Tuesday, October 28, 2014

Focus and Leverage Part 387

I finished my last posting (Part 386) by telling you that I would post Debra and Chad's Current Reality Tree (CRD) on their fictitious company.  I want to make it clear that the authors did not refer to the figure below as a CRT, but in reality it is what it is.  Let me remind you that the CRT is read from the bottom up using sufficiency based logic (i.e. interconnected "if" - "then" statements) with the tail of the arrow being the "if" and the tip of the arrow being the "then."  The ellipse shape connecting the arrows is the logical "and," implying both conditions must exist to result in the effect at the tip of the arrow.  Either condition by itself is not sufficient to create the effect.  So let's now look at how Debra and Chad explained this CRT-like logic structure.  I won't go through all of the "if" - "then" statements that Debra and Chad presented in their book, but I will write some of them so that those of you not familiar with CRT's will get a basic idea of how they work.  I encourage everyone to get a copy of Debra and Chad's book to get the full details of the CRT.

  • "If" a key plant metric is to maximize their cost of goods sold dollar credit (the plant receives a credit value of the product unit cost for every product produced) "and" people behave according to their metrics, "then" plants try to maximize making high CoGs dollar products (products with high unit cost).
  • "If" plants try to maximize making high CoGs dollar products, "and" some items have more CoGs dollars than others, "then" departments tend to prioritize producing the high CoGs items at the expense of the low items (e.g., cherry-pick orders based upon CoGs dollar value).
  • "If" departments tend to prioritize producing the high "CoGs" dollar items at the expense of the low items (e.g. cherry-pick orders based upon CoGs dollar value), "then" some make-to-stock products are over-stocked.
  • "if" some make-to-stock products are over-stocked and there is common labor and machine resources, "then" capacity is consumed unnecessarily.
  • "If" capacity is consumed unnecessarily, and plants feel pressure to expedite late work, "then" capacity is not always available when needed.
  • "If" capacity is not always available when needed, "then" we feel pressure to add capacity and we feel pressure to use overtime.
With this first leg of the CRT completed we see that we have reached two of the undesirable effects (UDEs) that the plant is facing (shaded areas at the top).  These UDEs are not what we want to have happening.

Using the same logic, I encourage everyone to complete the "If" - "then" connections for the entire CRT.  The CRT connections show the plant's actions to meet their planned absorption rate measure.  CoGs credit in the diagram become the negative effects (shaded boxes I the middle of the diagram).  They are then forced to take firefighting actions when they feel pressure to meet their other other KPI of maximizing due date performance.  The authors ask this question, "What is the predictable effect of the actions taken to meet customer's delivery due dates and their fill rates for make-to-stock products?"  At the top of the diagram we see what is happening to all of the key performance indicators of ROI.......they are going the wrong way together.  That is, On Time Delivery is decreasing, Inventory is Increasing; Lead Time is Increasing; Cost is increasing; and Revenue is Decreasing.  As the authors point out, the actions taken to meet their absorption cost measures, actually light the fires they end up fighting with the actions necessary to try to meet their customer service measures:
  • The plant is forced into taking actions that oscillate between attempting to meet the target efficiency/plant performance measure and then scrambling to recover their on-time delivery to their customers.
  • The sales manager is forced into taking actions to reduce prices and run extra promotions to compensate for the poor service levels.
  • The engineering manager is forced into justifying capital improvements that will increase individual batch sizes and make the inventory, service levels, and expedite costs even worse.
The bottom line is this oscillation of cost-and service-centric behavior creates tremendous resource and spending waste, erodes due date performance, and increases investment.  ROI goes in the wrong direction.
The authors explain that if the above scenario looks and sounds familiar, it is because the same meeting takes place within supply chains around the world.  They authors continue, "The same list or some variant of this list is in every organization, even those considered best in class and top performers."  The bottom line is, if companies continue to operate under the cost-centric world of "push and promote" to run their businesses, these problems will continue to happen.  But when companies begin operating under the flow-centric world of "position and pull," amazing things begin to happen.  Debra and Chad lay out four different companies who have changed their approach from being cost centric to being flow centric and the results achieved by all four companies are dramatic.

There are many other valuable insights into the Demand Driven Performance methodology that Debra and Chad have written about in their book.  Things like decoupling points and control points that truly impact the success of your business.  So much so that I could have gone on and on with blog postings on all of these subjects.  My advice to all......go buy Debra and Chad Smith's book, Demand Driven Performance Using Smart Metrics!  You will thank me later, but most of all, you'll thank Debra and Chad!!
Bob Sproull

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