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February 1, 2010

Get Dirty with the Data 2: The Need for Good Measures

Let us be clear, in all business operations it is performance that drives cost, not the other way round. To make effective business decisions we must seek first to understand performance and how it drives cost.

 

Cost is a lagging indicator – the outcome of the operation of a process – not a leading indicator. To take cost out of a business process one should not arbitrarily cut headcount or slash expenditure; one should study the performance of the process and work to improve the process in order to maintain (or improve) customer service at lower cost.

 

Every business process – whether manufacturing, service, administrative, chemical or whatever – has a timeline. Let us call this “flow time” (many people call this “lead time”, but it is not always the same thing). It takes a product or service X hours (or X days) to move through the process from start to completion. However, only a percentage of that total flow time is spent actually working on the product or service (let us call that “productive time”). The rest of the time is waiting, checking, reworking, transporting, lying in stock or WIP, setting up, downtime, and so on. It is very common for the “productive time” to be 25% or less of the total “flow time”. The rest of the time is waste: it adds no value for the customer and generates no revenue.

 

Try it for yourself. Take a sample of customer orders (for statistical accuracy you would probably have to take a sample of several hundred orders, but a sample of 25 or so will give you an insight), and work out when each job was initiated and when completed. Calculate the average flow time and the standard deviation. Then track through the process steps involved and estimate the actual processing time (productive time). You may have access to actual data, but a “back of envelope” guess is fine at this stage.

 

What is the difference between the productive time and the flow time ?. Why do your products and services spend so much time in the process not being worked on productively ?. Perhaps it is shift patterns, or working practices, or just “the way things are dome”. It doesn’t matter. The fact is that if you could halve the flow time you could do twice the amount of productive work with the same resources and without having to reduce the actual productive touch time. Assuming that you can sell the extra capacity, this means that you could increase profitability, improve efficiency, and boost customer satisfaction simply by reducing the delays and waste in the process, but without having to pressure people to work faster or harder (just smarter).

 

This means, of course, that it is crucially important to measure “flow” in our business processes, and to identify the factors that impede that flow. Good performance measures are the key. What those indicators might be will be the topic of my next blog.