: In the beginning they were skeptical. I got all of the people who report directly to me into the board room, we sat down, I passed out copies of The Goal, and I said: "Guys, we're going to come together ev- ery week on Friday. We'll have fun, we'll have food, the whole bit, but we're going to discuss how to translate The Goal into banking terms." I'm looking over there at my CFO, he has this constipated look on his face. I said, "Jim, is there something wrong?" He says, "Yeah." I said "What?" He says, "There's no index in the back of the book. How do we find anything?" I said, "You read it, it's a novel." He eventually became our biggest advocate. But he was totally skeptical.

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  DW: So how did you approach the problem?

  RP: Traditionally the tough issue within banking is how you manage all the regulatory constraints that you're faced with. Banks are just immersed in regulations. And if you actually tried to manage accord- ing to the regulatory measurements, your bank would fail. You bring that up to the regulators and they laugh. There's just this whole slew of things, some of which contradict themselves. Some of them were created when lawmakers added them onto banking legislation because they looked good, or else to fit a particular situation at the time.

  DW: You're talking about regulations that keep banks out of certain businesses?

  RP: Right, as well as those that mandate certain loan mixes, how you approach a market, that type of thing.

  DW: Preservation of asset ratios and so forth?

  RP: You got it. We took a slightly different approach. We decided we had to figure out what our real market constraint was. Using TOC, we found it had to do with service levels and how we were solving problems for our customers, not with the specific products we were offering. So we ended up gearing the whole bank toward solving prob- lems for our customers. Part of the solution-the injection that broke the conflict-was the creation of personal banking for everybody, not just for wealthy people. Banks normally assume it's not worth spend- ing time with you if you have only $100,000 when they can spend that time with a guy who's got $10 million. We discovered that a guy who only has $ 100,000 isn't really going to spend a lot of time with you anyway; he's just not there very often. So we stopped worrying about that and began focusing on how to better manage our customer relationships across the board. People ended up coming to our bank- ers anytime they had a financial problem. If we couldn't solve it for them, then at least we could refer them to someone else, and we could give them good advice because we didn't have an ax to grind. All we asked is that they let us manage their cash flow. Most people gave us everything in that regard, plus all their loans.

  DW: You had a large mortgage business, too?

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  RP: Right. We had more than 300 correspondent banks, all over the country. National City and Bank of America would sell us mortgages. What we discovered-also using TOC, and this is how we expanded this business-is that most people with a loan viewed the bank that serviced the loan as their bank. So, whether Freddie Mac or Fannie Mae or PNC or any other investor actually owned the loan, we wanted to own the servicing asset. It was more valuable in terms of building customer relationships than the loan itself.

  Also, these days it's a lot easier, but it used to take forever to get a mortgage approved. That's because there are all these things you have to have in place-again, to satisfy the regulators. We looked at that and said, "Okay, what's the conflict here?" We built our conflict clouds, and we built a current reality tree, and we discovered there are only three things that end up deciding whether a loan is a go or a no-go. If we just focus on doing those three items, and worry about plugging everything else into the file later, we can speed things up. In fact we were able to cut the approval time almost in half. That made us really popular with realtors and mortgage brokers, which brought us more business.

  DW: What effect did TOC have on customers' ordinary day-to- day interactions with tellers?

  RP: Most of the tellers said they wanted to do this TOC thing, too. Well, what do they really need to do? They really don't need to know how to do future reality trees because their everyday life is not involved in future reality trees. But a teller is often dealing with conflict resolu- tion. Tellers represent the frontline defense, especially at savings and loans. People come up to them and say: "This doesn't work, this is out of balance, they screwed this up," and it's the tellers who have to solve the problem. So we taught them how to do conflict clouds. We created conflict-cloud worksheets for them, pads of 50 sheets, eight and a half by eleven. On the back side were the instructions, just in case they forgot how to do it. And the teller could actually fill in the cloud as he or she was talking to the customer, work out the prob- lem, then rip off the sheet and do the next one. We had that going throughout the bank.

  DW: It sounds like one of the main conclusions you reached

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  was that the perceived constraint-the regulatory climate-was not the actual constraint

  RP: Correct. I would walk into the office of my compliance officer and I'd say, 'Jeff, I got this idea." And he would just automatically point to this poster on his wall that basically said: If you can dream it, there's a regulation for it.

  DW: And yet even in that environment, you found ways to grow.

  RP: We did things in the banking industry that were totally unheard of. We actually had regulators visit us more often than other banks because those other banks kept calling them and saying: "They've got to be doing something illegal, you need to check them out."

  Interview with David Harrison, Administrative Ser- vices, Founder, Positive Solutions, Newcastle, U.K.

  DW: Tell me about Positive Solutions.

  DH: We provide management and administrative services to inde- pendent financial advisors
. At present we have 755 of those people who rely upon us to help them with such things as compliance with financial services regulations, collection of commissions, and so forth. That's the company we built, 60% of which we sold recently to the Aegon group, one of the world's largest insurers.

  DW: How have you made use of The Goal?

  DH: In a couple of ways. First and foremost we use the five focus- ing steps almost instinctively now, in that we seek to identify the constraint in any problem before we do anything else. That's sort of been my mantra, if you like-before we go any farther, let's identify the constraint.

  Beyond that, a big part of what we do is acquire new independent financial advisors-we want people to join our organization, and the people we use to recruit them we call our business consultants. Oded

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  RP: In a couple of ways. First and foremost we use the five focussing steps almost instinctively now, in that we seek to identify the con- straint in any problem before we do anything else. That's sort of been my mantra, if you like-before we go any farther, let's identify the constraint.

  Beyond that, a big part of what we do is acquire new independent financial advisors-we want people to join our organization, and the people we use to recruit them we call our business consultants. Oded Cohen, of Goldratt UK, helped us build a process for that. He broke it down into very discrete steps and helped us program software which helps us track how each of our business consultants is succeeding, or not. At any point in time they may have 150-200 people they're hav- ing conversations with about joining Positive Solutions. We've got them to think of each of those people as a project. That streamlined the process and also got our business consultants to think in a more logical fashion.