Stein Industries still looks pretty much the same as three years earlier when Gerald Fish, the company's CEO, initiated a move that caused them to grow from a fifty-million dollar company to over two-hundred million. For an outsider, it would be difficult to see the change. Even the sign on the CEO's office looks old. Gerald has a reputation for being very conservative with money. This reputation seems to be in conflict with the success of the company; one cannot truly succeed by saving money.
Gerald's secretary greets them heartily. "Hello, how good to see you again Lenny. You must be Maggie, welcome to our company. And you are, of course, Mr. Duncan. I've heard so much about you."
Gerald comes out of his office wearing a big friendly smile. He is surprisingly young. His beard and casual clothes are not typical of the CEOs they usually do business with. He shakes hands first with Maggie. "Hello, Maggie, I think this is your first visit to Stein Industries. Please come inside," he says, shaking hands with Scott and Lenny.
This is no longer a small company, thinks Scott. But it feels like one, warm and informal. I don't sense the tension and pressure of a company going through accelerated growth.
As if to answer his thoughts, someone rushes through the door. Upon seeing Gerald with guests, he stops abruptly and turns to retreat.
"Roger, wait a minute. Meet three outstanding people who are responsible for our great information system," says Gerald.
Roger shakes hands with them.
"Roger is our key dispatcher guy. He sees to it that every shipment goes out on time. Now, when he comes to me it means something needs to be delayed. Is that right, Roger?"
"Well, not exactly. Lucifer asked if we could ship their order so they get it by eight a.m. I went over the night-shift plan with Jane, and we can squeeze it in if I call two trucks for midnight. I looked for Jimmy for approval but he's on his way to San Diego. I didn't know you had guests."
Maggie laughs loudly. "What company calls itself 'Lucifer'?"
Roger is embarrassed. "Oh, no ma'am, that's not their name, we call them that 'cause they're so mean."
Gerald smiles and says to Roger, "Don't worry, Lucifer will pay for the special delivery. Their controller promised me last week that they'd honor any invoice for urgent delivery. I think they've learned their lesson."
In addition to the friendliness and informality, there is also a feeling of calm and camaraderie, Scott realizes. They enter Gerald's private office.
"Delighted to have all of you here. What an honor. However, I assume you usually visit customers who have complaints. We don't."
They chuckle. Scott picks up the ball. "Gerald, you personally presented at our user group conference two years ago. You declared that BGSoft beautifully supported your business. You even said that your investment in the whole application was fully returned in much less than a year. We'd naturally like to hear more about it."
Gerald laughs. "It's about time you showed some interest. Let me guess. Not that many of your customers have such an impressive return on your software?"
"That's right."
"Well," Gerald begins, "please don't take this personally, but I don't buy technology just because everybody else is buying it. Or because it's nice or sophisticated. 1 buy technology for only one reason."
He pauses to stress his point. "I buy technology only when I'm convinced I can make more money by using it.
"Luckily for us, not every president has the same opinion," Maggie comments half jokingly Whoa! she thinks, this guy's friendly, relaxed manner is contagious.
Gerald flashes a smile at her. "So, several years ago I had a very clear idea of how your system could help me make profits. Frankly, at the start it didn't work out as I expected, but eventually we made it work. Since then the software has played an important part in our business."
They wait for him to continue, but he doesn't.
"We came here for the details," Scott gently reminds him.
"You want the details?" Gerald checks. "I'm not sure that I want my competitors to know the details. Okay, let me give you the basics."
"That's what we're here for," Maggie assures him.
"My interest in your ERP system started around ... mid nineteen ninety-five. That year started out as a bad one for Stein Industries. We were not yet losing money, but I saw it coming. In nineteen ninety-four there had been a small decline in the market and in 'ninety-five it intensified. We were too damn near break-even. I was concerned because it looked like the decline would continue. For us, further decline meant being in a spot that's difficult to bounce back from. We desperately needed more sales."
He pauses, remembering how hard it was to think proactively, how hard it was to resist the temptation to seek refuge in "right-sizing."
"I was looking for a competitive edge. That was the only way we could survive the decline without losing too many of our people. So, I tried to analyze the situation through the eyes of my customers. I knew I had to find something that was really important for them. Once I put my mind to it, it wasn't too difficult to zero in on the critical factor.
"Our customers deal with large projects. Our products come relatively late in the game; when a client comes to us, their project is near completion. This is the only way they can give us the precise measurements we need. No wonder that often, completion of the whole project has to wait for our product. So I thought, what if I could promise much faster delivery than my competitors?"
He pauses and asks, "Got the picture?"
"Are you kidding?" Maggie smiles. "It's the story of my life, my implementations. The final stage of our projects is always testing the new system while still working with the legacy systems. It hurts the performance of the company, and the frustration goes up sharply. Don't worry, Gerald, we can easily relate to pressures near the end of a project."
Scott pushes on. "Your point is clear, Gerald. Fast and reliable response from you is of the utmost importance to your customers. Cutting your lead time should give you a competitive edge. So you decided that ERP technology could do it for you."
"Not so fast, not so fast. First of all, please call me Gerry. And yes, Scott, you're right, I wanted to cut lead times. I was aware that ERP companies claimed their systems reduced lead time, but I didn't take it for granted. Not at all. I had to be sure that whatever we did would work. Besides, 1 don't have money to throw around.
"I put together a team to check our process, and find out how we could cut the lead time. The team found that preproduction, especially the price quotation part, took almost two weeks. They also found that every order was delayed at least another week because of material shortages. Once those two causes were revealed, the option of ERP was raised. That's a big step for a company our size, and we hadn't really considered it before.
"We knew that an ERP system could help us shorten the time it takes to do the price quote. We also knew that it could help us better manage the materials, reducing the problem with shortages. Based on this, I estimated that using ERP, we could shorten the lead time from an average of ten weeks to about seven.
"Of course, before investing such enormous sums of money, I wanted to make sure I could get more sales. I visited all my big customers. Based on what they told me, I felt I could safely say that reducing our lead time to seven weeks would give us at least ten percent more sales. I needed the sales so badly, and the chance looked so good, that I made the decision to purchase your system for the huge price you charged."
"Good decision," says Maggie. Not too sophisticated, she thinks. But, she realizes, his rationale was straight bottom-line justification. And they also saved on cost since the misers did the implementation themselves.
"Did you have any problems installing the system?" she asks.
"Not really," Gerry says flatly. "It even worked as we expected. Within a relatively short time we were able to cut the preproduction from two weeks to two days, and very few orders were delayed due to shortages."
"Nice success story," Maggie concludes.
"Who's talking about success?" Gerry grins. "It was a total failure."
It's his day. At last the big kahunas have recognized that he has done something very different. And he intends to squeeze every drop of satisfaction from it.
"The system worked. Lead time went down. The concept seems right; you should have gotten the sales lift. So what happened?" asks Scott.
"The system worked, but the lead time did not go down," Gerry answers.
"I don't understand." Maggie is puzzled. "But you said ..."
"Yes, I know what I said. And at the time, believe me, I was as puzzled as you are, if not more. You see, in my business, if I go and commit to seven weeks and then don't deliver in seven weeks, or at the most eight, I'm out of business. So, of course, before committing to our clients, we tested. Well, we finished preproduction in just two days all right, there were no material shortages to speak of, but we were still scrambling to ship the order in ten weeks."
"How come?"
"Yes, that was exactly my question."
Lenny thinks that the problem is somewhat familiar. In his days working with MRP, he came to realize that giving production more time didn't improve the ability to ship on time, or reduce expediting.
Gerry continues. "Sometime later, my operations manager and I attended a Constraint's Management symposium. One presentation was given by this guy talking about their TOC implementation in production. I couldn't believe my ears; he was describing our environment, even though he was from a very different industry. He proved that in conventional complicated operations like ours, releasing the work earlier does not mean that it will come out the other end earlier. Releasing more work orders means that queues grow, and the average time to complete each work order grows!"
He pauses, letting them digest that, and then continues. "That explained why we hadn't seen any results. What happened was that the two weeks saved on preproduction were actually used to release the materials to the plant two weeks earlier. Thus, the shop floor now contained ten weeks of work rather than eight. The foremen, faced with more work orders, had more decisions to make, and many more possibilities for mistakes. Eventually, all the allotted time was fully used—exactly as Parkinson's Law claims."
Gerry looks at his audience. They're with him. They might be big shots, but they're learning new stuff from him.
"So, our problem was to complete every order in seven weeks, rather than ten. The presenter we saw suggested using the Drum-Buffer-Rope method. In its crudest form it just means choking the material release according to the orders' due dates; delaying the release of work orders until seven weeks before their final due date.
"I must admit, that at the time, it sounded counter-intuitive to me. It meant we had an order, we had the materials, the work centers at the start of the process had nothing to do, and yet we don't release the work. I understood the argument that releasing the order earlier meant it'd be stuck downstream causing traffic jams and confusion. But to accept that in order to finish earlier, it had to release later, was hard.
"Jane, my operations manager, was convinced we should do it. So, I let her try. And of course it worked—we could safely deliver every order in seven weeks."
"So you instructed your sales agents to quote seven weeks delivery. And sales started to roll in." Scott completes the picture.
"This move brought us almost twenty percent more sales/' Gerry confirms. "Now we were making money. We were off the hook. And ... I had time to think about the next step."
Gerry pauses, staring at his guests.
Scott smiles. He is aware Gerry wants him to try to guess. "If you could release the orders seven weeks before delivery and make it, why not try six weeks, or even less?"
Gerry acknowledges the remark with a smile. "Absolutely right. But I approached it from a different angle. My clients wanted shorter lead times because they get real value from it. If I'm the only one who provides it, why shouldn't I share in this value? Why not get higher prices?
"I wanted to continue the strategy of gaining more market by cutting the lead time. But I introduced another element. I wanted to get more money for the increased value I generate for the customer.
"My idea was to offer an option of four-week delivery for an additional ten percent on top of the regular price. I thought that such an offer would be attractive to many of our clients. Besides, being able to make such an offer would build our reputation—put us in a breed apart."
"Of course, with such an offer you needed to ensure ninety-nine percent on-time delivery," Lenny remarks.
"Right. By then we were familiar with TOC, and we studied the Drum-Buffer-Rope planning technique in detail. We thought we knew how to safely achieve another quantum leap in our lead times. We needed to drastically reduce the queue and wait times. For that we needed to carefully schedule our most loaded resource, and synchronize the material release schedule accordingly. I asked the team to design the Drum-Buffer-Rope planning process in detail.
"After a week, they reported they had a problem. Scheduling the bottleneck could be done manually. But then, to ensure synchronization of the release of our hundreds of materials, we needed the ERP system. So we needed to connect the bottleneck schedule to the ERP."
Lenny continues the story from his perspective. "Now I understand your request for the code change. You wanted me to add a feature that accepts a detailed schedule for a certain resource and implodes to calculate the effect on the orders' completion dates. I was wondering about this odd request. It was counter to what ERP/MRP algorithms usually do. I read one or two books on Drum-Buffer-Rope planning but didn't make the obvious connection."
Gerry nods. "You are quite right. The best solution was to ask you to write that small feature. When your price quote for one-hundred-thousand dollars came to me, I was furious. That was a very small feature to program! Don't tell me otherwise."
Scott laughs. "I remember the incident. Lenny insisted that only he could do it... And it was so special that we couldn't use it anywhere else. So I gave you that quote. As a matter of fact, I hoped you would back off. Lenny was so busy that his time was more precious to us than the hundred thousand."
Gerry smiles. "I almost cancelled that request. I thought of using an Excel model to do it. Luckily my production manager convinced me that for all practical purposes it was impossible; we really needed that feature embedded in the ERP software. She reminded me we intended to make a small fortune from it. That was pretty convincing.
"Once we got the additional feature we went into action." Gerry continues the story. "The announcement that we were accepting four-week orders made us quite famous. Our sales went up sharply. By focusing on the bottleneck we could improve its performance. That was very valuable because we found we could do more with the same people than we had ever imagined. When sales took off even more we had to go to night shifts on the bottleneck and two other work centers pretty regularly.
"Still, I was frustrated by the reluctance of my customers to pay the extra ten percent. With my largest customers it ended up at a mere two percent. We were doing great, but those misers made me furious."
Look who's talking, Maggie smiles to herself.
Lenny encourages Gerry. "You came last year with another strange request..."
Gerry continues. "Yes, as I said, my mind was on the market. I still wanted to get much more money for much more value to the customer. The four-week delivery option was good, but not enough for our customers to pay significantly more. I asked myself, under what circumstances would they be willing to pay us any price we asked?"
"When a last minute problem arises, and one part is holding up the whole project," Maggie confidently answers.
"Exactly!" Gerry looks at her with new appreciation. "So I realized that me making a clear commitment that whenever a client has a real problem, we are willing to deliver an urgent order even with just a week's notice, is a very attractive safety net for our clients. A thirty percent surcharge on urgent orders is not an issue. Of course, I was willing to give this offer only to customers who promise all their business to us.
"There was only one little problem. I gathered the team and all my key people, and asked them one question: how can we ship up to a quarter of all our orders in one week, and still not miss any due dates?"
"And what did they say?" Maggie asks.
"They said it was 'totally impossible! Completely out of the question!' I liked this answer because that would be the reaction of our competitors as well. I simply asked them to keep thinking."
"You have a lot of confidence in your peoples' ability." Scott says.
"Yes, I do," Gerry assures him. He smiles. "Arid I knew that they knew where to look for the solution."
"Buffer-Management?" Lenny asks.
"Exactly."
In answer to Scott's unspoken question, Lenny explains. "It's the follow-on step of the Drum-Buffer-Rope. When you want to squeeze lead times to the extent that they start to approach the magnitude of delays caused by Murphy ..."
"You mean," Maggie tries to understand, "something like a machine breakdown?"
"Basically, yes," Gerry takes over. "But I'm more concerned with the more routine things. You see, in our company it's unusual for a machine to go down for more than a day, but it's very common for a work order to be stuck in some queue for two, or even three days. When you want a substantial number of orders to be completed in just one week, your operation must know how to handle it. On the one hand, you must frequently jump the queue, but on the other, if you constantly juggle the production plan you throw your operation into chaos. The answer is to supplement the planning system with an execution system.
"We run our Drum-Buffer-Rope system only once a week, and we stick to the resulting plan. Of course we leave enough spare capacity on the bottleneck so that urgent orders do not disrupt the plan, they are just added to it. The material release and the work of the bottleneck always obey the planned schedule.
"In addition, we have Buffer-Management running on line. Based on the planned schedule and feedback from some key work centers, it provides everybody with what's most important to them."
He leans forward. "This is key. Everybody, including the support functions, looks at the buffers all the time. Whenever anybody has a queue, has a choice about what to do next, they look at the buffers."
"I can lend you my books on Buffer-Management if you're interested," Lenny says to the other two.
"I am," says Scott. "The concept of an execution system as distinct from the planning is new to me," he confesses.
"That's the problem," Gerry groans. "That's why we had to pay you another fortune for your programmers to help us develop it."
"Lenny, were you personally involved?"
"No, he wasn't," Gerry answers. "And you didn't charge me an arm and a leg for the programming work itself. You just charged me for having more people connected on line. Believe me, if my people hadn't proved to me that it's essential to be fully integrated with the ERP system, I would never have agreed to pay you for so many more concurrent users. I still don't understand why I had to pay you so much."
"Have you made money out of it?" Scott asks, smiling.
"You bet," Gerry grins again. "You, Scott, are very proud of forty percent growth every year. I think we'll grow this year by another seventy-five percent."
Scott leans forward. "This is very impressive, Gerry. What's your next step?"
Gerry laughs. "Oh, Scott. You don't expect me to tell you that."
* * *
The first question Scott asks after they enter their limo is, "Lenny, under what type of contract did you write the code for Gerald?"
"It's Gerry, remember? But if you're asking who holds the copyrights? We do."
"Good. Arid how tailored is that code?" Scott continues questioning.
"There are parts which are totally tailored," Lenny answers. "But most is generic. To answer your real question, for Drum-Buffer-Rope, based on this code, I can provide a good enough program within a few weeks. To turn it into a package that can be used in any environment is another story. Something between six months and a year."
"That's for planning. What about the execution part?"
"The Buffer-Management piece? I don't know. I have to check what we did there, but it can't be that big a job." Lenny doesn't seem overly concerned.
"Maybe I can save you the time," Maggie interjects. "Scott, why all these questions? What are you getting at?"
"Isn't it obvious," Scott replies. "We have the answer for the mid-range market."
"I don't think so," Maggie says firmly.
Scott tries to persuade her. "Look, Maggie, Gerry represents our sales-peoples' nightmare. He's cheap, he's not impressed with technology, and he's small. Not a prospect you could expect to turn into a client. Certainly not as good a client as he is."
"And the key is value," Lenny joins in. "Maggie, we said that the key to the mid-market is value, bottom-line value. Now we know how to provide it."
"No we don't," Maggie says emphatically.
If they didn't respect her opinions they would ignore her. But since it's Maggie, they listen.
"Between the two of you, you probably know everything there is to know about computer systems for business."
"After today, I'm not sure anymore," Scott mutters.
She ignores his remark and continues, "But when it comes to implementation, to working with the people who have to use the system, to overcoming suspicion and resistance, I think I've learned a thing or two. Friends, don't you realize that sweet-talkin', innocent Gerry didn't tell us the full story?"
"What didn't he tell us?"
"He didn't tell us how difficult it was to install the system. I don't mean to install on the computer, I mean to install it in his peoples' heads. Don't you realize that what he described to us was actually a culture change? No, a cultural revolution!"
When she sees that they're not impressed, she tries to explain it from another angle. "Look, changing the rules is tough. People are threatened by change. He told us how he felt about choking the release of orders. How awkward it was to have the order, to have the material, to have the people free, and nevertheless not to release the work. He told us how he felt. What do you think his people felt?
"What do you think people feel when they are not being fed enough work? Don't you realize that the question that starts to go through their heads is 'when are they going to announce the layoffs?' To achieve full collaboration under such circumstances is not a triviality.
"This guy not only had the intelligence and insight to create these solutions for his company, he must be an amazing manager to have gotten his people to go along with him."
Scott recalls the impression of trust and good feelings within the company. Even the guy from shipping seemed comfortable talking with his CEO.
Maggie continues, "You know that changing the technology is often met with hostility. Don't you realize that when you change to something that conflicts with the performance-measurement system you may run into a wall?"
"Of course we do." Scott is not happy. "But what does the performance-measurement system have to do with what Gerald told us."
"I'm not aware of any change that Stein Industries made to our performance-measurement module," Lenny confirms.
"You've been looking at the world through the lenses of your computer systems for too long." Maggie knows she's not reaching them. But she is not the type to give up. "Listen guys, do you agree that worker efficiency is part of the performance-measurement system?"
"Yes," Lenny has no problem agreeing.
"When the release of material is synchronized to the bottleneck schedule, what must happen to the efficiencies of all the workers who man the non-bottlenecks? Gerry never even mentioned 'efficiencies,' but I'm telling you, for the method he described to work, he had to chase out the efficiency measurement from Stein Industries. I bet he had wars with his employees on that issue alone."
"I see," says Lenrty.
"You're right," Scott admits. "The change Gerry succeeded in implementing is by far more substantial than what he actually said.
"It explains another thing. I wondered why he didn't hesitate to reveal all the technical details to us. Now it's clear. Due to these difficulties Maggie described, he knows that it will be almost impossible for his competitors to imitate."
"Precisely," Maggie agrees.
"And that's bad news for us," Scott is quick to grasp.
"Why?" Lenny asks.
"Suppose that you write the code," Scott explains. "What are the chances that it will be implemented, including the essential culture change, so it will bring value?"
"Maggie's people can take care of the required culture change," Lenny suggests.
"Not a chance," Maggie retorts. "My people are experts in system integration. But to bring about a culture change, they are about as qualified as your programmers are."
The last argument convinces Lenny. "So what are we going to do?"
"What you have already decided to do," Maggie says decisively. "If the problem is that there are traffic jams on the shop floor, we don't have to change all the rules. We just need a very smart traffic cop."
"You mean an optimization program, adding an APS module?"
"That is exactly what I mean," Maggie answers.
"Fine," Scott says. And he starts to hum.