Thursday, August 2, 2012

Eight Erroneous Paradigms for Operations Management

Courtesy of Theory of Constraints guru Martin Powell, here's the list:

1.    A resource standing idle is a major waste
2.    Efficiencies are the best guide of performance and profitability
3.    Leads times are a given
4.    Reducing set ups reduces costs
5.    Process batch = transfer batch
6.    Everybody needs to be an expeditor
7.    Flow depends mainly on physical layout
8.    Taking orders within the normal lead time increases profitability (i.e. expedited orders are worth it)

 For anyone familiar with Theory of Constraints, first developed by Eli Goldratt, most of this list will be obvious. Perhaps the last one needs a bit more discussion. We can charge more for those 'rush' orders. We think the costs are the same because no more labor time is incurred for that order as a rush than it would have been as a regular order. Maybe some costs are higher if overtime is incurred, but that's part of the expedite fee, right? However, what we fail to consider is the disruption to the flow of the other orders, the extra confusion and the 'traffic jams' created when the rush order jumps ahead of line creating a pile of WIP in front of a bottleneck. To understand this, think about traffic in a big city. If everyone is traveling along at a steady pace, traffic moves smoothly like it does outside of 'rush' hour. Through some more cars in the mix, going at different speeds, especially one car changing lanes frequently, running up on someone else and putting on the brakes. The brake lights cause others to put their lights on, back off the speeder's bumper and now we have a jam. Expedited orders do the same. They cause a pile-up and cause other orders to slow down.

The effect is that some orders are late. Doesn't that cost you something as some customers are disappointed, frustrated, angry, less likely to have repeat business with you, etc.?

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