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The Theory of Chains Starring: The Chain as “itself”

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The Theory of Chains Some (possibly overly simplistic but hopefully not too condescending) stories to help us think about what we are here for…

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Part 1 The fable of the two mules

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The fable of the two mules Let’s start with the famous fable of two mules who were tied together.

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The fable of the two mules They each wanted grass, but neither could get any because they were pulling in opposite directions.

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The fable of the two mules They pulled...

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The fable of the two mules They pulled...

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The fable of the two mules They pulled... And pulled...

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The fable of the two mules They pulled... And pulled...

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The fable of the two mules What were they doing wrong? What is the solution?

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The fable of the two mules The answer is obvious!

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The fable of the two mules They need to try harder!

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The fable of the two mules They need to try harder!

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The fable of the two mules They need to try harder!

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The fable of the two mules They need to try harder!

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The fable of the two mules They need to be more efficient!

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The fable of the two mules They need to be more efficient!

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The fable of the two mules They need to be more efficient!

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For anyone who doesn’t know this story... The moral is that co-operation is better than struggle. The fable of the two mules

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But that’s not my moral... The fable of the two mules For anyone who doesn’t know this story... The moral is that co-operation is better than struggle.

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Part II Efficiency vs. Effectiveness

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Efficiency This is an efficient light bulb!

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Efficiency This is an efficient light bulb!

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Efficiency This is an efficient light bulb!

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Effectiveness Effectiveness is about the direction, not the speed!

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Effectiveness Effectiveness is about the direction, not the speed!

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Effectiveness Effectiveness is about the direction, not the speed!

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Efficiency vs. Effectiveness Ineffective Effective Efficient Inefficient A helpful and un-ironic four-quadrant diagram

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Efficiency vs. Effectiveness Ineffective Effective Efficient Inefficient A helpful and un-ironic four-quadrant diagram

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Efficiency vs. Effectiveness Ineffective Effective Efficient Inefficient A helpful and un-ironic four-quadrant diagram

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Efficiency vs. Effectiveness Die Slowly Die Quickly Ineffective Effective Efficient Inefficient A helpful and un-ironic four-quadrant diagram

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Efficiency vs. Effectiveness Die Slowly Die Quickly Ineffective Effective Efficient Inefficient A helpful and un-ironic four-quadrant diagram

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Efficiency vs. Effectiveness Thrive Die Slowly Survive Die Quickly Ineffective Effective Efficient Inefficient A helpful and un-ironic four-quadrant diagram

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Efficiency vs. Effectiveness “Efficiency is doing things right; effectiveness is doing the right things.” “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.” “The most serious mistakes are not being made as a result of wrong answers. The true dangerous thing is asking the wrong question.” -- Peter Drucker.

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Part III The Chain

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The chain Can you see a problem with this chain?

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The chain Can you see a problem with this chain?

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The chain Keep looking!

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The chain Keep looking!

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The chain Keep looking!

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The chain Give up? The answer is...

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The chain The links are wasting metal and heavier than they need to be.

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The chain I replaced my steel with aluminium I reduced my diameter by 2mm A more efficient chain!

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The chain I replaced my steel with aluminium I reduced my diameter by 2mm

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The chain I replaced my steel with aluminium I reduced my diameter by 2mm

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Time for the first overly-simplistic business analogy....

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The chain Fulfilment IT Sales Finance ???

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The chain We cut costs by 10% We were 15% more efficient We saved £100K Fulfilment IT Sales Finance ??? A more efficient business!

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The chain We cut costs by 10% We were 15% more efficient We saved £100K Fulfilment IT Sales Finance ??? A more efficient business!

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The chain Help the weakest link get stronger. Me too! I’ll lend you some of my metal

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The chain Me too! I’ll lend you some of my metal There is no point making other links efficient until the weakest link is strengthened.. Help the weakest link get stronger.

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The chain • What is the goal of a chain?

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The chain • What is the goal of a chain? To be strong

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The chain • What is the goal of a chain? • Is there always a weakest link?

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The chain • What is the goal of a chain? • Is there always a weakest link? Yes!

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The chain • What is the goal of a chain? • Is there always a weakest link? • What is the most effective action to take?

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The chain • What is the goal of a chain? • Is there always a weakest link? • What is the most effective action to take? Make the weakest link stronger

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The chain

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The chain

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The chain

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Part IV The bucket brigade

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The bucket brigade

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The bucket brigade Meet Mr. Blue.

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The bucket brigade Meet Mr. Blue. And Mr Pink.

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The bucket brigade Meet Mr. Blue. And Mr Pink. And Mr Green.

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The bucket brigade They are forming a human chain – a bucket brigade.

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The bucket brigade Water input Water comes in one end....

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The bucket brigade Water input Water output ... And goes out the other.

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The bucket brigade Water input Water output But what happens...

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The bucket brigade Water input Water output ... if Mr Blue is faster than Mr Pink?

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The bucket brigade Water input Water output ... if Mr Blue is faster than Mr Pink? A big puddle coming soon.

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The bucket brigade Water input Water output And what happens...

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The bucket brigade Water input Water output ... if Mr Green is faster than Mr Pink?

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The bucket brigade Water input Water output ... if Mr Green is faster than Mr Pink? Mr Green does a lot of waiting. He is quite bored now. Even Twitter has lost its charm.

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The bucket brigade Water input Water output • What is the goal of a bucket brigade?

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The bucket brigade Water input Water output • What is the goal of a bucket brigade? To move as much water as possible in as little time as possible. Throughput, not efficiency.

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The bucket brigade Water input Water output • What is the goal of a bucket brigade? • What (or rather who) determines the throughput?

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The bucket brigade Water input Water output • What is the goal of a bucket brigade? • What (or rather who) determines the throughput? The slowest person

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The bucket brigade Water input Water output • What is the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link?

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The bucket brigade Water input Water output • What is the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link? Yes! There is always a slowest person

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The bucket brigade Water input Water output • What is the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link? • What is the most effective action to take?

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The bucket brigade Water input Water output • What is the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link? • What is the most effective action to take? Make the weakest link stronger

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The bucket brigade Water input Water output • What is the goal of a bucket brigade? • What (or rather who) determines the throughput? • Is there always a weakest link? • What is the most effective action to take? Make the weakest link stronger Make the slowest person faster

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The bucket brigade Water input Water output Question: Which person never gets a rest? What happens if he does rest?

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The bucket brigade Water input Water output Question: Which person never gets a rest? What happens if he does rest? Hint

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The bucket brigade Water input Water output Question: Which people always get a chance to be idle? What happens if you insist that they always keep working?

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The bucket brigade Water input Water output Question: Which people always get a chance to be idle? What happens if you insist that they always keep working? Hint

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The bucket brigade Water input Water output

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The bucket brigade Water input Water output

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Part V What is the goal of a business?

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How a business works Our business Stuff we buy Stuff we sell Inventory/Investment Operating expenses

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The goal of a business Inventory/Investment Operating expenses Our business Throughput Goal: Try to increase this bit

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The goal of a business Inventory/Investment Operating expenses Our business Throughput These numbers are related, often in unobvious ways. Changing one affects all the others. It’s a balancing act!

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The goal of a business Inventory/Investment Operating expenses Our business Throughput Some common metrics to help you relate the numbers and do the balancing act...

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The goal of a business Inventory/Investment Operating expenses Our business Throughput Net profit (NP) = Throughput (T) - Operating expense (OE) Some common metrics to help you relate the numbers and do the balancing act...

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The goal of a business Inventory/Investment Operating expenses Our business Throughput Return on investment (ROI) = Net profit (NP) ÷ Investment (I) Some common metrics to help you relate the numbers and do the balancing act...

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The goal of a business Inventory/Investment Operating expenses Our business Throughput Productivity = Throughput (T) ÷ Operating Expense (OE) Some common metrics to help you relate the numbers and do the balancing act...

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The goal of a business Inventory/Investment Operating expenses Our business Throughput Investment Turns = Throughput (T) ÷ Investment (I) Some common metrics to help you relate the numbers and do the balancing act...

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What if a bucket brigade was like a business? Another overly-simplistic business analogy....

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If the bucket brigade were a business... Water input Water output If the bucket brigade were a business, what questions would we ask?

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If the bucket brigade were a business... Water input Water output What is the throughput?

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If the bucket brigade were a business... Water input Water output What is the throughput? How long does it take a bucket to move through the system (“flow time”)? a.k.a "latency"

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If the bucket brigade were a business... Water input Water output What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory?

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If the bucket brigade were a business... Water input Water output What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses?

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Real Numbers Mr Pink can do 1 Bucket/hour Mr Blue can do 2 Buckets/hour Mr Green can do 3 Buckets/hour Let’s look at some real numbers! Each bucket sells for a markup of $24 Each worker costs $12/hour

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Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is the throughput? $12/hour $24 $24 $24 $24 $12/hour $12/hour

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Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is the throughput? $12/hour $24 $24 $24 $24 $12/hour $12/hour 1 bucket/hour (Mr Pink is to blame)

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Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is the throughput? How long does it take a bucket to move through the system (“flow time”)? $12/hour $24 $24 $24 $24 $12/hour $12/hour

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Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is the throughput? How long does it take a bucket to move through the system (“flow time”)? $12/hour $24 $24 $24 $24 $12/hour $12/hour Mr Blue takes 30 min per bucket, and Mr Green takes 20 min, so it takes a bucket 1h 50m to go through the system.

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Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? $12/hour $24 $24 $24 $24 $12/hour $12/hour

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Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? $12/hour $24 $24 $24 $24 $12/hour $12/hour Little’s law: inventory = throughput * flow time. So inventory = 1 bucket/hour x 1.83 hours => 1.83 buckets

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Real Numbers 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses? $12/hour $24 $24 $24 $24 $12/hour $12/hour

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Real Numbers What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses? 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $12/hour $12/hour $12/hour x three people = $36/hour

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Real Numbers Throughput (buckets/hr) (money/hr) Flow time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I 1/hr or $24/hr 1h 50m 1.83 $36/hr -$12/hr 0.54 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $12/hour $12/hour Here are all the numbers.... Oh noes.... We’re losing money!

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Real Numbers We’re losing money – what should we do?

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Real Numbers We’re losing money – what should we do? Let’s step back and look at the problem...

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Real Numbers We’re losing money – what should we do? Let’s step back and look at the problem... Mr Pink is working flat out but look at all the idle people! Mr Blue is only working ½ time. And Mr Green is working only a third of the time. Lazy sod!

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Real Numbers We’re losing money – what should we do? Let’s step back and look at the problem... Mr Pink is working flat out but look at all the idle people! Mr Blue is only working ½ time. And Mr Green is working only a third of the time. There’s your problem right there!

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Real Numbers What to do? Option 1: Panic!

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Real Numbers What to do? Option 1: Panic! Option 1: Reduce wages or staff (helps with operating expenses) Especially the lazy ones like Mr Pink...

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Real Numbers What to do? Option 1: Reduce wages or staff (helps with operating expenses) Option 2: Hire extra people (helps with throughput, maybe?)

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Real Numbers What to do? Option 1: Reduce wages or staff (helps with operating expenses) Option 2: Hire extra people (helps with throughput, maybe?) Option 3: Change the process (but how?)

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Fixing the problem by reducing staff Let’s start with option 1: “Reduce staff on the non-bottlenecks” 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $12/hour $12/hour A.k.a. Don’t pay people to be idle.

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Fixing the problem by reducing staff As it happens, around this time, Mr Blue had a very unfortunate industrial accident – he was cut in half.

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Fixing the problem by reducing staff As it happens, around this time, Mr Blue had a very unfortunate industrial accident – he was cut in half. Luckily he can still work at 2 buckets/hour, But since there is only half of him, his average throughput is now 1 bucket/hr.

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Fixing the problem by reducing staff As it happens, around this time, Mr Blue had a very unfortunate industrial accident – he was cut in half. Luckily he can still work at 2 buckets/hour, But since there is only half of him, his average throughput is now 1 bucket/hr. As a result, the cruel capitalists who employ him have decided to slash his salary in half as well -- to only $6/hr.

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Fixing the problem by reducing staff By coincidence Mr Green also had a very unfortunate industrial accident – he was cut into one third.

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Fixing the problem by reducing staff By coincidence Mr Green also had a very unfortunate industrial accident – he was cut into one third.

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Fixing the problem by reducing staff By coincidence Mr Green also had a very unfortunate industrial accident – he was cut into one third. His productivity is only a third now. Just like Mr Blue, his average is now 1 bucket/hr. The cruel capitalists have decided to slash his salary even more -- to only $4/hr.

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Fixing the problem by reducing staff Here is the new setup. Mr Blue and Mr Green have been rehired at lower wages, corresponding to their lower throughput. 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour $6/hour $24 $24 $24 $24 $12/hour $4/hour

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Fixing the problem by reducing staff What is the throughput? Still 1 bucket/hour 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour $6/hour $24 $24 $24 $24 $12/hour $4/hour

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Fixing the problem by reducing staff What is the throughput? How long does it take a bucket to move through the system (“flow time”)? Mr Blue and Mr Green have lower throughputs, but their latency is still the same. so the flow time is unchanged at 1h 50min. 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour $6/hour $24 $24 $24 $24 $12/hour $4/hour

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Fixing the problem by reducing staff What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? Same as before. 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour $6/hour $24 $24 $24 $24 $12/hour $4/hour

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Fixing the problem by reducing staff What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses? $6 + $12 + $4 = $22/hour 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour $6/hour $24 $24 $24 $24 $12/hour $4/hour

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Fixing the problem by reducing staff Throughput (buckets/hr) (money/hr) Flow time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I 1/hr or $24/hr 1h 50m 1.83 $22/hr +$2/hr 0.54 Here are the new numbers... 1 Bucket/hour 1 Bucket/hour 1 Bucket/hour $6/hour $24 $24 $24 $24 $12/hour $4/hour

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Fixing the problem by adding staff Now try option 2: “Adding extra staff on the bottleneck” That is -- bring the weakest links up to speed 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $12/hour $12/hour

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Fixing the problem by adding staff We’ll hire 2 people to help Mr Pink. This team’s throughput is now 3 buckets/hour! 3 Buckets/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $36/hour $12/hour

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Fixing the problem by adding staff But now Mr Blue is the bottleneck. 3 Buckets/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $36/hour $12/hour

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Fixing the problem by adding staff But now Mr Blue is the bottleneck. Luckily he has a half-brother who can help. 3 Buckets/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $36/hour $12/hour

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Fixing the problem by adding staff But now Mr Blue is the bottleneck. Luckily he has a half-brother who can help. Literally! 3 Buckets/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $36/hour $12/hour

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Fixing the problem by adding staff Mr Blue’s throughput is now 3 buckets/hour as well. 3 Buckets/hour 3 Buckets/hour 3 Buckets/hour $18/hour $24 $24 $24 $24 $36/hour $12/hour

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Fixing the problem by adding staff Throughput (buckets/hr) (money/hr) Flow time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I 3/hr or $72/hr 1h 50m 5.5 $66/hr +$6/hr 0.54 Here are the numbers for this approach. 3 Buckets/hour 3 Buckets/hour 3 Buckets/hour $18/hour $24 $24 $24 $24 $36/hour $12/hour

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Fixing the problem by adding staff Moral: Adding staff can be more profitable than reducing staff – if you know where to add them. Adding also gives economies of scale, because there are other fixed costs like buildings, etc., which don’t need to be scaled at the same rate.

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Fixing the problem by adding staff Moral: Adding staff can be more profitable than reducing staff – if you know where to add them. Adding also gives economies of scale, because there are other fixed costs like buildings, etc., which don’t need to be scaled at the same rate. Question: Under what circumstances can you NOT add staff?

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Fixing the problem by adding staff Moral: Adding staff can be more profitable than reducing staff – if you know where to add them. Adding also gives economies of scale, because there are other fixed costs like buildings, etc., which don’t need to be scaled at the same rate. But can we do even better?

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Fixing the problem by changing the process Option 3 is “changing the process”. What does that look like? 1 Bucket/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $12/hour $12/hour

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1 Bucket/hour 2 Buckets/hour 3 Buckets/hour $12/hour $24 $24 $24 $24 $12/hour $12/hour Fixing the problem by changing the process What happens if we get rid of the second step in the process and merge it into the first?

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Fixing the problem by changing the process What happens if we get rid of the second step in the process and merge it into the first?

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Fixing the problem by changing the process Mr Blue and Mr Pink now work together on step 1. Their combined throughput is now 3 buckets/hour.

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Fixing the problem by changing the process Mr Blue and Mr Pink now work together on step 1. Their combined throughput is now 3 buckets/hour. $12/hour $24 $24 $24 $12/hour 3 Buckets/hour 3 Buckets/hour $12/hour

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Fixing the problem by changing the process Mr Blue and Mr Pink now work together on step 1. Their combined throughput is now 3 buckets/hour. $12/hour $24 $24 $24 $12/hour 3 Buckets/hour 3 Buckets/hour $12/hour

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Fixing the problem by changing the process What is the throughput? 3 buckets/hour $12/hour $24 $24 $24 $12/hour 3 Buckets/hour 3 Buckets/hour $12/hour

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Fixing the problem by changing the process What is the throughput? How long does it take a bucket to move through the system (“flow time”)? Mr Blue and Mr Pink have a combined latency of 40 mins so the total flow time is now 1 hour. $12/hour $24 $24 $24 $12/hour 3 Buckets/hour 3 Buckets/hour $12/hour

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Fixing the problem by changing the process What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? Little’s law: inventory = throughput * flow time. So inventory = 3 bucket/hour x 1 hours => 3 buckets $12/hour $24 $24 $24 $12/hour 3 Buckets/hour 3 Buckets/hour $12/hour

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Fixing the problem by changing the process What is the throughput? How long does it take a bucket to move through the system (“flow time”)? What is the current inventory? What are the operating expenses? $12 x three = $36/hour $12/hour $24 $24 $24 $12/hour 3 Buckets/hour 3 Buckets/hour $12/hour

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Fixing the problem by changing the process Throughput (buckets/hr) (money/hr) Flow time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I 3/hr or $72/hr 1h 3 $36/hr +$36/hr 1 $12/hour $24 $24 $24 $12/hour 3 Buckets/hour 3 Buckets/hour $12/hour

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Summary of different approaches Option Throughput (buckets/hr) (money/hr) Flow time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I Original 1/hr or £24/hr 1h 50m 1.83 £36/hr -£12/hr 0.54 Reduce Staff 1/hr or £24/hr 1h 50m 1.83 £22/hr +£2/hr 0.54 Increase Staff 3/hr or £72/hr 1h 50m 5.5 £66/hr +£6/hr 0.54 Change Process 3/hr or £72/hr 1h 3 £36/hr +£36/hr 1.0

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Summary of different approaches Option Throughput (buckets/hr) (money/hr) Flow time Inventory (buckets) Opex (money/hr) Net Profit (money/hr) = T - OE Inventory turns = T/I Original 1/hr or £24/hr 1h 50m 1.83 £36/hr -£12/hr 0.54 Reduce Staff 1/hr or £24/hr 1h 50m 1.83 £22/hr +£2/hr 0.54 Increase Staff 3/hr or £72/hr 1h 50m 5.5 £66/hr +£6/hr 0.54 Change Process 3/hr or £72/hr 1h 3 £36/hr +£36/hr 1.0

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Summary of different approaches Moral: Changing the process can have much greater impact than just tweaking efficiencies.

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Summary of different approaches Moral: Changing the process can have much greater impact than just tweaking efficiencies.

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Summary of different approaches Moral: Changing the process can have much greater impact than just tweaking efficiencies.

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What is the goal of IT?

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What is the goal of IT? Sales IT Supply Chain What is the most effective action for IT to take?

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What is the goal of IT? Sales IT Supply Chain

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What is the goal of IT? Sales IT Supply Chain

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What is the goal of IT? Sales IT Supply Chain IT should not be a cost centre

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What is the goal of IT? Inventory/Investment Operating expenses The business Throughput IT should add value to the business

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What is the goal of IT? Inventory/Investment Operating expenses The business Throughput IT should add value to the business

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What is the goal of IT? Inventory/Investment Operating expenses The business Throughput IT should add value to the business

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What is the goal of your team?

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What is the goal of your team? Sales Your team Supply Chain What is the most effective action for your team to take?

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What is the goal of your team? Inventory/Investment Operating expenses The business Throughput Where can your team add value to the business?

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What is the goal of your team? Inventory/Investment Operating expenses The business Throughput Where can your team add value to the business?

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What is the goal of your team? For example, how might an HR team add value?

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What is the goal of your team? For example, how might an HR team add value? How can HR help throughput? • Reduce purchase costs by hiring or training expert purchasers. • Better throughput by encouraging employee feedback and learning. • Promoting and managing continuous improvement. How can HR help capex? - Reduce need for facilities by helping people work remotely. How can HR help opex? • Reduce turnover with better working conditions, training, employee morale.

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What is the goal of your team? For example, how might an HR team add value? How can HR help throughput? • Reduce purchase costs by hiring or training expert purchasers. • Better throughput by encouraging employee feedback and learning. • Promoting and managing continuous improvement. How can HR help capex? - Reduce need for facilities by helping people work remotely. How can HR help opex? • Reduce turnover with better working conditions, training, employee morale.

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What next?

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What next? “The Goal” by Eliyahu M. Goldratt & Jeff Cox And find out about • Value Streams • The “Theory Of Chains” • Lean Enterprise/Lean Accounting • The Toyota Way

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What next? “The Goal” by Eliyahu M. Goldratt & Jeff Cox And find out about • Value Streams • The “Theory Of Chains” • Lean Enterprise/Lean Accounting • The Toyota Way

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Thank you! Contact me @ScottWlaschin