Organizational Performance Part 49: Understanding Managing Workflow | Operational Excellence Quick Hits

In today’s session, we’re going to continue on the subject of breakthrough improvement and then mindset necessary to achieve breakthrough improvement. Today’s session, we’re going to talk about managing workflow. A lot of companies I’ve been in, the mindset is, the earlier that work is started, the sooner it’ll be completed. So we want to challenge that mindset today. If we look at a system, a system is made up of different processes and those different processes have different capacities. So in an unbalanced system, we have one resource that dictates the flow. We call that productive capacity, other resources that have more capacity that have protective capacity. And if we work in a push system where our goal is to keep all resources busy and activated, what happens is, when we look at the results of a push system, we have high efficiencies in the front of the process. After the capacity constraint, we have lower efficiencies. And what happens is we build excess work in process.

So if we have an unbalanced system, what happens is we have this excess work in process and lead time becomes extended and highly variable. When we start a job, it’s very difficult to determine when that job is going to finish. And in this case, if we look at calculating the lead time, we take the amount of inventory between the process steps, divide by the customer demand rate and we get how many days of inventory. So in this case, we got 4.8 days of inventory between operator one and two, two and a half on the next operation, 20 on the next, 0.9, 0.9, and 0.6. So our total lead time for a job to go from start to finish is 29.7 days. So therefore, to deliver on time, we need to start the order about 30 days before the due date.

Now, if we go to a pull system, so a pull system we’re releasing work based on the customer demand rate that’s aligned with our capacity constraint resource capacity. And in this system, we limit the amount of inventory in the system and we go to a standard work in process. So when we have standard work in process such in this system, we can understand more predictably what the lead time is going to be and the lead time is going to be much shorter. So if I do the same calculation, I take the inventory divided by the demand rate and what we see is that the number of days of inventory is much less and the total lead time in this system is 7.4 days. And the time to deliver to the customer goes from 30 days to eight days. So in this case, we can start much later and deliver on time. And by starting much later, we can control the work in process. If we control the work in process, then the system becomes highly predictable and lead times become shorter.

So let’s look at the impact of these two systems from a financial and operational performance. From our financial perspective, we still have the same profit because we met the demand of the customer, our operating expense didn’t change, but where we have the difference is in our operational KPIs in terms of inventory and lead time. So in this case, we had $20,800 tied up in inventory in the push system, in the pull system, $5,200, lead time, 29.7 days in the push, 7.4 in the pull. And where do we see the impact of that? Mostly is in our cash flow. If we have too much whip in the system, then that ties up valuable cash. So in round three here, our cash position from the start to the end of the month went negative. So that means we had to draw money from our line of credit to keep operations going, where in round four, we actually freed up cash and had a positive cash flow.

When we have a push system, we have unpredictable and unreliable dates, and we feel pressured to release work earlier so we can finish. In a pull system we release much later and finish on time. That’s our session for today. Next week’s session we’re going to talk about managing overtime and how running overtime to increase direct labor hours reduces overall overhead of the company. So this is a belief that I’ve seen in many companies: “Oh, we need to run overtime and that’ll reduce the overall overhead.” And I’m going to challenge that assumption in our next session.