Necessary But Not Sufficient

Wednesday, March 4th, 2009

I finally made the time to read Goldratt’s last business novel, Necessary But Not Sufficient, which argues that new information technology is necessary but not sufficient for reaching the goal of making more money, because extra information doesn’t do you any good if you don’t do anything differently because of it.

The thin story of the novel involves an ERP software company with a major client who’s blindsided by a “weasel” on the board — a weasel who has the temerity to demand some justification for all the money spent on this enormous IT project. How does it improve the bottom line?

That’s when the ERP software company realizes that it has no case. “Better visibility into operations” doesn’t translate nicely into a dollar figure. Quicker turnaround on quarterly financial reports is also nice, but it — ironically? — doesn’t translate nicely into a dollar figure either, especially when no one from the finance department gets laid off. In fact, most time-saving improvements don’t translate into dollar savings, because, again, no one’s actually getting laid off; labor costs aren’t going down.

The real, quantifiable payoffs come from improvements in the supply chain. When the plants know how much has been sold from each distribution center three weeks sooner than they used to, that means they can carry less inventory and suffer fewer stock-outs, reducing their carrying costs and increasing their sales.

The system also reduces invoicing errors, which means they can get their money from customers sooner, and it allows them to combine purchases made by multiple plants, which means they can get better deals on raw materials.

(Incidentally, these benefits mean much less for medium-size firms with just a few plants and distribution centers, which aren’t so spread out.)

In the end, our heroes revolutionize the entire ERP software industry with their simpler, more effective solution, based on drum-buffer-rope and buffer management — which are not explained at all in the book, but which, in this fictional scenario, boost capacity by 40 percent.

But this boon has its own downside: suddenly the regional warehouses are overstuffed with finished goods. What happened?

The target inventory levels didn’t change — they stayed at four months’ inventory — but with the plant’s increased capacity, it can now fulfill requests in a timely manner, and actual inventory levels have climbed from an average of two months’ inventory to three.

With replenishment times cut in half, they cut target inventory levels in half, but this leads to shortages, because demand is still volatile, and one plant can go through two months’ inventory in one product pretty easily, even if it has plenty of inventory in other products, and other plants have plenty of inventory of that one product.

In the end, the solution is to pool inventory at a warehouse near the plant and to replenish the regional warehouses overnight from there, using pull inventory — sending them as much of a product as they’ve just sold.

Then the client realizes he can take this one step further and integrate his whole supply chain, not just the vertically integrated portion he owns — and that means our heroes can sell their ERP solution to medium-size and small firms who need to integrate with big firms. Everyone loves a happy ending.

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