In the first part of this series, we used the “Financial Cause & Effect Diagram” (see figure) to begin to try to unravel some of the cause-and-effect relationships that lead, ultimately, to a low (or, lower) ROA (return on assets) or ROI (return on investment). FIN Cause-and-Effect.jpg


One thing about this diagram: while it is a true representation of reality (in a generic sense), it is difficult to read and it does not make it easy to see where the core problems really lie. So, allow us to introduce a revised way of portraying these same cause-and-effect relationships. We call this the Current Reality Tree (CRT) and it comes from the Theory of Constraints Thinking Processes (PDF) tool set.


The clear advantage of laying out our cause-and-effect in the CRT format is that we can easily begin reading from the bottom to the top using if-then statements. The entities are numbered, too, for easy cross-referencing and to facilitate discussions within an organization.


Stimulating new thinking and innovation


One might start with Entity 3 and read: IF (3) we do not manage our inventory well, THEN (10) we have too many stock-outs AND (2) our inventories are too high AND (11) we have poor inventory replenishment and / or buying practices.


Here we have great example of how the Thinking Process tools to cause people to really thinking deeply about what is causing their enterprise to fall short in terms of making more money. Someone in the organization might argue along this line:

“Wait a minute. I think this is backwards. I think we should reverse the order of 3 and 11. Isn’t it true that IF (11) we have poor inventory replenishment and / or buying practices, THEN (3) we do not manage our inventory well?”CRT FinancialCauseAndEffect.jpg


This could stimulate discussions over batch-sizing, purchase lot sizing, order frequency and a multitude of other supply chain questions.


Ultimately, there is no right or wrong answer. The right answer is the answer that helps each individual organization get to the “roots” of the Current Reality Tree so that they know what they really need to work on in order to lead to real improvements in the near future.


Another example leading to innovation


Let’s talk about the thinking that might be stimulated by beginning with another “root” in the CRT. Entity 17 says, “Our product design is not integrated or well-planned.” Here, we are talking about the whole product research and development process, not an individual product.

We should carefully note where the logic beginning at this root takes the readers: IF (17) our product design [process] is not integrated or well planned, THEN (1) we do not manage our product lifecycles well AND (12) our truly variable costs (TVCs) are too high.


This is a “root” that Toyota recognized years ago, and how they have addressed it has helped to make them the most successful automobile manufacturer in the world. They not only design for manufacturability, their design and development process fully integrates key vendors ideas and concepts so that both production costs and the cost of components (TVCs) can be minimized over the lifecycle of the resulting product.


Go ahead.


Take time to read through the rest of the CRT in this article. We believe you will see a lot of the typical challenges faced by enterprises and supply chains. Reading it may even provoke you and your team to new insights on the causes of many of the fires you put out week after week, month after month.


Installing new Thoughtware


In their excellent book, Demand Driven Performance – Using Smart Metrics, authors Debra Smith and Chad Smith call for “installing new Thoughtware” into organizations and supply chains before laying out capital for more hardware (e.g., computers, production equipment, warehousing equipment) or software. We wholeheartedly agree.


Using “new Thoughtware”, like the CRT, in order to better understand what is keeping your enterprise from making more money tomorrow than you are making today is a great place to start.


We would like to hear your comments, questions and learn about your experiences in a process of ongoing improvement (POOGI). Please leave your comments below, or feel free to contact us directly.