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

Chapter 15

Goldratt decides early on if he wants to work with a company based on how he classifies the top management.

fmcg company in india supplying with 10% of the market: 2000 distributors 2.5 million shops.

bought 40% of intermediate product from outside instead of closing a bottleneck. solved the bottleneck and started supplying intermediate product to other companies.

shipped all their product to regional warehouses. didn’t know demand from each warehouse so had to ship products between warehouses depending on actual demand. made new plant warehouses and since plants had overlapping capabilities, managed them as one logical warehouse.

implemented replenishment to consumption in regional warehouses so their managers no longer place orders from the plant they just run the regional warehouse.

Inventories decreased shortages were almost eliminated. increase in sales of 10% over five months.

next step replenishment to consumption in shipping to external distributors. sales people thought external distributors would reject the idea of the company deciding what supplies they should get based on sales.

all the distributors agreed and sales went up 30% compared to previous year.

next step replenishment to retailers. variability is highest at retailers and so are shortages. so this will produce largest increase in sales. also retailers have limited shelf space and cashes they hold only a few skus. replenishment decreases shortages and reduces inventories to less than half.

that step should result in at least another 30% increase in sales. company can do this without additional expenses. variable cost = 60% of price and thoughput is 40% of sales so net profit is 0.6x0.4 = 0.24 unheard of in that industry.

distributors measure inventory turns. 10% improvement is very good, projected improvement is 1.6/0.6 = 250%.

what about retail? company’s products are 5% of their sales. 2% profit on sales is good for supermarkets in the West. markup is 15-35% but profit is smaller due to expenses and inefficiency. large sales volume and small investment makes supermarkets a good investment. indian supermarkets have the same problems but also smaller markup so they make 1% profit.

they are sensitive to what sells well and an increase of sales of 50% will makes the company’s products very popular with supermarkets.

but the company didn’t approach the retailers. why not?

Chapter 16

What explains the FMCG company not trying to extend replenishment to retail?

already making a profit. might not work, so play it safe?

owners of small shops may not understand and accept the offer.

but the company enthusiastically changed their way of doing business until they reached the step of replenishing retail despite already making a profit when they started.

why not try with 1000 shops out of 2.5 million? and they already sell to 2.5 million shops so they know how to do it.

those ideas were a result of a tendency to blame people and come up with unsubstantiated derogatory explanations.

psychologists’ professional training often involves considering people who behave badly.

but goldratt’s ideas so it’s a good idea to learn to think clearly.

prior stages involved making changes in businesses they know well. Maybe the next step requires the company’s managers to step out of their comfort zone?

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Chapter 17

comfort zone - area where a person feels he has control or influence.

FMCG company didn’t proceed with retail because they thought they had no control or influence and will continue to drag their feet.

problem: contradicts other cases. manufacturer X of parts sold to another manufacturer Y, many competitors, X produces a small fraction of the parts bought by Y. but x will usually approach Y with an offer anyway.

maybe the comfort zone is related to knowledge. don’t think the offer is likely to have the desired result.

two reasons for hesitation. (1) they don’t understand the suggested change of policy. (2) they do understand suggested change and think it won’t work.

couldn’t predict that inventory turns would be more important to distributors than controlling their orders, but goldratt could explain this to them.

retailer makes 2% profit on sales. FMCG company would consider this a disaster and didn’t understand that shelf space and cash are the major constraints in retail. they assumed the offer won’t be attractive and will be rejected out of hand.

also need fine details they don’t have to fit the suggestion to their circumstances.

how can we persuade them to change?

don’t compromise. explain and substantiate the cause and effect relations that will persuade the FMCG company to implement replenishment properly.

launch to test and have executive committee review the results so they can (1) tell the extent of acceptance, rejection of offer and (2) tell how large an effect it has on sales.

tests have to be designed carefully to avoid misleading results. A big store might hesitate about replenishment cuz their loading deck is a bottleneck, and this might be misinterpreted as rejection of the offer.

should tie store’s reduction of inventory to a commitment to keep same shelf space or sales may decay.

suggested test and what conclusions and actions should follow from different results and the test was launched. people are willing to invest in reconsidering ideas about cause and effect in the light of an explanation.

Chapter 18

everything is just cold, factual logic for goldratt?

no. have to come up with new ideas about cause and effect and expose assumptions by intuition.

have to use emotion, intuitions and logic.

different people have emotions geared to different things. they have most intuition in ares most important to them.

when you use logic in an area you gain deeper understanding. if you succeed in removing a conflict and improving a situation your emotions intensify. deeper emotion results in better intuition and to better results, which leads to more intense emotions and so on.

optimistic. (1) people are good. (2) every conflict can be removed. (3) every situation that appears complex is actually simple. (4) every situation can be improved substantially. (5) every person can reach a full life. (6) there is always a win-win solution.

optimist with experience: practical visionary. not easy. can’t take refuge in blaming others or circumstances.

Do you have some project goals? How do you view the project? Happy with results so far? Is the project a sub-project in any larger goals?

The objective of this project was to make some notes on “The Choice” to understand it better. I did this because I wanted to get more familiar with Goldratt. I think it has gone okay. I might make some notes on “The Goal” next.

Why? What are a few levels of bigger goals above that?

A higher level goal would be to understand how Goldratt’s ideas can be integrated with other FI ideas, such as objectivism and critical rationalism.

Another higher level goal would be to be able use Goldratt’s idea with other FI ideas to solve real life problems.

Cool. Why do you want to do that? What motivates you?

It might be interesting and make my life in better in other ways I can’t currently foresee.

Are you happy with the results? Motivated? Excited? Energetic? Or having to drag yourself along to keep going? How does it compare to other activities you do?

I am motivated but it’s harder than other stuff like reading or watching stuff.

Are you too tired from some other activities that you’re prioritizing over philosophy stuff? How do you schedule your life and energy usage? Are you planning and budgeting energy usage as a key resource to manage and keeping track of what you do that uses much? (Do you want to talk about these things?)

I’m not keeping track of energy usage. I guess I should start doing that.