VELOCITY - DEE JACOB [136]
“I would never say that we have nothing to worry about,” said Elaine. “But I am seeing real improvement on the operating side. Everything you told Winner is taking place.”
“I might mention here, since we’re touching on finance,” said Murphy, “that there are three measurements that come from TOC that have served me well in my own thinking about money: throughput; investment, including inventory; and operating expense.”
“And you want to increase throughput, while reducing in a relative sense the investment and inventory, and obviously operating expense,” Wayne Reese inserted, wanting to show that he was on board. “I’ve been doing a little reading, doing my homework.”
“Well!” said Amy with a sweep of her hand. “Please continue!”
Wayne turned to Murphy, as if deferring, and said, “I don’t want to steal your thunder.”
“It is not my thunder to steal, sir. This has been around for a while. I just apply it.”
“All right … feeling like a student at an oral exam,” said Wayne, “throughput is the rate at which inventory is converted into completed sales – cash, in other words. Investment and inventory – and of course inventory is a shorter-term investment – is the money that has purchased both the means of production and whatever is to be sold from that production. And operating expense is the money spent to make the system work.
Wayne stood, went to the whiteboard, took a marker, and wrote some letters and arrows.
“So, over time, we want throughput – T – to be increasing, while capital investment and inventory – I – and operating expense – OE – are declining in a relative sense.”
“In other words,” Sarah said, getting the gist of it, “if we’re converting sales orders into paid receipts faster and faster, and operating expenses and investment and inventory stay the same, then I and OE are lower and T is higher relative to each other.”
“But how can inventory be lower if sales are going higher?” asked Elaine.
“We’re talking about inventory held within the system,” said Wayne. “It’s moving through faster, but the amount held is lower, because we’ve ‘leaned’ it to only what is required. We’re buying raw materials based on demand patterns and time to reliably replenish.”
“So as a business,” Amy said, “the goal is to make the most, the quickest, with the least.”
“Yes, ma’am, that’s the idea,” said Murphy. “The most money by the quickest path with the least investment.”
“Basic capitalism,” said Wayne.
“But I do use that general concept whenever I evaluate the choices of a major decision,” said Murphy. “I think about what the effect of the decision will be on T, I, and OE. If I increase investment and it does not proportionally increase throughput or reduce operating expense, then that’s a bad decision. Likewise, for example, if I increase operating expense by hiring more workers or whatever and the result is a large gain in throughput – more sales with faster turnover of inventory – then that’s a good decision.”
“All right then, by those measures, how are we doing so far?” asked Amy. “It seems to me we’ve improved.”
“Definitely,” said Wayne. “Throughput is increasing because we’re shipping on time and getting paid faster. Inventory is lower because we’ve been working off WIP. And expenses are down due to, among other things, less overtime – as well as fewer mistakes and less scrap, if I may put in a plug for Lean.”
“Well, that’s great,” said Amy. “However, I know that Nigel Furst will always want more. And I certainly think that we can do better, that there are more than ample opportunities for improvement.”
“I think we would all agree with that,” said Wayne.
There was general assent around the table, with Sarah adding, “It’s been a good start, but we really need a few more policy injections onto that logic tree we’ve created.”
“How well is the priority system working?” Amy asked her. “Are the analysts doing the design reviews the way they’re supposed to?”
“We still have some issues,” said Sarah, “but basically the priority system has been doing pretty well. Some of the analysts