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2016
RDCushing

He Who Laughs Last...

Posted by RDCushing May 30, 2016

Author Michael Lewis captures a poignant moment during the draft preceding the 2002 Major League Baseball season. The scene was the conference room of the Oakland Athletics. The A’s had just completed an amazing season, posting 102 wins, while carrying the second lowest team payroll in the major leagues.MLB Logo.jpg

 

They were about to embark on a season in which they would post 103 wins, far outpacing their competitors who were carrying much, much higher operating expenses (read: payrolls).

 

Management at the A’s had taken a path far, far different from strategies and tactics employed by the vast majority if their opponents. So far afield, in fact, that they were frequently openly ridiculed in the trade press and in the management offices of their competitors.

 

As we pick up the scene, the draft is at the thirty-fifth pick of the first round. The A’s head of player recruitment is sitting alongside the speakerphone:

As the thirty-fifth pick approaches, Erik once again leans into the speakerphone. If he leaned in just a bit more closely he might hear phones around the league clicking off, so that people could laugh without being heard. For they do laugh. They will make fun of what the A's are about to do; and there will be a lesson in that. The inability to envision a certain kind of person doing a certain kind of thing because you've never seen someone who looks like him do it before is not just a vice. It's a luxury. What begins as a failure of the imagination ends as a market inefficiency: when you rule out an entire class of people from doing a lob simply by their appearance, you are less likely to find the best person for the job. [1]

 

Which would you rather manage?

What was true about personnel selection with the A's is equally true in the matter of selecting strategies and tactics--for, for the Oakland A's, the selection of player personnel was intimately related to their strategy and tactics for achieving wins.

 

I am often amazed at how many executives and managers are reluctant to try new approaches to managing their companies and supply chains. Even when radical new approaches to management of organizations and supply chains have demonstrated over and over the ability to significantly improve customer service levels (read: “wins”), while driving inventory levels lower—usually, significantly lower.

 

So, imagine yourself at the end of another year.

 

Which organization would you rather take credit for managing?

  • The Texas Rangers, who finished their year 31 games out of first place, after spending about $107 million for their “inventory” of players?
    or
  • The Oakland Athletics, who finished first in their division, and spent just under $42 million for their “inventory” of players?

I can tell you this: I’d rather be trying to explain to senior management how I managed to be at the top of my division while spending less than half what my big-spending competitor was spending, than trying to explain to senior manager how I spent $107 million while losing ground to my “smarter” competitors.

 

Everyone’s doing it now

Today, virtually every Major League Baseball team plays some form of “moneyball.” The teams that led the way had the early advantages.

 

But, the executives and managers of that run-producing “supply chain” called the Oakland A’s had to be willing to endure the laughter and sneers of their competitors while they took up their position on the cutting edge of their industry.

 

Lewis brings two more keen insights as to what keeps executives and managers from making improvements by adopting fresh new strategies and tactics early. Here, Michael Lewis quotes Pete Palmer, an engineer at Raytheon, who had become a keen observer of baseball managers’ tendency to make irrational decisions: “Managers tend to pick a strategy that is least likely to fail rather than pick a strategy that is most efficient," said Palmer. "The pain of looking bad is worse than the gain of making the best move.” [2]

 

Then, Lewis finds himself quoting Dick Cramer, a research scientist for the pharmaceutical company then called SmithKline French (now GlaxoSmithKline): “'Baseball is a soap opera that lends itself to probabilistic thinking,' is how Dick Cramer described the pleasure [of winning against old-school thinking]." [3]

 

So, are you managing your organization and supply chain based on the fresh new insights made available through demand-driven MRP and demand-drive supply chains, or are you still finding day-by-day adventure managing a “soap opera” with no shortage of drama?

 

Let us know about your rationale for managing your company and your supply chain. We’re interested in hearing your comments.

 

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[1] Lewis, Michael. Moneyball: The Art of Winning an Unfair Game. New York: W.W. Norton, 2003.

[2] Lewis, ibid.

[3] Lewis, ibid.

 

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“Every at-bat is like a game of blackjack. Every card that’s dealt changes the odds.” So says Paul Brand, the character inspired by Paul DePodesta in the movie “Moneyball.”DDMRP Buffer Calculation.jpg

 

The people who count cards at the blackjack table are generally unwelcome in Las Vegas and casinos everywhere.

 

Why?

 

Because, being able to understand the changing odds of success or failure—winning or losing—in near real time swings the odds in favor of the bettor, and the casino is more likely to lose.

 

The odds of winning are constantly changing

I cannot tell you the number of companies with which we have come into contact whose inventory or supply chain folks will tell us something like, “We have this Excel workbook we use. We have it set up so that we try to keep about 6 [or 10, or 16, or some other number] weeks of inventory on-hand.”

 

Frequently, they will go on to describe a process something along these lines: “Every week, we start by looking at our current inventory position and comparing it SKU-by-SKU with our target inventory position. To do this, we use this report and that report. If we have any questions about the numbers, we will check with the warehouse, if necessary. From this, we put together our replenishment orders and figure out if there are any expediting actions we need to take, too.”

 

Here’s the problem.

 

The odds of your supply chain winning (read: successfully satisfying demand) change with “every card that is dealt”—that is, with every moment that passes and every new actual demand transaction that occurs in the system.

 

Most supply chains fail to provide unambiguous signals for action

As the odds of “success” change across most supply chains—whether you consider your supply chain as merely within your four walls, or if you receive near real-time feedback from your extended supply chain—the decision-makers generally fail to receive crystal clear, unambiguous action signals about those changing odds.

 

The signals may be there, but they are buried in multiple ERP screens and a half-dozen reports. Furthermore, it may take hours to put all the pieces together. Even then, six different managers looking at the data may not be able to agree on the priorities to assign to the actions indicated.

 

Along comes Demand Driven MRP

With DDMRP, all of this changes.

 

Imagine a simple dashboard that gives your supply chain team clear signals about the changing odds of “success” in the system in a very simple, straightforward way: a COLOR CODE and one simple NUMBER.

DDMRP Buffer Signals.png
In the accompanying figure, it is very easy to see priorities. RED is acted on before YELLOW; YELLOW is acted on before GREEN. And, the PERCENT of BUFFER remaining clearly indicates the level of criticality within any color segment.

 

What kind of success might be expected with DDMRP?

In a conscientiously applied program of DDMRP, “success” rates typically climb into the high 90s in terms of on-time order fulfillment rates. That would be great for many companies if that were the only advantage. But it’s not.

 

While “success” rates are rising, DDMRP is simultaneously leading to lower inventory levels. Indeed, 30 or 40 percent reductions in inventory are not uncommon.

 

If you would like to know more, let us know. Leave your comments here, or feel free to contact us directly. We would be delighted to help you improve your odds of success, while liberating cash and increasing your ROI at the same time.

 

 

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"How did one of the poorest teams in baseball, the Oakland Athletics, win so many games?"

 

“How did the second poorest team in baseball, opposing ever greater mountains of cash, stand even the faintest chance of success, much less the ability to win more regular season games than all but one of the other twenty-nine teams? For that matter, what was it about baseball success that resisted so many rich men's attempt to buy it?”

2002 AL West End-of-Season Standings.jpg

 

Those were the questions that compelled author Michael Lewis to write Moneyball: The Art of Winning an Unfair Game.

 

It’s how well you spend your money that delivers results

Author Lewis discovered that the “answer begins with an obvious point: in professional baseball it still matters less how much money you have than how well you spend it.”

 

Interestingly, some have thought seriously about this matter. It turns out that a “leading independent authority on baseball finance, a Manhattan lawyer named Doug Pappas… [has developed]...The Pappas measure of financial efficiency...: how many dollars over the [estimated] minimum $7 million does each team pay for each win over its forty-ninth? How many marginal dollars does a team spend for each marginal win?”

 

In the accompanying table are the American League West standings at the end of the regular season in 2002. Note that the total payroll for each team is precisely in reverse correlation to their standings in division. This could be a fluke—but it’s not.

 

In 1997, at the beginning of a brand new approach to base managing a baseball team, Sandy Alderson, then the GM for Oakland A’s, had a team that won 65 games and lost 97, and was at the bottom of their division. But, as Alderson, and then his successor, Billy Beane, continued to hammer away at their revolutionary approach to baseball team management, the A’s went from winning 65 games in 1997 to winning 74 games in 1998; in 1999 it was 87 wins, and in 2000 it was 91; by 2001, they won 102 games. This was no fluke

 

A willingness to rethink

At the bottom of the Oakland experiment was a willingness to rethink baseball: how it is managed, how it is played, who is best suited to play it, and why. Understanding that he would never have a Yankee-sized checkbook, the Oakland A's general manager, Billy Beane, had set about looking for inefficiencies in the game. Looking for, in essence, new baseball knowledge. In what amounted to a systematic scientific investigation of their sport, the Oakland front office had reexamined everything from the market price of foot speed to the inherent difference between the average major league player and the superior Triple-A one. That's how they found their bargains. Many of the players drafted or acquired by the Oakland A's had been the victims of an unthinking prejudice rooted in baseball's traditions.

 

Like every David and Goliath contest, the clear underdogs have an advantage only if they fight a different battle than their opponents.

 

In the case of Alderson and Beane, their rethinking caused them to see that while other teams were out using their conventional wisdom and buying “players,” they could seize the advantage by buying “runs,” simply by coming to better understand what actually produced a “run.”

 

If you read the book Moneyball, you will see that it is really all about systems thinking (even though the word is never used in the book). While other teams were stocking up on their “inventory” of heavy-hitters and “tools” in order to try to create or protect some perceived (albeit incorrectly) advantage, the Oakland A’s were focused on FLOW—getting as many men as possible on base.

 

It was the consistent flow of men on base that won the day and produced the desired results—wins—at the lowest cost for the Oakland A’s.

 

Why?

 

Because they took time to rethink what they were doing. They rethought the whole world of baseball. They began teaching the whole industry that forgetting what they thought they knew and thinking in brand new ways could make them a winner and more efficient, too.

 

So, how is your rethinking coming along?

Are you still trying to gain a competitive advantage in your industry using the same thinking at all your competitors are using?

 

I believe we can help you with that. Please leave your comments below, or feel free to contact us directly.

 

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All quotes, unless otherwise noted, are from Lewis, Michael. Moneyball: The Art of Winning an Unfair Game. New York: W.W. Norton, 2003.

 

 

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In 1982 between Eiji Toyoda, then head of Toyota Motor Corporation, and Philip Caldwell, then head of the Ford Motor Company, had a meeting. Toyota was, at that time, emerging as the lowest-cost producer of the highest quality automobiles in the world. Ford and the rest of the Big Three were bogged down by rapidly declining market shares, ever-increasing levels of customer dissatisfaction with the quality of their vehicles, and huge financial losses.DDMRP House.jpg

 

Caldwell was visiting Toyota in Japan, supposedly seeking new ideas. During Caldwell's visit, Mr. Toyoda, toasted Mr. Caldwell (or, so the story goes) by saying, "There is no secret to how we learned to do what we do, Mr. Caldwell. We learned it at the Rouge." [1]

 

Henry Ford had built the River Rouge plant, but…

Henry Ford had built the River Rouge plant, and it was stunning in its size, scope and capabilities.

 

“Construction [at the River Rouge plant] began in 1918, portions of the plant began operating in early 1920, and by November the River Rouge assembly line was rolling out 800 cars per day. The Rouge plant became the next of Henry Ford's marvels as it produced finished cars as well as millions of parts to be shipped to the company's network of branch assembly plants.” [2]

 

Yes, Henry Ford’s vision built the plant, but what Kaiichi and Eiji Toyoda saw at River Rouge was an entirely different vision from what Henry Ford and his theory of scientific management led Ford’s executives and managers to see.

 

The differences in what these two groups of managers saw—when looking at exactly the same things--resulted in huge differences in results over the life of the two companies (e.g., Ford Motor Company and Toyota).

 

“Toyota by the early 1980s was using stunningly simple means to successfully produce a diverse array of vehicles at mass-production costs, while maintaining the highest quality and earning gratifying profits. Meanwhile, Chrysler, General Motors, and Ford, from the 1950s to the 1980s produced an increasing variety of vehicles by using complicated means, generated products of variable quality, and often suffered disappointing financial results.” [3]

 

Efficiency versus Flow

Henry Ford’s vision for improving efficiencies led the need for larger inventories and the facilities to store the inventories, and the capital equipment to move and move again the inventories from place to place. Ford’s management system demanded more middle management in the form of controllers and schedulers in order to coordinate the movement of materials between stages and from inventory through to finished goods.

 

In theory, over long periods of time, output from all the separate operations were expected, in Ford’s mind, to “balance out” with customer demand. But, instead, it resulted all too frequently in building inventories, scrapping excess output, and spending more and more on advertising and sales promotions—and, finally, reducing prices to liquidate excess stocks of cars. Defect rates went undetected for years as there was almost always enough “good stock” to keep things moving.

 

In the end, as worldwide production capacities grew beyond market demand, profits tumbled. This was the end result of an empire built on a vision of improving “efficiencies.”

 

On the other hand, Kaiichi and Eiji Toyoda saw something completely different in Henry Ford’s operations at River Rouge during their visits in 1929 and 1950. They had a vision of flow.

 

Producing variety in a continuous flow

“[W]hat Toyota had perceived about operations at the Rouge was very different [from] what Caldwell and his Ford colleagues or their counterparts in the other Big Three auto companies had seen. [The Toyota managers] seemed to perceive a holistic pattern permeating every minute particular of the system. On one level, the pattern that caught Toyota's attention was the overall continuous flow of work in the Rouge as a whole. But at a much deeper level, they observed that work flowed continuously through each part of the system—literally through each individual workstation—at the same rate, the rate that finished units flow off the line.

 

“It is not difficult to see that this pattern has the potential to produce the superior costs, quality, and flexibility for which Toyota became so famous by the 1980s. If every step in the continuous flow works at the same rate, then at any moment each step consumes only the resources required to advance on customer's order one step closer to completion....

 

“Indeed, to Toyota's people, Henry Ford's River Rouge system achieved low costs because balancing every step in a continuous flow conserves resources.... Moreover, Toyota people perceived that if each work could design and control the steps he or she performed, then workers could perform different steps on each unit that passed by them in every time interval. Thus, variety could be achieved at no greater cost than if all units were identical.

 

“Toyota people saw low cost at the Rouge as a property of the system that emerged spontaneously from the relationships among the parts--the individual workers and the steps they performed to meet customers' needs--and the pattern that was implicit in those relationships. Low cost was not forced by manipulating the speed at which individual workers performed their tasks. It was achieved by nurturing in each work station the conditions that maintained a balanced flow overall--the pattern that defined the whole system. Thus, perceiving the key feature of Henry Ford's system to be its ability to pace every step of the work at the same rate that finished units flowed off the line convinced Toyota executives after World War II that variety had to be achieved in the context of continuous flow if it was to be achieved at the lowest possible cost and highest quality....” [4]

 

Ironic paradox

It is, indeed, an ironic paradox that Ford Motor Company put all its eggs in the “efficiency” basket, and ended up getting neither real efficiency nor profits, in the long run.

 

On the other hand, Toyota put all its eggs in the “continuous flow” basket and ended up getting both flow and efficiency in producing long-term profits. That’s what really counts, is it not?

 

The same thing is true today in thousands—even tens of thousands—of supply chains serving the small to midsized business enterprises with which we come in contact: they struggle valiantly for “efficiencies” and find profits elusive. Perhaps, as we try to tell them, it is time to try something different—like focusing on “flow.” Flow is the natural path to both real efficiencies and better profits.

 

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So, what are you seeking in your supply chain—efficiencies or flow? What are your bottom-line results? How do you feel about it?

 

Please leave comments or questions below. We would be delighted to hear from you.

 

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NOTES:

[1] "The Rouge" here being a reference to Henry Ford's River Rouge complex near Dearborn, Michigan, which both Kaiichi Toyoda and Eiji Toyoda visited. Kaiichi visited ‘the Rouge’ in 1929 and his nephew, Eiji Toyoda, visited it again in 1950, to study Henry Ford's methods.

[2] http://fordmotorhistory.com/factories/river_rouge/index.php

[3] Johnson, H. Thomas, and Anders Bröms. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. New York: Free, 2000. Print.

[4] Johnson and Bröms, ibid

 

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Are you satisfied with your supply chain’s performance? Are you satisfied with your customer service levels? How about lead times?WARNING Complacency.jpg

 

Are you satisfied with how much you are spending (wasting?) on expediting expenses and excess freight costs when things go wrong?

 

Here’s the more important question

Are you satisfied because you are confident that you have a real and effective POOGI (process of on-going improvement) in place, and improvement is happening incrementally, day-in and day-out? Or, are you “complacent” because profits are “good enough,” and you really don’t want to do anything for fear of making things worse instead of better?

 

“Good enough” stopped being good enough a long time ago

In today’s highly competitive global economy, “good enough” stopped being good enough a long, long time ago. If you are not improving, you are falling backwards.

 

Are out-of-stocks still disrupting flows in your supply chain?

 

Have you invested heavily in your ERP system, but still finding that you have to work around your ERP—using spreadsheets and other means—to determine what supply chain actions you need to take on the production floor and in your supply chain?

 

Changing what you measure will change how you manage

Traditional MRP (material requirements planning) is ready for retirement. Traditional MRP was really designed in the post-World War II era, codified by Joe Orlicky in the mid-1970s, and implemented into software for business in the 1980s and 1990s.

 

Hey! Traditional MRP is already more than 65 years old! It’s ready for retirement! It’s long past its prime and was designed for an era where manufacturing capacity was far below market demand, and supply chains were relatively short (not global).

 

Don’t get me wrong! There are some important elements in traditional MRP that cannot be entirely ignored. But, for a great many companies, it just does not provide what they need for real improvement.

 

DDMRP (Demand Driven MRP) is traditional MRP’s logical successor.

 

By incorporating the best of what is found in traditional MRP, Lean theory and practice (the Toyota Production System), and Theory of Constraints, it has proven to be an effective method for rapid improvement and almost immediate return on investment.

 

Demand driven MRP works because it changes what you measure, and it helps supply chain managers focus on—and effectively manage—what is important. It provides clear—absolutely unambiguous—signals to management regarding priorities.

 

While traditional MRP can—in some cases—accurately tell you what you need, it supplies no information that will help supply chain managers strategically position inventories and appropriately size inventory buffers. DDMRP accomplishes that using methods that are easily comprehended by those applying its methods.

 

DDMRP changes what management measures and how management thinks about improving supply chain flow.

 

About results

Typical (read: average) results from a conscientiously applied effort in the implementation of DDMRP look like this:

  • Order fill rates increased from below 70 percent to the high 90 percent range
  • Out of stocks dramatically reduced
  • Lead times significantly cut, thus providing a competitive advantage
  • Inventory levels reduced—sometimes as much as 40 percent—while reducing out-of-stock and increasing order fill rates
  • Productivity increased to the extent that new capacities are uncovered and new opportunities opened

Campaign against complacency

As Albert Einstein so cogently observed: “We cannot solve our problems at the same level of thinking that created them.”

 

If you are still trying to solve your supply chain problems—internal or external—using the same thinking you have been trying for the last decade or longer, your present complacency probably stems from just being worn out. You are exhausted by fighting the same battles over and over again while finding sustainable improvement always just out of reach.

 

It’s time to change your thinking. We suggest that you investigate DDMRP.

 

Real improvement begins with new thinking! Depending upon your situation, new software or hardware may be entirely optional to achieve new levels of performance.

 

We can help. Contact us or leave a comment below. We would like to hear from you.

 

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