Notes on “The Choice” by Eliyahu M. Goldratt and Efrat Goldratt-Ashlag

I have been reading Goldratt’s book “The Choice” and I’ve made some notes.

Chapter 1

Goldratt wants to live a full life.

Does this require genius?

No, you need to think like a scientist.

A scientist understands how his instruments are supposed to work. If it stops working that is an opportunity to find out more about why the theory about how works can be improved.

If you always work like a scientist you don’t get disappointed by plans going wrong.

“The more complicated the situation seems to be, the simpler the solution must be,” he recites.

Main obstacle to thinking like a scientist: people believe reality must be complex so they look for complex explanations and solutions to problems.

Chapter 2

big brand are clothing company. they think in five years they can increase their net profit to $1 billion per year in five years. Goldratt sez they can do $4 billion per year in five years.

Most popular items are about 30% of the items they provide.

Since they run out of the most demanded items their losses are higher than the percentage of missing items. They are out of the most demanded items after about 1 month of a six month season. the total amount of missed sales > all realised sales.

problems is that lifetime products < time to supply those products

regard being sold out as positive but it’s actually hiding a large missed opportunity.

also outlet sales of stuff that they can’t sell illustrate the problem

don’t know demand before start of season but try to forecast anyway. Find out demand in first two weeks of the season but the lead time is 2 months so they can’t use that information.

but the long lead time is a result of large quantities, but if they make smaller and more frequent orders in the same volume over the season the cost is the same.

big brand could offer to take back unsold stuff for a full refund. If they mostly hold and supply highly demanded stuff this won’t cost much.

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They want complex solutions like correctly weighting and adding 50 factors, which are qualitatively different (e.g. price and deliciousness are hard to add), to figure out just the right credence that is further updated by any piece of evidence. Then they just end up factoring in a bunch of local optima, that, in the bigger picture, have excess capacity, so they shouldn’t actually change the result (the desire to always update the credence on any good or bad evidence is wrong! they don’t know you can have excess!). Besides quickly checking that many factors don’t ruin an option (giving pass/fail grades to things that are not near the borderline between pass and fail), you should focus your more detailed attention on just a few important factors, which is simpler than trying to use 50 factors.

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Notes on more chapters

Chapter 3

efrat knew about shortages of popular clothes and outlet sales, but didn’t understand the cause and effect and come up with improvements.

Obvious in hindsight but why not in prospect?

Most people don’t want to come up with large improvements in industries but they still have problems they are blocked on. What psychological barriers stop people from solving such problems?

people with chronic problems hide those problems from themselves and put effort into less important problems, then lower their expectations.

Companies do similar stuff: aim at cost reductions instead of large improvements from solving shortages, and surpluses.

Need courage to decide to get rid of something that is at the foundation of your business such as forecasts for season. Don’t see how the perception that reality is simple could give a person the needed courage.

Chapter 4

what can help a person to think clearly?

Need to take inherent simplicity seriously as a practical way of viewing reality.

Motion of all the bodies in the world looks complex, but a lot of it can be understood with newton’s three laws.

if we keep asking why enough times we find simple root causes instead of just getting more and more causes.

Psychologists won’t agree reality is simple cuz people have freedom of choice.

But psychologists say ‘Tell me how you measure me and I’ll tell you how I will behave’ so they concede people are sometimes predictable.

Big brand was apparently complex, how can it be simple?

Is (A) a bunch of isolated stuff more complex than (B) a bunch of stuff linked together?

Depends on your definition of complexity.

Standard definition: more parameters needed to describe a system = more complexity.

But if the number of points you have to touch to change the whole system is small then number of independent parts are small. Different definition of complexity.

Big brand is like B: a bunch of stuff linked together. It has a lot of parts but they are linked together so changing one part of it can change lots of other stuff. So the amount of stuff you have to change is small - so big brand is simple by that definition.

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I’ve started writing a detailed breakdown/explanation of my dense paragraph. I may share and help if anyone tries to analyze and understand the paragraph.

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Chapter 5

if we look at all the details of relationships get overwhelmed by complexity.

But they are a result of simple cause and effect relationships.

Nature is harmonious with itself. There are no contradictions or conflicts.

But people have conflicts between one another and internal conflicts.

Two different techniques to measure height of a building give very different answers. Don’t say the height is the average of the two results. We must have made a mistake.

A person can have two conflicting desires. A conflict happens when you want a contradiction. Want wings on a plane to be strong, so give them supporting beams but also want them to be light.

Can treat any conflict like a contradiction. When fail to reach a compromise say that one of the underlying assumptions is wrong, and eliminate it.

second obstacle to solving problems is that people think conflicts are a given and compromise is necessary.

optimisation - how to find the best compromise instead of removing the cause of the conflict.

Chapter 6

how did inherent simplicity help solve the problems of big brand?

big brand was mostly doing the right thing. just looked at things that weren’t working well.

took simplicity for granted so problems must be caused by only one root cause - an unsatisfactory compromise.

other people gave up on solving those problems. smaller problems aren’t connected to main problem so solving them doesn’t help tackle large problems so ignore them.

more return for same effort when solving large problems.

Inherent simplicity - any conflict can be removed by removing an underlying false assumption. The underlying assumption for big brand was that they had to order the correct quantity of clothes in advance.

Can do the same for conflicts in relationships or individuals. Find a false underlying assumption and remove it.

in organisations false assumptions accepted as facts of life.

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Despite having read the thread that discusses credence, I’m not confident I follow how “credence” is being used here. Is it like weight, probability, something like that?

Yes. Credence = degree of belief = confidence level.

This is saying that people want complicated solutions. They want to weigh and add 50 factors together, but the factors they want to combine are incommensurable. They want to treat the factors as commensurable so that they can … and here I start to lose the thread of what Elliot is saying. I’m not clear what the relationship is between figuring out the right credence, updating, and evidence. I’m particularly unclear what “further updated” is referring to. Is figuring out the right credence and the credence being further updated part of the same process, or are these two separate steps?

They want to treat the factors as commensurable so that they can add them together to figure out the right credence. The credence can later be updated by new evidence.

(Note that my wording here is actually problematic. I say the credence can be updated, but really they think something more like that the credence should be or must be updated. The credence isn’t meant to be final.)

They are two separate steps.

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Here’s my attempt at coming up with an example: someone trying to pick a university builds a scoring system that takes into account “proximity to home” as one of the 50 factors, and assigns a higher score for that factor the fewer miles from home the school is. But really, what they care about is that they’re within a 3 hour flight from home. But their scoring system assigns extra weight to a school in their hometown over one a 3 hour flight away.

stuff falling within a certain range shouldn’t cause changes in the credence/weight people assign stuff. I think my previous comment had an example of this point (re school distance from home). I think this connects to breakpoints - like if the evidence or whatever doesn’t indicate that something has crossed a breakpoint, then your credence or whatever shouldn’t update and your analysis of what to do shouldn’t change.

Chapter 7

nature is simple and harmonious. not just lack of contradiction. apparently different issues often turn out to be related.

what do people think are the reasons for disharmony in relationships? they blame the other person for disharmony calling them egotistical or whatever.

third obstacle in the way of thinking clearly is blaming other people.

points toward getting rid of the other person, which usually doesn’t solve the problem

also ruins the harmony in a relationship.

to pursue promising opportunities need to collaborate with other people. disharmony prevents good collaboration.

why not blame people when they are at fault?

harmony exists in any relationship between people, but in most cases we don’t bother to find it

what about when one party demands a major change from the other party. other party may object.

big brand demanding change from its suppliers. Isn’t it reasonable to expect them to resist quick response to small orders?

Chapter 8

85% of company X’s income comes from big brand companies. a large client can get a lower price and low margins.

but X has ten clients none of whom are very large compared to the others.

X is in Europe so they can transport stuff to warehouses of clients in a few days, but production lead time is 2 months so they can’t take advantage of that.

not much setup so could cut lead time to one week. brands want to reduce inventory and will pay X to hold some of it for them. proximity and shorter production time means X can do this for a small price increase.

reducing lead time exposes excess capacity - can double sales without increasing manpower.

material cost is about 1/2 of selling price so making profit = current sales means increasing direct labour by 50%

But material cost is actually 75% not 50% cuz big brand companies can squeeze suppliers that are eager to grow. must increase sales and margins.

Give a premium price for rapid response. But dying is a batch process, don’t want to do it in small quantities. also can’t guarantee same colour in subsequent batches.

is all garments are made from one dyed fabric could just produce the fabric and do small runs of each garment. can forecast amount of different sizes that will be bought so can know how much cloth is needed.

number of models versus fabrics is 7 to 1. is that good enough?

30% roe skus run short, 30% have a surplus. run out in one month of three month season so sales could be made about 3 times larger.

X will buy fabric in advance but only make half of it into clothes then wait for more orders. leftover fabric will either be held at big brand’s expense or turned into more clothes at the end of the season.

this will increase inventory turns, which brands will want. offer can double X’s margins and increase sales.

Blaming other non-people is a problem too. Blaming or making excuses (which are similar actions) is one of the things talked about in The Reason People Don't Get Better At Chess According to Ben Finegold - YouTube

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Chapter 9

“for every relationship there is a change that will cause the parties to each achieve what they need from the relationship.”

blamed big brand for demanding a change from large up front orders to quick response to actual consumption, so didn’t look for a benefit to suppliers.

Blaming mind set blocked finding the deal.

Why blame others? Look for compromise. change shares of small cake. somebody has to get less - win lose. when not satisfied with end result will blame other party.

if we remove an underlying false assumption that enables us to increase the size of the cake and get a win win solution. win win solution always exists.

should assume a win win solution exists. if there is no acceptable compromise you don’t lose anything by assuming it exists and may profit.

start by looking for the other party’s win? the contractor would might assume the brand would want cheaper prices, but they would be wrong.

started by noticing the brand wants suppliers to hold inventory for them. then realises brand wants inventory turns more than lower prices.

want bigger win for our side have to arrange bigger win for other side. if there is such a win then why doesn’t the other party ask for it? they lower expectations to calculate to camouflage large chronic problems.

can identify bigger wins by looking for camouflaged problems

Chapter 10

how can supplier get higher margins? what about selling directly to retailers? need a new type of company: designing garments.

but supplier X already does this. already sell a lot to shops in their country. could sell to shops outside the country. why haven’t they done it? don’t have name, brand recognition and building it takes time and money.

Why do they need brand recognition? brand name stuff is more likely to sell and shops have to optimise what they display.

but shops do sell non-brand stuff. supplier X could offer clothes on consignment, but might not sell so they could get back a load of unsold stuff. shops won’t want to do it since non-selling stuff takes up shelf space that could be filled by selling stuff.

set prices to be lower than brand name prices instead. half of the brand price would still result in a substantial profit that is larger than the brand will pay the supplier. but the price is actually less than half, not enough for a good profit.

what if we can reduce the risk of stocking the non-brand stuff below the risk of stocking the brand stuff? some risk in stocking brand stuff as illustrated by clearance sales of non-selling brand stuff.

allow shops to buy based on actual consumption not forecasts and offer full refund for unsold stuff.

assume conservatively that total increase of sales is 50% (fewer shortages more high runners). for shops this doesn’t require any increase in overhead or employee costs.

most shops make less than 5% profit on sales. 50% increase of sales makes their profit on supplier’s stuff a factor of five larger than for standard manufacturer.

supplier could concentrate sales on a densely populated area with just one warehouse, so lots of profit for small inventory investment.

instead of trying to find a way to reduce the risk compared to brand, instead tried to reverse the gap by making the suppliers less risky than the brand’s stuff.