The concept of multiplying money by time has occupied a lot of thought from Eli Goldratt for quite long time. The entities of money and time represent two different dimensions and thus the product of the two represents their combined impact.
In the financial area value-days are known for very long time, but with one substantial addition: the concept of “price of money” is accepted and widely used. The value of the product of money and time can be translated into money in the same way as other types of value. “The price of money” is an interest rate and it allows quantifying the financial worth of loans as well as investments. More on it – later in this post.
The use of dollar-days replaces certain, grossly biased, performance measurements that express
The damage of failing to achieve the delivery commitments
Thus, Throughput-Dollar-Days (TDD) is by definition a negative performance measurement. The best value you can get is zero. The prime use of TDD is measuring on time and in-full delivery of orders. When an order is late, relative to the promise to the client, then the T of the order multiplied by the late-days is far superior to simple due-date performance. Consideration of lateness creates motivation for efforts to minimize the lateness. Without it there is a real concern that once an order is late it loses its priority because the damage to the measurement has been done.
About twenty years ago the flight captains of El-Al, the Israeli airline, were measured by their on-time pull back from the terminal, and the bonuses were determined by it. As a traveler I could see the efforts to be on-time. But, when there was a delay it was alarming to see how people stopped to run and started walking, slowly, because they did not mind anymore.
However, TDD generates several negative branches. The T worth of an order is a key factor in the measurement. But, do you really like to give automatic higher priority to $1,000 order over $500 order? This measurement does not consider the damage to the reputation and does not consider the characteristic of the client and the level of business with that client. Buffer management, the formal TOC priority scheme in Operations, totally ignores the T of an order for setting the priority. So, is TDD an additional priority mechanism?
Another question is why to use the T of an order rather than the revenue? From the client perspective the worth of an order is the full price. We like to get the full payment, including the TVC, as soon as possible. The division of the revenue to TVC and T has nothing to do with the need to get the payments on time. Shouldn’t we use RDD (revenue*days-late) as a measurement?
My biggest issue with the concept of dollar-days is that it is not intuitive. DD generates very high numbers, which are quite confusing when compared with the net worth. An order of $1K delayed for 60 days, is 60K DD. How clear the true state of the situation is reflected by this one number?
Eli Goldratt wished TDD becomes a key measurement for the whole supply chain – keeping every link responsible for possible loss of sales. The practical problem is: how to measure the TDD of items that are sold from stock? When there is a shortage we suspect some lost sales – it is less clear how much. We can use statistics of sale-days, which are actually based on forecasts. Problem is, forecasts are quite confusing and many do not understand the ramifications.
My conclusion is that TDD has the potential of creating real value, but we should review the logic and be ready to introduce changes. Reservations and new ideas are welcome.
Inventory-Dollar-Days (IDD), supposedly the twin concept of TDD, is actually a different concept. The original idea was that while TDD expressed failing to deliver, IDD represents the effectiveness of the investment in inventory.
IDD is the accumulation of the cost of every item in inventory, the actual price paid for it, multiplied by the days passed since the purchasing. So, it represents the dollars invested combined by the time those dollars have been held without generating value.
So, in order to achieve very low TDD we need to invest in inventory. An analysis is required to set a standard for the “right” level of IDD that would achieve reasonable value of TDD.
Does really the IDD represent the effectiveness of the investment? IDD does not consider whether the items leaving the IDD calculations have generated money or just scrapped. While items spend time in inventory, or being processed but not sold, their real worth in money might have changed, but the IDD cannot relate to it – the real value would be revealed only when the item is sold.
What value we get from IDD?
We can use it to identify items that are both expensive and spent long time in inventory, contributing the most to the IDD, motivating operations to get rid of those items. It also motivates the purchasing people to be more careful when they order large amount of such materials. If this motivation is important, can’t we identify those items by crossing together the expensive items and their aging? Is the use of one number, which is not intuitive, a better way?
IDD is for inventory and it cannot be used for other investments. Suppose we have bought a new machine. The intention is to use it for many years. Dollar-days would accumulate from the day of purchasing the machine. Without considering the T generated by that machine the IDD of infra-structure is useless.
Here comes the concept of ‘Flush’ as a measurement of such an investment. The dollar days start with the initial investment. From that date negative dollar-days (DD) accumulate. Additional expenses increase the negative DD. When T is generated positive DD are added. Hopefully, at a certain time the state of the investment-DD would reach zero: the DD of the investment is fully recovered. Flush is the number of days to the breakeven of the DD of the original investment.
Flush is superior to the simplistic measurement of the time to return the cost of the investment.
But, is Flush superior to Net-Present-Value (NPV), where the DD are converted into money?
Flush ignores whatever happens after the DD become breakeven. More income might be generated, which have no impact on Flush. I also think we cannot simply ignore the concept of the “price of money”, which is a simpler, yet effective, way to evaluate an investment.
The real difficulty in evaluating an investment is the risk associated by it. Both Flush and NPV do not provide a good answer to that.
Another point that puts Flush in a funny perspective: When one spends money for pleasure then its DD would grow to infinity. Does this seem intuitive to you?
Do you like to discuss this further?