“When you look at this inventory problem, where should you be spending your time?” I asked.

Bruce looked down. “You’re right. I walk around the store barking orders about removing this display or re-working that shelf arrangement. I have team members to do that, and I have supervisors to make sure it happens.”

“What should you focus on?” I repeated.

“I need to focus on the system. I mean, I can still walk around the store. It gives me a better sense of reality, but I need to focus on the system. It’s the system that provides the predictability in our inventory management. Everything else is simply rearranging deck chairs.”

“If I had to reduce my inventory by 30 percent by the end of May,” Bruce continued, “I would be able to spend more time analyzing which inventory I wanted to get rid of, adjusting my min/max and re-order points. I would look at inventory turns, lead times and ship frequencies.”

“So, what’s the difference in blowing out 30 percent of your inventory by the end of next week and reducing it by the end of May? You still get your inventory down?” I asked.

Bruce smiled. “If I just blow out my inventory in one week, I will guarantee that within two weeks, my levels would all be back. I might even have more inventory then, because people will be ordering stock outs without any rhyme or reason. In the short term it works, but in the long term, it all comes back.

“By working systematically, I can make permanent changes in stock levels. I will have much more control. We will have the profitable inventory we need, that turns, that makes us money. It gives us more predictability and consistency. It all gets back to the system.”

A little more than one month ago, Dr. Eliyahu M. Goldratt was diagnosed with lung cancer. Dr. Goldratt is the author “The Goal” and many more books based on Theory of Constraints. When I speak about Stratum III systems and Stratum IV integration of systems, this is the foundation. Eli passed away on June 11, 2011.

“Yes, but sometimes, profit erosion occurs by some unforeseen circumstance, some outside force, that’s not part of your system. Profit erosion is not always caused by a broken system,” Jacob explained.

“You’re absolutely right,” I agreed. “That’s why I want to see WHO is in charge of your system. The role, at Stratum III, is not only to create your system, but to monitor your system. And when one of those outside forces, or unforeseen circumstance occurs, I want that Stratum III manager to ask this question, ‘Why didn’t our system anticipate this outside force, or at least mitigate the damage from this unforeseen circumstance?’

“The role at Stratum III is to create the system, monitor the system and constantly improve the system. The role is to adapt our systems to prevent new problems from occurring a second time.”

“And I know, the profit margin you designed into your price list, or your estimating system, is the same percent profit you report on your tax return at the end of the year,” I smiled.

Minor chuckling erupted.

“You know, some of you call me up. And tell me you are experiencing profit erosion, either gross profit, or net profit, and ask if I can help. So, I ask to see your organization chart.

“You protest. ‘It’s not our organization chart. It’s a pricing problem, or cost containment, waste or scrap.’

“No, I really do understand. If you experience profit erosion, something that your system was designed to prevent, then something is out of kilter with your system. Something in your system is broken. And one of the things I have discovered when I look for the cause of the problem, I try to figure out WHAT’S the problem. Turns out, the problem is seldom a WHAT. It’s almost always a WHO.”

“It’s just that, with our volume down, it seemed that the supervisor’s role could be covered by one of our managers,” Rene defended.

“For that matter,” I replied, “your production roles are simple enough, couldn’t the manager step in and cover those as well?”

Rene laughed. “We joked about that, but you don’t save any money by laying off a production person. You save more by laying off the supervisor.”

“And how much are you saving, now, running your manager in a supervisor’s role and letting your systems go to hell in a handbasket?”

The smile left Rene’s face. “I know, I know. We haven’t counted up what this is costing us, but with the over-runs and under-runs, and customers on backorder, I figure it took us two weeks to lose back what we may have saved in the last 18 months.”

“You are running short and running long,” I repeated. “Are there any patterns to the fluctuations that would help us understand.”

“Absolutely, but the manager is working as a supervisor and doesn’t have the time to lay it all out,” Rene continued. “We have spreadsheet models that we used two years ago, but the assumptions don’t hold up, need to be tweaked. You know, it’s funny. The manager asked me last week if, what he is doing now, as a supervisor, is really the best use of his time?”

“What did he mean?”

“I don’t know,” Rene replied. “For a minute, I though we might have a motivation problem. You know, right now, everybody has to pitch in and do whatever it takes. But it did get me to thinking. We didn’t hire him to be a supervisor, it’s just now, that’s what we need him to do.”

“That’s what you need him to do, or someone else to do? Do you need someone to put out all the fires or do you need your manager to work on the system that will prevent most of those fires?”

“What gives?” I asked. (This is known as a probing diagnostic question.)

“We’re having difficulty ramping back up,” Rene replied. “It’s interesting that when we were doing four times the volume, things seemed easier. We had almost no back-orders. We never built excess inventory in our finished goods. I know we are running with fewer people, but we have brought back plenty of production people to cover the output.”

“How do you get both backorders and excess finished goods at the same time?” I wanted to know.

“Easy. One product line runs short, the next one runs long. And we’re not that busy. You would think this would be easy.”

“And, what does the supervisor say?”

“Well, we reorganized last year, to deal with the recession,” Rene explained. “So, we have a manager watching the area, actually three areas. And that’s where the problem seems to be. He tells me that he is constantly putting out fires. Like yesterday, we ran short on raw materials for one of the lines.”

“I thought you had an MRP system that was supposed to take care of those issues?” I pressed.

“We do. But we adjusted our min/max re-order points to deplete some of our inventory during the recession and the manager hasn’t had time to go back and re-adjust as our volume ramps up. Not to mention, lead times from our suppliers, the ones still left, are all over the place.”

“They are buying the work,” Tony explained. “They bid the job below our cost, so I know they are not making money. Sooner or later, it is going to catch up with them and they will go out of business.”

“How many projects have they beaten you on, just this year?” I asked.

“More than you can count on both hands and one foot,” Tony replied.

“Tony, you can give me all the excuses you want. Their bid was lower than yours because they have a lower cost structure than you. Their bid was below your cost and there is still profit in the job for them. You have costs in your system that your customer doesn’t value, isn’t willing to pay for and it’s killing your edge in the marketplace.”

Tony’s face was sullen. He had expected me to agree with him. “Look, we have done our layoffs, reduced our inventories. We value engineer every project. What else are we supposed to do?”

“The answer is not some incremental, value engineering, corner cutting line item. You have to go back to fundamentals and look inside your systems, and how your systems handoff, and how your systems impact each other. There are likely three or four game changers, permanent game changers. Your competitor has already figured out some steps that you are unwilling or unable to take. That difference can be counted on both hands and one foot.”

“You said there were four elements in the goal that I had to look at,” Denise reminded. “I have to look at the quantity required, the quality standard, the resources I have and what else?”

“What else is missing?” I replied. “And this element may be the most important element.”

Denise looked up and to the left.

“How long does it take for one cycle to go through your system?” I asked.

“Time,” she nodded. “Time span. How could I forget about time span?”
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