BETTER THAN FLOW EFFICIENCY
We know FLOW EFFICIENCY is more powerful than RESOURCE EFFICIENCY.
Results are so spectacular!
You might be content and not compelled to improve further.
After all, we did discover that FLOW EFFICIENCY is the key to make incredible improvements.
As we did conducting "The Magic Wand Experiment."
twitter.com/tendon/status/1524978237692006400
Could there be anything that sustains even more the outrageous claims I did?
With FLOW EFFICIENCY we have already seen it is possible!
twitter.com/tendon/status/1524306595995262976
But we can do even better, and sustain the Outrageous Claim in an even more powerful way.
Be introduced to THROUGHPUT EFFICIENCY!
Just as FLOW EFFICIENCY trumps RESOURCE EFFICIENCY, THROUGHPUT EFFICIENCY trumps FLOW EFFICIENCY.
Let's find out how it might look like.
WHICH PRODUCT SHOULD WE SELL?
Let's consider a simple example.
We have four products: A, B, C and D.
They will be sold respectively for 50, 50, 55 and 52 dollars.
The question we want to answer is: which product should we produce and sell to make the greatest profit?
Note: this is a "manufacturing" example.
You might believe that this does not apply to knowledge-work.
Remember how we work in TameFlow.
We use MENTAL MODELS to gain deeper insights about reality.
This is another MENTAL MODEL.
Maybe it applies to knowledge-work too?
COMPUTE UNIT PROFIT
We need more information to make the decision.
If we can get data in the form of production times, material costs and labor costs, then we will be able to compute the unit profit.
The unit profits are respectively: $24.00, $18.67, $24.17 and $26.17.
PICK THE HIGHEST UNIT PROFIT
Now the decision can be made.
Obviously we will pick product D, the one with the highest unit profit.
Don't we all agree that it makes sense to maximize the unit profit?
Not so fast...
BEWARE OF CONFLICTS OF INTEREST
The stated objective is to maximize profits
Different KPIs create conflicting interests.
Sales will push the product with the highest price, for the commissions.
Production the one with highest resource efficiency.
We have hidden agendas!
Interesting questions:
1. Can we make more money for the company selling some other product that is NOT the one with the highest unit profit?
2. Can we resolve those hidden conflicts and create common interests across the roles?
"Impossible!" most will say, to either!
BREAKDOWN THE PROCESS
Who's working?
Mr. Green and Mr. Gray.
See which activities they perform (in this case, assemble or work on the components/raw materials).
Note the order or sequence of the activities.
Map this out for each product.
MEASURE FLOW TIMES / PER WORKER
Measure how much time ("Flow Time") each of them employ to perform each activity.
What stands out is that, no matter which product is being put together, Mr. Green consistently takes more time than Mr. Gray.
Is this significant?
IDENTIFY THE CONSTRAINT
We have found the CONSTRAINT IN THE WORK PROCESS.
(We colloquially refer to the Constraint as "Herbie")
It is Mr. Green, precisely because he always needs more time than Mr. Gray.
Mr. Green is always the "slowest."
OPERATIONAL THROUGHPUT PER DAY FOR EACH PRODUCT
What does it mean that Mr. Green is the Constraint?
The system can never produce more than what "Herbie" does!
We can compute the maximum number of units per day, for each product, relative only to the capacity of "Herbie."
NET PROFIT PER DAY / FOR EACH PRODUCT
If we know the maximum number of units per day, we can also calculate the NET PROFIT PER DAY for each product.
We do this calculation with the simple equations of THROUGHPUT ACCOUNTING.
Now something really surprising stands out...
WHICH IS THE MOST PROFITABLE PRODUCT NOW?
We see that product A, that nobody cared about, is really the one that will give us the most "bang for the buck!"
It will produce +59% more DAILY NET PROFIT compared to product D which had the highest unit profit!
Unbelievable!
Reflect on what happened here.
The product that conventional thinking deems is providing the highest (unit) profit, does NOT make the most money for the company.
It is counter-intuitive, isn't it.
It is another Egg of Columbus!
And what was the burden to the company?
HOW MUCH DID THIS IMPROVEMENT "COST?"
We sustained no investment, no hiring, no purchasing of assets, no restructuring, no reorganization, no retraining, no overtime, no additional data (besides what was available).
We changed nothing, except a decision.
We had zero risk!
Again we showed that we can sustain our outrageous claim, just as Columbus did with his egg!
twitter.com/tendon/status/1523949167587905536
NO BIG DATA. NO DATA NOR COGNITIVE LOAD.
You might believe that to make such decisions you need lost of data - "Big Data."
But compare the dataset supporting the cost accounting decision making compared to the one of throughput accounting.
They are both the same size!
THE GREATER BENEFIT: UNITY OF PURPOSE AND COMMUNITY OF TRUST
In all this, there is even a greater benefit.
Imagine that all KPIs, of all roles, are aimed at the maximization of FINANCIAL THROUGHPUT.
We will have a SINGLE METRIC that drives all activities, no matter who!
Not only will this kind of decisions make the company much more profitable, but it will foster the UNITY OF PURPOSE and a COMMUNITY OF TRUST.
Conflicts of interests and hidden agendas, will be replaced by shared interests and actions that all pull in the same direction.
Did you like this example?
It is from chapter 13, "the Financial Metric Supporting Unity of Purpose and Community of Trust" of my book "Hyper-productive knowledge work performance: the TameFlow Approach and its application to Scrum and Kanban"
amazon.com/Hyper-Productive-Knowledge-Work-Performance-Hyper-productivity-dp-160427106X/dp/160427106X
If you want to see how these ideas can be used in knowledge -work, and in particular software engineering management, check my latest book:
"Standing on Bits, Agile Software Engineering Management at Scale with the Theory of Constraints."
leanpub.com/standingonbits
Steve Tendon
@tendon
I help executives achieve superior financial, operational, organizational and human performance by adopting the power of Flow@Scale™.
