The Demand Driven Adaptive Enterprise. Carol Ptak

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to be. This incredibly simple concept is best described in what is known as Plossl’s Law.

      Plossl’s Law

      George Plossl was an instrumental figure in the formation and proliferation of Material Requirements Planning (MRP), the original planning and information system that would eventually evolve into modern-day Enterprise Resource Planning (ERP) products. He is commonly referred to as one of three founding fathers of these manufacturing systems; Joe Orlicky and Oliver Wight are the other two.

      In 1975 Joe Orlicky wrote the book Material Requirements Planning—The New Way of Life in Production and Inventory Management. This book became the blueprint for commercial software products and practitioners alike. By 1981, led by Oliver Wight, Material Requirements Planning had evolved into Manufacturing Resources Planning (commonly referred to as MRP II). MRP II went well beyond the simple planning calculations used in MRP. It incorporated and used a Master Production Schedule, capacity planning and scheduling, and accounting (costing) data. Oliver Wight passed away in 1983 and Orlicky passed away in 1986. In 1994, George Plossl took up the torch to paint a vision for the future in the second edition of Joe’s seminal work, Orlicky’s Material Requirements Planning 2e.

      Nineteen ninety-four, however, was an interesting and difficult time to write a book about the vision and implementation of technology. Mainframes had given way to client-server configurations and the birth of the Internet had people puzzled about its industrial application. But Plossl successfully navigated these difficulties by sticking to a key transcendent principle, one that had not been well articulated previously in manufacturing systems literature. He called it the First Law of Manufacturing. We now simply know it as Plossl’s Law.

      All benefits will be directly related to the speed of flow of information and materials.

      It should be noted that Plossl was focused on manufacturing centric entities. As such there is an obvious omission to the law about services. But providing services is also all about flow. For example, the process of obtaining a mortgage flows through a series of steps. The longer it takes, the more risk to the sale and more dissatisfied the customer. Having a surgical procedure at a hospital is about flow. The longer the process, the higher the cost and risk to the patient. Repairing a downed piece of equipment is about flow. The longer the repair takes, the less revenue that piece of equipment can generate. As such, consider an amended Plossl’s Law.

      All benefits will be directly related to the speed of flow of information, materials, and services.

      This statement is not just simple; it is elegant. It also requires a critical caveat in the modern services and supply chain landscape. We will get to that critical caveat in due time. First, let’s further explore the substance of Plossl’s Law.

      “All benefits” is quite an encompassing statement. It can be broken down into components that most companies measure and emphasize. All benefits encompass:

      

Service. A system that has good information and material and/ or services flow produces consistent and reliable results. Most markets and customers have an appreciation for consistency and reliability. Consistency and reliability are key for meeting customer expectations, not only for delivery performance, but also for things like quality. This is especially true for industries that have shelf-life issues and erratic or volatile demand patterns.

      

Quality. When things are flowing well, fewer mistakes are made due to less confusion and expediting. This is not to say that qualities issues will not occasionally happen, but what it does say is that quality issues related to poor flow will most likely be minimized. This is important in industries with large assemblies with deep and complex bills of material and complicated routings to be scheduled. Frequent and chronic shortages cause work to be set aside to wait for parts, creating large work-in-process queues and then the inevitable expediting to get the work through the system.

      

Revenue. When service and quality are consistently high, a company is afforded the opportunity to better exploit the total market potential. This means higher revenue volume from both the protection and growth of margin and market share.

      

Inventories. With good flow purchased, work-in-process (WIP) and end item inventories will be minimized and directly proportional to the amount of time it takes to flow between stages and through the total system. The less time it takes products to move through the system, the less the total inventory investment. The simple equation is Throughput × Lead Time = WIP. Throughput is the rate at which material is exiting the system. Lead time is the time it takes to move through the system and WIP is the amount of inventory contained between entry and exit. A key assumption is that the material entering the system is proportionate to the amount exiting the system. The basis for this equation is the queuing theory known as Little’s Law.

      It is also worth noting that to maintain flow, inventories cannot be eliminated. Flow requires at least a minimal amount of inventory. Too little inventory disrupts flow and too much inventory also disrupts flow. Thus, when a system is flowing well, inventories will be “right-sized” for that level of flow. What we will find out later is that the placement and composition of inventory queues will be a critical determinant in how well flow is protected and promoted and what “right-sized” really means in terms of quantity and working capital commitment.

      

Expenses. When flow is poor, additional activities and expenses are incurred to correct or augment flow problems. In the short term it could mean expedited freight, overtime, rework, cross-shipping, and unplanned partial ships. In the longer term it could mean additional and redundant resources and third-party capacity and/ or storage. These additional short- and long-term efforts and activities to supplement flow are indicative of an inefficient overall system and directly leads to cash exiting the organization.

      

Cash. When flow is maximized, the material that a company paid for is converted to cash at a relatively quick and consistent rate. Additionally, the expedite-related expenses previously mentioned are minimized, reducing cash unnecessarily leaving the organization. This makes cash flow much easier to manage and predict and will also lead to less borrowing related expenses.

      Furthermore, the concept of flow is also crucial for project management. R&D and innovation efforts that flow well can impact and amplify all of the above benefits as the company exploits these efforts.

      What critical business equation is defined with these six basic benefits? It is an equation that defines and measures the very purpose of every for-profit organization: to protect and grow shareholder equity. This is and always has been the basic responsibility and duty of every executive.

      In its simplest form the equation to quantify this purpose is:

      Net Profit ÷ Investment = Return on Investment

      Net profit is a company’s revenue, which consists of total sales dollars collected through a particular period subtracting the operating expenses, cost of goods sold (COGS), and interest and taxes within that same period. Investment is simply the captured money in the system needed to produce the output. The simplicity of this formula can make it easy to manipulate depending on how one defines time periods, but essentially it is a measure of the money that can

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