alt="img"/> Cash. When flow is maximized, the material that a company paid for is converted to cash at a relatively quick and consistent rate. This makes cash flow much easier to manage and predict. Additionally, the expedite-related expenses previously mentioned are minimized, limiting cash leaving the organization.
What happens when revenue is growing, inventory is minimized, and additional and unnecessary ancillary expenses are eliminated? Return on investment (ROI) moves in a favorable direction. Thus the fundamental principle is established that the rules and tools of a business should be built around the protection and promotion of flow.
Establishing Flow as the Foundation
It is difficult to foster the flow of relevant information and materials through a system when the components of the system cannot relate their actions to that flow. It’s become cliché to say that our organizations have “silos.” Those silos typically result in friction, conflict, and communication difficulties between functions. This is because we tend to control segments of our organizations through different metrics. Figure 2-1 lists an organization’s primary functions and the respective primary objectives and example metrics to accomplish those objectives.
The actions that each of these functions might take to meet their primary objectives and metrics often come into conflict. As an example, sales typically has a different primary metric than operations. It can frequently be the case that when operations looks to maximize its primary metric, it may compromise or jeopardize the primary metric of sales and vice versa. When quality maximizes its departmental metric, then operations might be adversely affected.
Yet we have already established that when a system flows well, service, revenue, quality, inventories, expenses, and cash are all better controlled. All these elements directly protect the primary objectives of the functions in Figure 2-1. But if flow is not made visible and incorporated into the routine and metrics, then how can it possibly be protected? Flow, if encouraged, measured, and made properly visible, can align all these objectives with the system goal of maximizing return on shareholder equity.
FIGURE 2-1 Organizational functions, objectives, and metrics
Thus, aligning the functions to the promotion and protection of the flow can be the bridge between local actions and the global benefits. Furthermore, this alignment should significantly raise the quality and timing of relevant information and corresponding relevant materials in a system.
Additionally, the protection and promotion of flow is a unifying concept within major process improvement disciplines and their respective primary objectives. Dr. Eliyahu Goldratt, the inventor of the Theory of Constraints had a primary objective of driving system throughput. This was accomplished by a focus on total system flow. Late in Dr. Goldratt’s life, his writings became very specific about the interdependence between the Theory of Constraints and Taiichi Ohno’s work with the Toyota Production System (TPS) and flow. Most in the West might say that the goal of TPS and any Lean system is to eliminate waste. When things flow well, there is indeed less waste. But TPS is not just about waste elimination. When Ohno’s writings are examined closely, it becomes evident that the primary goal was in fact flow as described in his River Production System for Flow. Additionally, the quality movement driven by Dr. W. Edwards Deming and his 14 points for quality heavily relied on flow. The need for flow is obvious in this framework since improved flow results from less variability.
Any discussion or time spent on ideological battles between these disciplines is a complete waste of time and quite frankly, boring. Focusing on flow is about achieving a common objective through a common strategy based on common sense (also leveraging physics, biology, economics, and management accounting).
Goldratt, Ohno, and Deming did not invent the concept of flow. Their disciplines simply built off the works and concepts of industrial giants that changed manufacturing forever and gave birth to the corporate management structure in use today. To these industrial pioneers the concept of flow was simply common sense. These industrial pioneers include:
Relevant Information and Materials
Yet there is an important caveat to Plossl’s first law that becomes crucial and central to determining whether flow translates to better ROI performance. It has already been hinted at several times in the preceding text. The great basketball coach John Wooden said, “Never mistake activity for achievement.” A company cannot just indiscriminately move data and materials quickly through a system and expect to be successful. Today organizations are frequently drowning in oceans of data with little relevant information and large stocks of irrelevant materials (too much of the wrong stuff) and not enough relevant materials (too little of the right stuff). When this occurs, there is a direct and adverse effect on return on investment.
Thus the flow of information and materials must be relevant to the required output or market expectation of the system. To be relevant, both the information and materials must synchronize the assets of a business to what the market really wants; no more, no less. Having the right information is a prerequisite to having the right materials. With this is mind, Plossl’s first law can be amended to:
All benefits will be directly related to the speed of flow of relevant information and materials.
But in the highly complex and volatile New Normal, is it even possible to promote and protect the flow of relevant information? What stands in the way?
A massive amount of research and literature has been devoted to the phenomenon known as the bullwhip effect. However, very little, if any, of that body of knowledge has been related specifically to the objective of protecting and promoting the flow of relevant information and material. APICS Dictionary defines the bullwhip effect as:
An extreme change in the supply position upstream in a supply chain generated by a small change in demand downstream in the supply chain. Inventory can quickly move from being backordered to being excess. This is caused by the serial nature of communicating orders up the chain with the inherent
