Verstegen+Associates, LLC: Market+Profit Performance Improvement Resultants

W H Y ?

Why Go For the Flow?
An article by Dennis Verstegen, Principal, Verstegen+Associates


Flow production principles can be used to maximize the wealth creation potential of a manufacturing unit or enterprise by reducing the lead-time it takes for:
  • Cash to flow from operations to investment opportunities
  • The cash conversion cycle to be completed
  • Ideas to flow from concept to catalog
  • Information to flow from customer to supplier
  • Material or supplies to flow from source to customer
  • Orders to flow from inquiry to invoice deposit
Every manufacturing unit or enterprise has hundreds of opportunities to improve flow. Typically, financial performance improvement potential can exceed a $10,000 or even $30,000 reduction in annual operating expense per employee. What's more, there is normally potential for a reduction of four to one or better in delivery response time and inventory investment during a two- to three-year time-span. An effective work process for strategically managing performance improvement can continue to reduce operating cost by $5,000 or more per employee every year. The challenge is to discover, prioritize, and remove all of the root causes that inhibit flow.

As many as 24 basic strategies can be selectively prescribed and applied to reduce lead-time and inventory investment. Dozens of engineering and manufacturing management books and articles describe these strategies. They typically have adjectives in their title such as agile, continuous, constraint theory, demand, just-in-time, kanban, one-piece, proactive, quick response, time-based, total quality, and value-added. The ultimate purpose of the strategies is to achieve market+profit performance improvement.

Awareness of flow principles began to expand beyond the conscience of operations management in the United States around 1980. Japanese management at Kawasaki recognized that the "integrated assembly" technology (applied by Dennis Butt, manager of their Lincoln, Nebraska, plant) worked the same way as the "Just-In-Time" technology used at their Japanese plants. Both technologies apply the same flow principles.

Regardless of which collective name is associated with popular approaches to performance improvement, the principles are the same. Key flow principles are natural laws of the universe. Some of the natural laws that guide the prescription of performance improvement solutions are:
  • The longer it takes to do anything, the more it will cost.
  • Lead-time is the sum of value-added activity and delays.
  • Excessive changeover time, inspections, movements, and queues cause material and information flow delays.
  • Cash flow from operations is controlled by the money value of time.
  • Cash flow from finance and investment accounts is controlled by the time value of money.
  • All costs are variable when measured over a long enough time period.
  • Work processes interact with other work processes as elements of a system.
  • Entropy drives the need for continuous improvement.
  • A problem defined is already half solved.
Obeying these natural laws of the universe has financial benefit. Minimizing lead-time for the cash conversion cycle generates maximum cash flow from operations. (The cash conversion cycle measures how long your cash is obligated to filling an order until it returns again to your bank.) Therefore, as the transformation to flow production is realized, more wealth is created for owners. The evidence appears at both the top line and the bottom line of profit statements.

Further evidence of inventory investment reduction appears on the balance sheet. All benefactors are served by satisfying customers with the fastest delivery of the highest quality products and services at the lowest possible cost. Everybody wins -- customers, employees, environments, investors, owners, and suppliers. Being proactive and going for the flow means getting rid of every excess danger, defect, error, failure, inspection, movement, motion, or queue. These problems could be caused by the design of the following items:
  • Equipment
  • Facilities
  • Jobs
  • Layouts
  • Organizations
  • Policies
  • Procedures
  • Products
  • Systems
  • Technologies
  • Work Processes
Design changes are absolutely necessary. They are the only way to permanently get rid of the root-causes for these excesses. When root-causes cannot be completely eliminated, the next-best alternative is to improve their control enough to minimize their impact on flow.

Operating expense is the sum of the cost of sales and operations, including labor, material, and overhead. All operating expenses can be conveniently allocated into a few categories for the purpose of flow improvement management.

The names of these nine performance improvement categories are shown in the illustration below. Place your mouse pointer over any category to reveal a brief definition (may not work on older browsers), or click on any category to view specific case reports.

Conversion - Work processes and assets used to change materials into products with minimum lead-time. Development - Work processes and assets used to bring new facilities, markets, products, or services into reality with minimum lead-time. Logistics - Work processes and assets used to procure, move, store, and handle the flow of materials and supplies from source to plant to customer.
Compliance - Work processes and assets used to achieve and sustain adherence to laws, ordinances, and regulations enforced by federal, state, and local governments. Improvement/kaizen - Work processes and assets used to lead and manage the planning and execution of an effective performance improvement function. The purpose is to focus about 2 percent of payroll on reducing total operating cost from 4 to 8 percent every year and to double productivity within a few years. Kaizen is transliterated Japanese for continuous improvement. Materials - Purchased raw materials, components, and supplies consumed in plant, office and warehouse operations. This category usually represents the greatest potential for cost improvement.
Assets - Work processes needed to acquire, dispose of, improve, maintain, and use physical or intellectual resources. Assets include buildings, communications and computer systems, databases/lists, documents, drawings, gages, grounds, production equipment, tooling, utility systems, and vehicles. Quality - Work processes and assets used to prevent, detect, and correct failures, defects, and errors or to reduce their frequency and severity. Occupancy - Fixed cost to lease or own and sustain facility readiness, including standby utilities. (Utilities consumed in running operations are allocated to their point of use).

The categories in the above illustration are used because they are relatively independent of each other and improvement work can be defined and focused on separate strategic goals. Their relative importance varies with each situation. It all depends upon the latent opportunity available in a business unit or enterprise.

As a historical reference, the practice of flow production is at least 500 years old. It was probably practiced long before it was described by Leonardo da Vinci in 1496. James Watt wrote about some of the flow principles he applied to steam engine production during the 18th century. Many examples were reported by the textile and ordnance industries during the 19th century and by the aircraft, appliance, automotive, and electronics industries during the 20th century. These principles are still just as valid for the 21st century.


What next:

Ask yourself these ten questions to evaluate your company's performance improvement potential.

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