The Full Meaning of Flow in Operations

Flow in Operations refers to the movement of products and services to the client.  But do we fully understand the meaning of ‘improving the flow?’ 

Do we fully understand what value is generated when we improve the flow?

Improving the Flow, from the perspective of Operations, could easily be directed at two very different measurements:

1. The time it takes for one particle of the flow to pass through the whole route.
2. The quantity of units arriving at the end per period of time.

What happens when improving one measurement is at the expense of the other?

Actually, this conflict is the core of the dispute between the efficiency paradigm, which calls for big batches and high WIP in an effort to increase the total output, and the Lean/Kanban principles, which are focused on the speed of the materials, ensuring fast delivery to actual demand.

The Theory of Constraints (TOC), has resolved the conflict by achieving high scores for both measurements.  It started with improving and controlling the overall potential flow quantity, what is actually delivered to clients.  On top of that TOC succeeds in making the commitments to the clients highly reliable.  Understanding that the potential Flow, interpreted as the overall output generated by the organization, is limited by one capacity constraint, and drawing critical insights from this observation.

The TOC methodology also improves the second prime measurement, by preventing releasing orders that can safely be released later. In Goldratt’s verbalization the idea is to “choke” the release of new orders to the floor.  This is done by estimating the reliable time the order can be completed, considering the common and expected uncertainty, and refusing to release it earlier. Doing that ensures the WIP includes only the orders that have to be delivered within that reliable time.

Opening the way for the orders to flow without long wait times, also keeping a clear priority system to identify the few orders that might need extra push to be completed on time, is how the original conflict between the two prime measurements is settled.

This attitude clashes with the flawed managerial policy of trying to achieve high utilization of every resource, which is practically impossible, and TOC has realized that only the utilization of the constraint, or the weakest link, truly matters.

TOC also interprets the second performance management of Flow as the total value delivered in a period of time, rather than counting the physical output.  This is achieved by using the term ‘Throughput’, the marginal total contribution, to represent the value delivered in a period of time.

On one hand the use of Throughput bypasses the difficulty of defining the units or ‘particles’ of the Flow.  By that it gives an estimation of the total value generated in a period of time.

On the other hand, such interpretation raises an issue that is beyond the scope of Operations, as it looks on the net value the Flow generates.  As long as we are still focusing on Operations and on maximizing the total throughput (T) a relevant, yet disturbing, question is raised:

Can faster flow generate more T per unit sold?

The question expresses the key assumption behind the conflict: less units sold means less total T.  However, if it is possible that faster flow would make the customers ready to pay more, generating higher T per unit, then it could well be that the organization can generate overall more T by accelerating the deliveries, even when it is on the expense of the total quantity of products delivered.

A third performance measurement of Flow is emerging: The net value of the output per period, or the total Throughput generated!

Once the TOC solution for Flow is fully implemented, there is still a certain trade-off that lies within the exploitation scheme of the constraint.  TOC recognizes the need for maintaining protective capacity, even on the capacity constraint resource (CCR) itself, to ensure reliable delivery, in spite of the inherent uncertainty.  The size of the time-buffer, an integral part of the TOC planning methodology, depends on the available protective capacity, which depends on how much the planner is ready to load the most constraining resource. When the constraint is planned for more than 90% of its available capacity, then the reliable lead-times to the customers have to be fairly long, partially because it is difficult for the constraint to cover for fluctuations that impact its own utilization.  At this level of exploitation, it is practically impossible to accept new urgent orders, and the reliable response time cannot be truly short, due to the queue for the CCR time.

When Sales are ready to restrict the planned load on the CCR to 80-85%, then while the total flow is reduced, the speed of handling one order is significantly fast, and highly reliable.

Each of the three performance measurements of Flow can be improved, but special care should be given to whether the improvement of one doesn’t reduce the level of the others.

One of the ideas on turning superior operations into a decisive-competitive-edge (DCE) is offering ‘fast-response’ to clients that truly need it, for a markup.  This is a worthy strategy when the fast response time is perceived by the customer to generate added value. The idea is similar to the offerings of the international delivery companies (FedEx, DHL, UPS).  The advantage of the idea is that while it requires a certain amount of protective capacity, offering fast deliveries whenever required by the customer adds considerable Throughput.

A hidden assumption behind the previous analysis is that the response time in production is the same as the response time to the client.  This is valid only for strictly make-to-order environments.

The vast majority of manufacturing organizations involve make-to-stock products and parts.  This means that from the perspective of the client, when perfect availability is maintained, the response time is immediate.

So, what is the advantage of fast flow for finished-goods items that are held for stock?

There are two ways where fast flow, the first measurement of Flow, could increase sales.

1. Significantly reducing the on-hand stock without causing more shortages.  With the right method of control, it is possible to vastly reduce the number of shortages.  This basically means much less money stuck in inventory, and fewer items that are sold at significantly reduced price in order to get rid of excess inventory. Even more important is being able to sell more items due to the improved availability, possibly also due to a better reputation.
2. Being able to quickly identify changes in demand.  When the inventory levels are relatively small it is easier to identify that in too many cases emergency replenishments are required to prevent shortages.  This is a signal for a real increase in demand.  On the other hand, when the small quantity of stock stays for too long, it signals the demand is lower than before.  The TOC tool called Dynamic Buffer Management (DBM) is used to identify those changes.

So, fast flow for make-to-stock is able to increase the profit, but it has to be cleverly used, as just fast flow to stock doesn’t add value to the customers.

Should make-to-stock, more specifically make-to-availability, be applied to slow-movers?

Slow movers cause, on average, slower flow due to two different causes.  One is that when the priorities on the floor are properly followed, then when sales are weak, the production order is given lower priority, so it could be stuck until the higher priority orders are processed.  The second cause is that the finished goods inventory of slow-movers is held for a relatively long time.  From the return-on-investment perspective, slow-movers yield low return, even when the T per item is higher than for fast-movers.  It is more effective to manage slow-movers as make-to-order items, unless the clients insist on immediate delivery.

The key conclusion

Flow has to be measured by three different measurements, with certain dependencies between them.  First, the speed of one particle of the flow to go through the whole route.  Second, the total quantity that passes through the flow in a period of time, which highly depends on the available capacity of the constraint/weakest-link. Third, is the total value that can be generated in a period of time, which depends on the two other measurements, but also on additional factors.

Recognizing the cause-and-effects that enable fast response, understanding the dependencies between fast flow, the total quantity delivered, and the analysis of the generated value, is important for every organization.  Just accelerating the speed of orders is not sufficient.