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Rethinking Supply Chains

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guided presentation on Elucidate that explains the 
problems without it, the opportunities it offers and 
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Case Study: How Replenishing Inventory by Pulling it thru the Supply Chain increases profits


The Four Principles of Flow

A distillation of the core of Eli Goldratt's wonderful article "Standing on the Shoulders of Giants".  I think you will find this simple and powerful, as well as accessible.   By: Henry Fitzhugh Camp  September 8, 2013

  1. 1.      Improving flow is the main objective of a business
  2. 2.      Implement a mechanism to prevent excess inventory[1]
  3. 3.      Eliminate local efficiencies
  4. 4.      Balance the flow

Just implementing 2 can result in an order of magnitude improvement.

The reason we must have 3 is to protect 2.  Without 3 it is impossible that 2 can be sustained, because otherwise somebody will try to do better in terms of a local metric in his or her area, even though no global improvement is gained, and expect (at least cumulatively) to gain compensation for having done so.  If this happens, and it will as long as metrics of local efficiency remain, there is a global loss of productivity as measured by:

Productivity Formula

4 simply means that we must identify which of the many disruptions to flow should be addressed first.  Although conceptually simple, where to focus may not be easy to answer, especially not until 3 is complete.  Moreover, 4 is not less valuable than 2, therefore, deciding which disruption to address first is disproportionally important.

[1] In manufacturing businesses, “excess inventory” is typically caused by over production, more so than by purchasing raw materials too soon.  The opposite is true for distribution companies.

[2] Throughput is the rate at which money is generated by the business (Sales – Totally Variable Costs).  Where Totally Variable Costs are costs of goods sold which must increase with every sale.  As examples, the cost of a raw material, component or finished goods that must be purchased before a sale can be made are Totally Variable Costs; while direct labor to produce goods for sale are not, because labor must normally be paid even if production is interrupted or impaired.

[3] Operating expense is the rate at which money is paid to turn inventory into Throughput.  (Interestingly, as an aside, converting inventory into Throughput, directly or indirectly, is the only good reason for Operating Expense.)

Henry Very nice Let's smoke virtual cigar together!
Rocco -
Hi Henry: While practicing law by day, I earned my MBA at night. However, this is a more concise explanation of issues pertaining to supply chain management than I recall from the textbooks. Back at Brooks, the only topic similar to the one discussed in your blog post was whether contraband would make it to campus by Saturday night. As we are now permitted to drink legally on campus at reunions, I hope to see you this spring for our 40th. Stay well and thanks for this information.
Really impressed with your penchant for writing.
I feel I should voice a warning. The T/OE metric above is a calculation of efficiency. Please don't think I'm implying firing someone to improve OE, so as to increase the fraction's value. Efficiency is an outcome of continued effectiveness. You're about 10 times richer if you own a $1b company with a 1% bottom line than you are if you own a $10m company with a 10% bottom line. The OE you have is usually there to improve profits. Be careful. If you remove it you may remove profits too.
In the book The Goal (Chapter 18), Jonah shows that: " should not balance capacity with demand ... instead balance the flow of product ... with demand from the market." A very basic TOC concept presented by Eli in The Goal 30 years ago (as the first of nine rules that express the relatinship between bottlenecks and non-bottlenecks), and reminding us about it with the Standing on the Shoulders article few years ago. Cheers Henry!
thanks for the interesting read. szs
Stephen Z. Smith -
Hello Henry,

Thanks. I scooped it here: constraints-by-philip-marris

I hope this message finds you well.


Philip Marris -
Good day, Henry Glad to hear from you. I hope that business is well at IDEA.
Chris Nutley -
Henry, Well done. Very concise.
Mario Raia -
Good post, Henry! Hope all is well!
Tim -
Henry: Regarding fewer words - I've always been a fan of 'less is more'. 3 is a struggle getting those in authority to have global metrics rather than local.
Hi Henry, Nice to hear from you!

Read your blog article. I think it is nice to try and put something concisely. At the same time I think you are wrong on some of it. Or at least the words you chose are wrong to express what you believe and understand.

For example: the common interpretation of 'balance flow' (balance, line, balance, plant, etc.) is in direct contradiction with 'eliminate local efficiencies'. Maybe what you meant to say is 'establish a process of perpetual de- bottlenecking'?
But this is not correct either. The correct prescription is 'always maintain a V-profile of capacity around your chosen strategical constraint'.

The above statement also covers your #3 - which can also be misunderstood as is: local efficiency efforts are fantastic when applied to the constraint!

Maybe a better terminology would be 'focus efficiency efforts on the constraint, and kill them elsewhere'. Or - 'first be effective, then look at efficiency'.

Warm regards, Dan
Hi Dan,

Thank you so much for the criticism. Nobody has bothered to provide any before now. I’m finding that I very much appreciate it, quite to the contrary of what I had expected!

I see why you object to “Balance”, because you worry it will be interpreted as “balance the line”. As we both well know, a balanced line is a prescription for interrupted flow, because inevitable variations cause LOSS of flow. But I wrote, “balance the flow” and explained my meaning in the last paragraph to be
paragraph to be observing disruptions to the flow and eliminating the most meaningful first.

You are quite right not to feel comfortable with “perpetual de- bottlenecking.” Mostly what we will do is to reduce replenishment time and decrease the potential for delays.

For those of us who fully believe in TOC, we have the 5 Focusing Steps. However, most of the world is unaware of our jargon. Flow is comprehensible in common parlance and especially to LEAN practitioners.
... I think that is why Eli used it, rather than TOC terms in “Standing on the Shoulders of Giant.” By the way, I attach a link to Eli’s video from 4 years ago from which I distilled my blog.

Search on YouTube for "Goldratt standing on shoulders of giants"

I had another goal with my blog. I wanted to generalize Eli’s article on manufacturing to include supply chains.

Thiinnkg like that shows an expert's touch
Nyvaeh -
Good job Henry – hope all is well.
Henry, Good stuff. How are you doing? WB
Very helpful. Thanks!
Hey Henry - Good stuff!

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