The Four Principles of Flow

By: Henry F. Camp

 

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.

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

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.)