"Hi, Scott."
Scott doesn't have any problem identifying the deep voice. "Hi, Craig, what's up? Any new problems?"
"So that's how you think of me? If I call, it must be problems." Craig's laughter is loud, even over the phone. "No, nothing of the sort. I'm passing through town, and I wonder if we can have dinner tonight?"
"Sure thing. But Craig, this is my town, so let me take care of the arrangements." Checking his day planner, Scott asks, "Seven-thirty?"
"That'll be perfect," Craig answers. "It would be nice if Maggie could join us too."
"I'm sure she'll be delighted," Scott assures him.
"Excellent. Will somebody call my secretary with the location? See you at seven-thirty."
Scott smiles as he presses Maggie's direct line.
"Maggie, you never cease to amaze me," he says. "You sure are one of a kind. How did you manage to pull it off?"
"Thanks for the compliment, but Scott, what are you talking about?"
"What about him?"
"You and I are having dinner with him tonight."
"Really? When? Where?"
"Seven-thirty, in a restaurant to be determined by Mary-Lou. Can you come?"
"Of course I'll come. What do you think? That I'd let the two of you get together without me?"
"I didn't think so. But tell me, how did you get him to come here? And on such a short notice?" In a more cautious voice he adds, "Maggie, what did you promise him?"
"Two new modules and half of Lenny's time." After a moment, Maggie laughs. "Just kidding. Scott, you give me too much credit. I didn't even speak with the man. All I did was send him a short write-up of your approach, something I scribbled after our meeting. You know, that technology is necessary but not sufficient, that kind of stuff."
"So why is he here?"
"I'm not sure. I also mentioned that we have something interesting coming up with Internet technology, but I didn't give any details."
"Fine, we'll find out for sure at seven-thirty. See you then."
"Wait, Scott. Can you transfer me to Mary-Lou? I want to make sure she selects the right restaurant. Fancy enough for Craig, a private room so we can talk business and, most important, with food I like."
They haven't finished the salad course when Craig shifts the conversation away from small talk. "I want to personally thank you for what you've done. These last changes are working beyond our expectations. Pierco is not the same company it was a year ago."
"Thank you," Scott says. "And thank you for being so cooperative about sharing it with our prospects."
"Yes," Maggie joins in. "And especially for allowing your people to share actual numbers. That inventory drop is spectacular."
"All the tangible results are like that," Craig comments. "The increase in capacity, the reduction in response time, in cross shipments, in shortages. But for me the most impressive thing is what happened between the production and distribution managers. They used to be like wolves, always at each other's throats, always blaming each other."
"And now?" Scott asks.
"In the last four weeks none of the divisional managers got even a single complaint."
Scott nods in appreciation. "That's impressive. The first time I understood the dollar-days measurements I knew that they were powerful. But I had no idea that they were powerful enough to bring down the barriers between the production and distribution silos."
"Well, they are." Craig looks content. "At last I see real collaboration between different functions."
"I'm glad to hear it," Maggie says. "I'm also glad that it's over."
Craig puts his fork down and in his deep voice says, "That's what I came to talk about. It's not over. It's just the beginning."
Without noticing, both Maggie and Scott lean forward.
"What we have done so far is good but not good enough," Craig firmly states. "Pierco is now much more agile, but most of it doesn't reach the end customer. And as long as the end customer doesn't enjoy it, we aren't getting the biggest benefit, the lift in sales.
Maggie is confused. "Why doesn't it reach the end customer?"
"Maggie, we don't sell most of our products directly to the market. We sell to retail companies or to other manufacturers. Last month we ran some surveys. And these surveys clearly show that the fact that we significantly improved our deliveries to our client, didn't improve their delivery performance by much."
"I see," she says thoughtfully.
Craig continues. "Well, as you know, competition becomes more fierce every year. I think that the battlefield is changing. I think that the battles are actually fought, not so much between companies, but mainly between supply chains. And Pierco, as large as it is, is still just one link in a supply chain. If we want to win big we must look beyond the limits of our company. We must look on our entire supply chain."
"That's interesting," Maggie says. "How are you planning to do that?"
Craig waits until the waiter finishes serving the main dishes before he begins, "I want to extend what we've done to my entire supply chain; to my clients, my vendors, and their vendors. All the way from raw materials to the end customers. That's how we'll gain the competitive edge."
"That's a huge business to business project," Maggie states. "How many companies are in your supply chain? It must be in the hundreds." Her face lights up as she realizes the magnitude of the opportunity.
"Yes," Craig agrees. "The project is huge, but I believe that it's vital. What I want is not just to persuade them to implement the solutions for production and distribution but also ..."
"The solution for engineering," Maggie jumps in, completing his sentence. "Being able to quickly develop and introduce new products is a major part of the equation."
Craig is surprised. "You have a way to shrink product development? Why didn't you tell me about it?"
"Because we're releasing it just next month," Scott explains. "We first wanted to complete the tests on our software development projects. But Craig, you were about to say something else."
Craig is eager to hear more, but he is also eager to move on with his agenda. After a second of hesitation he continues, "So as I said, I want to persuade every company in my supply chain to improve their operations. But that's not enough. I think that for the supply chain to reach its full potential, not just the links have to improve, but also the collaboration between the links has to be improved. The entire supply chain has to work as one unit. We succeeded in doing it with our plants and warehouses. There is no reason why we shouldn't succeed in doing the same between our company and the others in our supply chain."
"Craig," Scott says, "these two cases are not the same. Two departments of the same company, each trying to optimize their own local performance is stupid. But different companies, on the other hand, have to look out for their own bottom line."
Craig doesn't buy it. "If companies belong to the same supply chain, I claim that it's about time they realize that if the chain loses, every company in the chain loses. So it's not so different."
Scott and Maggie agree.
"Causing different companies to work as one unit is a tall order," Maggie remarks.
"You can say that again," Craig sighs. "Many CEOs have tried to get full collaboration from their vendors and clients. I don't know of any that really succeeded. And I'll be the first to admit that I don't know how to do it." He pauses and then states, "But Scott, Maggie told me that you know."
Maggie almost chokes on her food.
Craig continues. "Maggie, thank you for sending me that write-up of yours. It's so obvious that when we install new technology we also have to modify the related rules, yet we never do it. Until recently that is. So, when you informed me about your new development, the ability to link companies over the Internet, I understood that you were also working on modifying the rules that govern the collaboration between companies. Was I wrong?"
"You were right," Scott smiles.
Craig smiles back in relief. "So, tell me."
Scott takes a sip from his glass of red wine, and decides to start by stating the objective. "You want all the companies in the supply chain to act on the concept that the best way to guarantee success is to make sure that the chain is successful."
"Well, I believe, that even with the best intentions, this concept will remain an empty slogan until we'll change the day-today practice to match it. The current practice is almost the opposite."
Craig chews on another piece of his juicy steak while waiting for Scott to explain his broad claim.
"Suppose that I'm one of the companies in your chain. When do I register a sale? The minute I ship the goods to the next company in the chain. I've made a sale, but did the chain make a sale? No. You can see that the performance of the individual companies is not tied to the performance of the chain."
Craig swallows and says, "You're right for the short term. But companies also have to look at the long run. Suppose that I'm selling one hundred units per month to another company, and that company succeeds in selling only fifty units per month to its clients. Am I happy? Do I say, 'I'm selling them one hundred a month, I don't care how much they sell or use?' That would be very shortsighted of me. If they don't use what I sell them, soon I don't have a client."
"Correct," Scott agrees. "We have a contradiction here. The day-to-day practice is that a sale is done whenever a single link ships to the other. That is the opposite of the long-term business sense; a sale is done only when the last link in the chain has sold to the end customer. Craig, how many times have you seen the long-term interest dictating the behavior of people? Relative to how many times you have seen the day-to-day practice dictating it."
"I understand. You claim that we don't have a choice but to change the day-to-day practice," Craig concludes.
Scott declares, "If we want to see in our lifetime individual companies acting according to the good of their supply chain, I think that we should make sure that the day-to-day practice will match the long-term business sense."
Maggie says it explicitly. "The day-to-day practice should be: as long as the end customer didn't buy, nobody in the supply chain has sold."
"Makes sense," Craig says slowly. "Makes perfect sense. But that won't be easy to implement. I don't think that my vendors will be happy to wait that long to get paid. To wait until, eventually, the end consumer buys. And you can't blame them, most don't have the hefty cash reserves needed for such a long delay in payment."
"Why do you claim that they'll have to wait much longer than now?" Maggie asks. "I'm sorry, but I was under the impression that you said you want to extend what you have done with our software to your entire supply chain. That's how you intend to get the competitive edge. How much have you reduced the lead time through Pierco? A quarter of what it was?"
"Less," Craig says.
"So," Maggie continues. "Suppose that the whole chain reaches comparable improvements. Then what will be the average lead time? From raw materials, which are commodities, until final sale? I would say, about two months. Not too bad considering that today your vendors have to wait a minimum of forty-five days for their money."
Craig thinks about it. "Still, for some of the upstream companies it will be too long to wait. We'll have to arrange some line of credit for them."
"Will it be a problem?" Maggie asks.
Craig doesn't see it as a big problem. "We are holding their inventories without paying for them. The least that we can do is to put up the collateral. Even my CFO will not have a problem with it. Besides, let's put things into perspective. The last improvements gave us excess capacity in both production and distribution. Our vendors and clients should get the same. Once they have that excess capacity, an increase in sales is not going to be associated with an increase in expenses. What is the bottom-line impact of having a competitive edge that will increase sales by, let's say, only ten percent? It's huge. In comparison, the small sums that will have to be paid for interest are less than peanuts."
They continue to eat, each absorbed in their own thoughts. After a minute Craig says, "Good. It does make sense. If I know that I'm not going to get paid until my client sells, then I will have his interests in mind. That will force the individual links to at last act as a chain."
He thinks about it some more and says, "I'm not sure that we'll stay with all the clients we currently have. I don't trust some of them to know what they're doing. I don't know if I want to give them my goods without being paid right away."
Craig now has a long face.
Scott doesn't help much when he says, "And judging Pierco based on last year's performance, some of your vendors might say the same."
Before Craig can comment he adds. "What you need is a good measurement. A measurement that will unequivocally tell you if your client is trustworthy. If when he asks for your goods he really needs them; if he is rapidly moving them to the market."
"Right!" Craig's face lights up again. "And I have the measurement. You gave it to me. Inventory-dollar-days. The situation is not much different than what we've done internally. Today we trust our plants and warehouses to determine the targeted inventories themselves. Those that just pad themselves with hefty stocks are flagged out by the inventory-dollar-days measurement like a sore thumb. This measurement is excellent for that. I can do the same with my clients. You want my inventory? I want to know the dollar-days value that you hold. And the companies that do not perform will not be our partners for long."
"The inventory-dollar-days enable a vendor to judge his client. You'll have to offer the same to your vendors so they can judge you," Maggie comments.
"Yes. The same terms that will be between us and our clients will also be between my vendors and us. It helps to have uniformity across the chain. But that also means that I'll ask from my vendors what I give to my clients. I'm holding inventory near my clients. I'm supplying whatever they want the same day. I want to get the same service."
"If that's what you want," says Scott, "if you are going to put such an emphasis on on-time deliveries, then you'll have to judge your vendors by the throughput-dollar-days.
"Of course," Craig replies. "Everyone will be measured not just by inventory-dollar-days but by throughput-dollar-days as well. Trust is nice as long as there are measurements that serve as a watchdog."
"That's nice," Maggie comments. "The same operational measurements inside each link and between the links. Craig, do you realize that what you are talking about here can only be done by the ERP of BGSoft?"
"I'm fully aware of that. By the way, can your software handle the additional requirements that we talked about here?" he asks.
"The code is ready," Scott answers.
"Ever tested?"
"Only in the laboratory," Scott admits.
"That's okay," Craig says, to Maggie's relief. "You'll have ample time to test it. There are hundreds of companies I'll have to convince. And I'm not going to start with them all at once. But regarding your software, there is a practical problem. And that is what I want to discuss with you."
The waiter approaches their table with the dessert trolley. Impatiently Maggie selects dessert and orders coffee for them all. "What is the problem?" she asks.
"My vendors and clients all use different software packages; many of them are homegrown. It won't be easy to persuade them to switch to BGSoft."
"But is it possible?" Scott asks.
"It shouldn't be too difficult," Maggie says. "Unlike other large companies, you are approaching them after you yourself implemented what you are asking them to do. And you can show them the results. No one can ignore such results."
"Pierco is big enough," Craig answers, "to put pressure on all its vendors and most of its clients. But there is a limit. What I'm asking for must be reasonable."
"And it's unreasonable to ask them to change to the only ERP that can do it?" Maggie asks.
"Yes, Maggie, it's unreasonable. The few that are large companies have already invested a lot of money and effort to implement other ERP systems. They won't be eager to throw it away. And the majority are medium to small companies that simply don't have the resources to implement your software. Not the money or the manpower."
"It's a big obstacle," Scott agrees.
After a moment of silence, Craig responds with a straight face, "It's not so big, if you're willing to change as well."
Maggie says sharply, "Don't even suggest we do it for free, or almost for free. I know all the arguments and I'm telling you it will not work."
"Maggie, I know you better than to even think about it," Craig assures her. He signals to the waiter. "I'd like an after dinner drink. How about you?"
"Trying to get us drunk?" Maggie jokes. "Yes, please, I'd like an Irish coffee."
"Cognac for me," says Scott.
Once the waiter is on his way to the bar, Craig starts. "Maggie, investing two or three hundred million dollars is almost routine for Pierco, but I still know how difficult it was for me to decide on a new ERP system. You know why? Because investing in computer systems is not like investing in anything else. It's not like investing in a new company or like investing in a building or a machine. You put out so much money and what do you have in your hands? Nothing you can resell, nothing you can offer as collateral. It wasn't easy for me and it won't be any easier for my vendors. So I was wondering, what offer could you make to a company that would bring no less money to you but would made their decision much easier?"
"That's an interesting approach," Scott says.
"Carry on," Maggie says.
"Over the last three years I paid, to both your companies, about three hundred million dollars. And I'll still continue to pay, for maintenance and such, about ten million a year. But you know what? I would gladly pay you a hundred million a year, forever, if I didn't have to buy your software and the implementation." He stops.
"What would you pay a hundred million a year for?" Maggie is all ears.
"For doing exactly what you did. Well, maybe a little bit more. If you agreed to subcontract all my computer related logistics, I would be happy to pay you that much. You handle the data; my people will enter it, but you handle it. You make sure that my people have the information they need. Your computers, your software—I don't want to know about them. I don't want to hear about bugs. I don't want to hear about new versions. I don't want to hear about new hardware. That's your headache. What I want are the end results. The information available when my people need it, where they need it, and in whatever form they need it."
Maggie and Scott look at each other. For a while nobody moves. Finally Maggie nods, and Scott says, "You know Craig, a year ago I would have considered your offer ridiculous."
"Why?"
"Because it would guarantee that BGSoft would go out of business."
"Why?"
"If a client can ask for whatever he wants without paying for it, he will never stop asking for changes; for new features, for new modules, for new templates, for whatever. As a matter of fact, clients are asking for those things even when they do have to pay for them. So, we would have faced two alternatives. Either do what the clients want and go out of business, or upset the clients arid go out of business. But with Pierco, at this point, I'll consider it."
"What's the difference? Are we so unique?"
"You became unique. Craig, since you started working according to TOC, requests for changes coming from your company have dropped to a small fraction of what they were before. And the requests we get are not because of a whim, they make sense. You see, in Pierco, what drives the system now is very different from before. Every request is justified by bottom-line argument. What a world of difference it makes. Maggie, do you agree?"
"I do, and I'm sure Lenny will. But Scott, the real reason is that previously people were operating under conflicting measurements. How can you strive for high local efficiencies while you have to lower inventories and lead time? And the joke is that they thought they could get a better answer if the computer would just do that... and that... and that. .. That's why they constantly asked for changes."
"You're right, Maggie. Absolutely right. So Craig, we might entertain your suggestion, but only for companies that agree up front that they will adopt the holistic approach of TOC. Everything is judged by the impact on the bottom line, short-term as well as long-term. And to hell with local optima."
"Scott, you're bursting through an already open door. We already said that. To be a valuable member of the supply chain, companies will have to adopt what we have done. Those are the companies that I'm concerned about, and I'm willing to work on that closely."
Maggie nods, and asks them both, "What about the small companies? How much do you think they can pay?"
Craig has already thought about all these points. "The same as Pierco," he answers. Seeing Maggie's puzzled look, he hurries to explain. "I mean, in relative terms. One hundred million is one percent of Pierco's yearly turnover. It should not be a problem to convince the others to pay the same. One percent of turnover. Actually, today they probably pay more to get what you'll deliver. Well, will you do it?"
"Craig, I hope you don't expect an answer right now," Maggie says.
"I'm not expecting an answer immediately. But when can I get an answer? You understand that it is key to my entire supply chain strategy."
"Craig, my first impression is good," Maggie answers. "What you are suggesting has the potential to solve a large problem for us. I've been racking my brain for a long time to figure out a way to avoid the problem of exhausting our market. The way we currently do business, we constantly have to expand to new clients. Your idea will solve this problem completely It turns a one-shot deal into a constant stream of income. A big one. It can give us incredible stability." After a short pause she adds, "And Scott, for the long run, it will increase even your rate of growth. What do you think?"
"Maggie, it will increase our rate of growth even in the short run," Scott answers. "Craig's suggestion has another big advantage. It gives us, at last, a way to really capitalize on the medium-sized-company market. For years we've wondered how to economically penetrate this huge market. What we are now talking about is using the sizeable base we have in the large companies as a lever to enter the mid- and small-sized companies."
"A lever?" laughs Craig. "A bulldozer! If we push for it, gently, just announcing that Pierco prefers doing business with companies that take our sensible offer, and if we do justice to our win-win offer by explaining it clearly, without hiding a thing, how many of our vendors, and clients, do you think will agree?"
"A lot. The majority."
Craig now repeats his question. "Can I get an answer in, let's say, two weeks?"
Scott is uncomfortable. "Craig, this would be a drastic change in the way we do business. For both BGSoft and KPI. Still, I must admit that if we think about it for more than just five minutes and do not find any real showstopper, then I think we gained much more from this dinner than you did. The phenomenal growth rate we're enjoying this year will be a snail's pace in comparison to what I can now envision. But let me stress, that's if there are no showstoppers. If there is not something, that right now we don't see, that makes this idea too risky."
Seeing that Craig intends to continue to press, Maggie says, "These are things we have to discuss with our people. It will take much more than two weeks before we can come up with a definite answer. Three to six months is more likely."
Craig doesn't seem surprised. "Okay," he says. "But maybe you can give me a quicker answer on another question. I want you to supply Pierco with this service. But we of course have already paid for the software and the vast majority of the implementation, so how about the following offer? Pierco will pay you, and I mean a joint venture of both your companies, half a percent a year of our turnover until the total sum reaches the amount we have already paid you. Then it jumps to one percent a year."
"Are you serious?" Maggie asks, her eyes glittering.
Rather than answering, Craig opens his briefcase and hands a copy of a proposal to each of them.
Scott and Maggie both know that they are hooked. The offer is simply too good to turn down.
"I'll patiently wait for your answer," Craig says, smiling.
THE END
or just
THE BEGINNING