The Demand Driven Adaptive Enterprise. Carol Ptak
In 2018 a joint study released by APICS and the Institute of Management Accountants named three significant issues regarding costing information that supply chain professionals receive from costing systems.
It is the job of management accounting, which is a different profession with an entirely different body of knowledge than financial cost accounting, to provide meaningful and relevant information for decision making. While the body of knowledge still exists there are few with real deep expertise in it. What happened to all the management accountants? They were essentially stripped out of mid-management in the 1980s because they were deemed largely irrelevant because executives believed that the system could now effectively tell the organization what to do via the automated cost data.
Two important points must be made about cost at this point. First, any measurement based on past activity is guaranteed to be wrong in the future. Assuming that past cost performance will be indicative of future cost performance in the VUCA environment is simply nonsensical.
Second and most importantly, good flow control actually yields the best cost control. If things flow well within a period, the previously described benefits of flow occur during that period. If those previously described benefits happen, then fixed (depending on the length of the period) and variable expenses are effectively controlled in combination with better volume performance. This will be reflected in the GAAP statements produced for that entire past period. Thus, emphasizing flow will actually be more effective even for cost accountants!
This leads us to an interesting yet simple rule about cost and flow, a corollary to Plossl’s Law:
When a business focuses on flow performance, better cost performance will follow. The opposite, however, is not the case.
It should be noted that embracing a flow-based focus is not license or a strategy to overspend on massive amounts of capacity, constantly employ overtime, and expedite everything. That is not a flow-based focus. Those tactics become necessary mainly because a company is not primarily focused on flow.
In Chapter 2 we will dive into this corollary in more depth. At this point, however, the conclusion should be relatively solid: if a business wants to manage cost performance it must first and foremost design and manage to flow performance. The mistake to use GAAP-generated cost numbers and metrics as operational tools is actually a self-imposed limitation by an organization’s management. But what can we use in its place? It has to be something that emphasizes flow now and in the future.
With this flow and systems perspective there are at least two additional corollaries to Plossl’s Law that are worth mentioning at this point:
Something is productive if and only if it leads to better promotion and protection of system flow.
Something is deemed efficient if and only if it leads to better promotion and protection of system flow.
To fundamentally understand how to emphasize flow now and in the future, we must first understand the biggest determinant in the management of flow: the effective management of variability. In Figure 1-7 we see an expanded form of the equation previously introduced. Variability is defined as the summation of the differences between our plan and what actually happens. As variability rises in an environment, flow is directly impeded. Conversely, as variability decreases, flow improves.
FIGURE 1-7 Connecting variability to the flow equation
The impact of variability must be better understood at the systemic rather than the discrete detailed process level. The war on variability that has waged for decades has most often been focused at a discrete process level with little focus or identified impact to the total system; Deming would not be pleased. Variability at a local level in and of itself does not necessarily impede system flow. What impedes system flow is the accumulation and amplification of variability across a system. Accumulation and amplification happens due to the nature of the system, the manner in which the discrete areas and environment interact (or fail to interact) with each other. Remember the three characteristics of complex systems: nonlinearity, extreme sensitivity to small initiating events, and a disproportion between cause and effect. Smith and Smith proposed the Law of System Variability.
The more that variability is passed between discrete areas, steps or processes in a system, the less productive that system will be; the more areas, steps or processes and connections between them, the more erosive the effect to system productivity.13
Quite simply, Figure 1-7 says that when things don’t go according to plan, flow is directly impacted. Is this really surprising? Methods like Six Sigma, lean and Theory of Constraints have recognized the need to control variability for decades. Unfortunately, many of those methods point to or get focused on limited components or subsystems of an organization or supply chain. Most of them attempt to compensate for variability after a plan has been developed and implemented (a plan that is typically built utilizing a design that assumes everything will go according to plan—an extremely poor assumption).
The Rise of VUCA
The world is a much different place today than it was 50 years ago, when the conventional operational rules and systems were developed. Figure 1-8 is a list of some dramatic changes in supply chain–related circumstances that have occurred since 1965.
FIGURE 1-8 Supply chain circumstances in 1965 versus today
The circumstances under which Orlicky and his cadre developed the rules behind MRP and surrounding techniques have dramatically changed. Customer tolerance times have shrunk dramatically, driven by low informational and transactional friction largely due to the Internet. Customers can now easily find what they want at a price they are willing to pay for it and get it in a short period of time.
Ironically, much of this complexity is largely self-induced in the face of these shorter customer tolerance times. Most companies have made strategic decisions that have directly made it much harder for them to effectively do business. Product variety has risen dramatically. Supply chains have extended around the world driven by low cost sourcing. Product complexity has risen. Outsourcing is more prevalent. Product life and development cycles have reduced.
This has served to create a huge disconnect between customer expectations and the reality of what it takes to fulfill those expectations reliably and consistently. This will not get better any time soon. The proliferation of quicker delivery methods such as drones will simply serve to widen the disparity between customer tolerance time and the procurement, manufacturing,