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Few performance standards deliver the competitive advantage you gain by keeping your promise to deliver on time, doing so faster than your competitors, and suffering no defects while you’re about it.
[ Listen to the audio version, read by David Hodes]
When we exclude the big three financial numbers of Throughput, Operating Expense and Investment, three operational measures stand head and shoulders above all others:
Due Date Performance (DDP) – how good we are at keeping our promise
Lead Time (LT) – how long it takes to get specified work done
Quality (Q) – how much rework must be done to eliminate defects
Let’s deal with each of these in turn and explore why they are so important.
Due Date Performance: No matter your line of business, the ability to deliver on your promise is a sign of integrity. It doesn’t matter whether the promise is internal to a downstream function, external to an expectant customer, or even just turning up on time for your colleagues. Doing what you say you will do, when you said you would, builds trust and is a basis for delivering value—even when you’re the Prime Minister of Australia.
I once was on a project where every effort was made to improve DDP for the delivery of iron ore. Why, I asked, was it so important to be so committed to being on time for what is, after all, a mere commodity? The marketing manager explained that if they were very reliable in delivering on time, the mills they supplied would feel more comfortable reducing the amount of ‘just in case’ inventory they would have to carry in the event a shipment missed its promised date.
Carrying less inventory had a real financial impact in terms of how much cash was tied up and how much space was needed for storage. So much so, that the marketing manager significantly incentivised his team for the price they got above the daily traded price, encouraging them to make the case to the buyer of their commodity.
In another case, at a refinery, a prime measure for maintenance work is ‘schedule adherence on the day’. Much of the maintenance work done in the refinery is done after carefully coordinating the activities of operations, contractors, supervisors, shared services, materials and equipment. If anyone is delayed, then everyone is delayed, and costs and volumes suffer.
For airlines, the industry standard is On Time Performance (OTP). For me, I would rather that my flight left and arrived on time more than any other aspect of how I would value the experience. So important is on-time performance that the Australian Department of Transport makes these figures available publicly.
In supply chains, we sometimes call due date performance by the acronyms OTIF or DIFOT—that is, On Time In Full, or Delivered In Full On Time. It is as important to measure the inbound due date performance as it is to know how you are performing in your delivery to promise to your customers. Let’s say you need five different suppliers to deliver your product or service to your customers. Each supplier promises 95% on-time delivery. As a consequence of covariance, though, the probability of having all suppliers line up so you can hit your own due date drops from 95% to a lowly 77%. The consequences of such poor performance could be additional costs of having to hold just-in-case inventory, expediting costs, reputational loss and even loss of customers whose own supply chains and reputations have been damaged by your poor performance.
For project management, due date performance is at least equal in importance to any other type of business activity, and often even more so. Many projects have significant operating costs associated with each day they run late. But, probably more importantly, being late means you could miss a critical integration milestone, a practical completion for handover, or a window for the launch of a new product. I was once working with a consumer appliance company’s new product development department. Any product shipped late for Christmas would have to wait five months until Mother’s Day before the opportunity for launch came around again. The costs in lost revenue, advertising penalties from the big retailers, and inventory holdings were enormous for every product that didn’t make it on time, in full.
Lead Time: How long does it take to deliver your service, product or project? The longer your lead times, the less responsive you are to changing market demands, and the higher your inventories and work in process. Furthermore, the longer your lead times, the bigger the penalty you place on your internal or external customers for having to work with you. By contrast, who wouldn’t want to change their mind in response to market conditions and work with suppliers capable of turning on that dime? If you can be that agile when your competitors cannot, that’s a source of competitive strength and enduring loyalty.
To properly understand lead time, we need to break it up into its components and see the end-to-end cycle from intention to delivery.
In supply chains, we measure the order lead time as the part of overall lead time accounting for the delay in turning a sale signal into a committed order. Imagine if you buy a bar of chocolate in a supermarket, and for that very bar, a purchase order is immediately raised on the supplier. It doesn’t have to wait for the fortnightly sales and operations planning meeting before collating a big batch of orders to place on the supplier. You’ve just saved yourself two weeks of order lead time, and thus reduced your overall lead time by those two weeks.
Next up, you might wait at the factory until you have a big enough collection of orders to run a big enough production batch to maintain low unit costs. This production lead time is another component of the overall lead time. Consider the trade-off between minimising unit production costs and delivering extraordinary agility from small batches and quick turnarounds. The implication for your customers is for them to meet their needs without having to invest in excess inventory. This feature of your offering could easily be converted into a higher price.
And of course, there’s always the temptation to wait until the truck or ship is full before you transport your goods. This transport lead time can also be reduced, giving the same potential benefits as all the other components of lead time. Ship smaller batches more frequently and think carefully about the trade-offs for throughput, cost and inventory—for both you and your customers.
“What prevents me from delivering my work in zero lead time?”
The same principles of lead time reduction apply in the world of projects. The faster we deliver, the less is invested in work in process, the less money we burn on project resources and the sooner benefits are realised. The quicker we can get to the toll gates, the quicker we can get to the end of the project. A delay in any phase could put the whole project in significant jeopardy. I recently witnessed a major project delayed by one month because it wasn’t ready for the investment review committee. The consequence was an entirely avoidable delay of an entire rainy season lasting six months.
Lead time can also be a lever for differentiated pricing. A simple example is an airline seat booking. Although the costs of carrying you are the same whenever you make your reservation, most airlines have differentiated pricing, depending on the lead time to departure. There are often commercial situations where the market has an expectation of lead time, and the price competition for delivering to that market-based expectation is quite ferocious. However, imagine if you had the means to offer your product or service at 60% of the industry norm for lead time—say, six weeks instead of ten? In many cases, you would be able to charge more for that expedited service based on your customer’s need to include it in their offer. After all, why not profit from their poor planning?
The whole idea of the Theory of Constraints is that we should always ask the seemingly absurd question: ‘What prevents me from delivering my work in zero lead time?’ Once we know the answer to that question, we are ready to understand the trade-offs between time and money. And, as we know, time is money and money time.
Quality: Dr W Edwards Deming made quality famous in the west with his System of Profound Knowledge. He is quoted as saying that ‘quality is pride of workmanship’. It’s the kind of pride that made Steve Jobs have the Macintosh team sign their names into the inside cover of the computer, knowing there was no way even a technician would get in there to see it. In a sense, their spirit of quality was etched into the product without anyone being able to see it.
“You cannot ‘quality check’ your way out of a bad system of quality management.”
For me, the simplest way of thinking about quality is to measure how much rework needs to be done. A badly made product must either be replaced with a new one or sent back to get fixed. Think of the cost in terms of customer frustration, let alone the tangible material and labour costs.
Deming taught us that the ultimate guarantee of quality is a function of the design of the system used to produce the product or service. He noted that you cannot ‘quality check’ your way out of a bad system of quality management.
That’s not to say that every product or service has to be of the very highest quality, in the sense that we might say it’s ‘the Rolls Royce’ of its type. In the same way we have a concept of just in time, we can also profitably have a concept of ‘just on quality’. This idea could be misconstrued to mean that a product or service is just good enough to get away with its otherwise inherent flaws. But this is not the case. Just on quality means that it is fit for purpose in its intended use, and one should avoid ‘gold plating’ when the additional effort delivers nothing beyond what the customer is willing to pay for.
Due Date Performance, Lead Time and Quality—three critical measures that can make a world of difference to your ability to deliver more throughput at a lower operating expense and off lower investment.
The change to using Theory of Constraints (TOC) as an underlying operating system is both profound and exhilarating. We’ve developed the Systems Thinker Course to bring the ideas into your organisation.
[Background image: Three Telephones by Pavan Trikutam on Unsplash]
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