The importance of “Flow” – that is, the unimpeded flow of work through operations – crops up again and again in our work – you may have seen previous posts on the topic on this blog. Dr. Alan Barnard, CEO of Goldratt Research Labs, dedicated an interesting presentation1 to this concept at the most recent TOCICO conference in September 20152.
His ideas are rooted in the Four Concepts of Flow by Dr. Eliyahu Goldratt, which we will introduce later. Dr. Barnard posits that they may be too restrictive to cover all possible circumstances and asks: how can we expand them to ensure every organization will implement the best changes for improving flow most effectively.
A Balance between Supply and Demand
We find that most businesses tend to stumble when supply and demand become significantly out of balance, and frequently fail to recover for months or even years. How come? We find the answer by applying Little‘s Law to the production environment:
Work-in-Process (WIP) = Flow Rate x Flow Time
in other words:
Flow Rate (Throughput) = WIP / Flow Time
An increase in demand in the market – even just a temporary one – that supply cannot keep up with will result in higher work in process and longer lead times. The business, with the same capacities, will be unable to close this gap even once demand has leveled down. The same is true if supply falls for a short time and is unable to keep up with “normal” demand.
Own graph, based on Alan Barnard, Cumulative Flow Diagrams3
Here we can also see the rule of Antifragility in action: a fragile system suffers more from negative circumstances than it gains from positive ones. We can conclude that demand and supply need to be balanced for the business to be able to survive in the market long term. This is the most effective way of avoiding the typical problems such as delivery delays, backlogs, unreliability and quality issues. But how can we achieve this?
There are three possible approaches, as Dr. Barnard explains:
1. Reducing complexity and uncertainty
2. Reducing demand (and demand variation)
3. Increasing capacity by reducing flow time
So which of these is the most efficient? At this point it is worth taking a step back and looking at the history of production, and how Dr. Goldratt came to his Four Concepts of Flow.
The Four Concepts of Flow by Dr. Eli Goldratt
In his seminal article Standing on the Shoulders of Giants, Dr. Goldratt hypothesized that reducing losses in flow was the fastest and most effective way to close the gap between supply and demand. He came to this conclusion by way of a thorough analysis of the Ford-Methode and the Toyota Produktionssystem developed by Taiichi Ohno.
The main cause of losses in flow time is typically overproduction, a fact that was recognized early on. Henry Ford used space as a prevention mechanism against this: I will stop producing when I run out of space to store my item behind my work station. This system works well if you produce only one finished product (e.g. one car model), but collapses as soon as there is a more diverse product line. This inspired Ohno to use inventory instead and develop Kanban boards: the ‘size’ of the board (and thus the number of each item to be produced) is determined by demand and production time: how many do I have to produce in order to cover demand during the timeframe it takes to replenish.
Goldratt recognized that this system too eventually reaches its limit. Once you reach a certain amount of different products, the Kanbans can no longer reliably predict what will be used (sold) and what won’t be: the result is, yet again, overproduction of some parts and underproduction of others. The only remaining mechanism to control work (flow) on the factory floor is time: I will only start production at the appropriate time before the due date. To absorb uncertainty, I will use an aggregated time buffer. Buffer penetration can then also be used to manage priorities (cf. buffer management)
This simple discovery led to the Four Concepts of Flow:
1. Flow is the primary objective of operations.
2. This primary objective should be translated into a practical mechanism that guides the operation when not to produce (prevents overproduction).
3. Local efficiencies must be abolished.
4. A focusing process to balance flow must be in place.
The three part series The Importance of Flow discusses these concepts in more detail and is a great introduction before embarking on part II of our current article series, where Dr. Barnard will question the validity of the four concepts of Flow: do they really apply to every possible situation? Where do they fall short and how can they be improved?
1: Barnard and Malykhanov: Improving effectiveness and efficiency of FLOW within any environment, slide 12
2: Dr Eliyahu Goldratt, Standing on the Shoulders of Giants, p. 3 http://www.goldrattconsulting.com/webfiles/fck/files/Standing-on-the-Shoulders-of-Giants.pdf
3: Dr. Alan Barnard und Dr. Andrey Malykhanov: Improving effectiveness and efficiency of FLOW within any environment… What (decision rules) can make the difference?, TOCICO 2015