Underlying the operations of every company is its value delivery system. It is the central processing unit of the entire company. For example, what does it take for a computer manufacturer to receive an order, process the order, produce the computer, deliver it, and collect payment? What are all the steps that a mortgage company goes through in processing a mortgage application and delivering a timely and accurate loan decision? How does Toyota design a new vehicle made up of thousands of component parts, manage the daily flow of orders and shipments with suppliers and assembly plants? Each business operation is different, but all of them share one common trait: all are systems for creating customer value—value delivery systems.
A company’s performance is the direct consequence of how effective the system is managed. Companies
that operate more efficiently and responsively than their competitors have better managed value delivery systems. Many company value delivery systems perform poorly because of time traps. One of the most formidable time traps is the planning loop.
The Planning Loop Trap
A fundamental test of the quality of a company’s value-delivery system is whether it is caught in the planning loop. All businesses must do some sort of planning for the future to ensure they are ready to fulfill customer orders. Manufacturers are challenged by the need to order raw material, schedule facilities, and add labor, and so on. Traditional manufacturing requires long lead times to settle conflicts between various jobs or activities that require the same resources. The long lead times, in turn, requires sales forecasts to guide planning. Because sales forecasts are predictions, they are inevitably wrong, however well intentioned. Naturally, as lead times increase, the accuracy of the sales forecasts deteriorates. With more forecasting errors, the need for safety stocks and excess capacity at every level increase, and inventories swell. Forecasting errors also mean more unscheduled jobs must be expedited, thereby squeezing out scheduled jobs. The need for even longer lead times become greater, and the planning loop expands—driving up costs, increasing delays, and creating inefficiencies in the value-delivery system.
Managers trapped in the planning loop often react by asking for better forecasts and longer lead times. However, this is treating the symptom rather than the cause of the problem. The only way to break the planning loop is to think Lean and reduce the time wasted activities throughout the value-delivery system, thus reducing the need for lead times. After all, if you could drive lead times down to zero, you would only have to forecast sales one day in advance. The forward-thinking companies understand this concept and are breaking the devastating loop that strangles much of traditional manufacturing and non-manufacturing organizations.
While lead times of zero is idealistic successful Lean organizations have at a minimum kept their lead times from increasing and many have reduced them, thereby lessening the planning loop’s damaging effect.
Escape from the Planning Loop Trap
To escape from the planning loop companies, have two choices.
- Produce to forecast and ignore the fluctuations in demand that would cause them to do otherwise.
- Reduce the time delays in the flow of information and product throughout the value stream.
The real solution is to reduce the consumption of time throughout your value-streams to become more flexible. Flexible factories consume significantly less time than traditional managed factories. The improvement in response time from being more flexible is even more impressive than in the improvement in the productivity of labor and costs. Many companies have dramatically improved their manufacturing response times by streamlining their processes and becoming more flexible.
Consider this example of one of Toyota’s suppliers. A Toyota supplier had a lead time of 15 days to ship parts to a Toyota assembly plant. Dissatisfied with this level of response to its changing needs, Toyota went to work to help the supplier reduce its lead time. By reducing lot sizes, they cut the supplier’s lead time to six days. After streamlining the factory layout to reduce much of the work-in-process inventory, the lead time fell to three days. Finally, the elimination of all work-in-process inventories resulted in the supplier being able to respond to Toyota with only a one-day notice.
Companies can become more flexible (reducing wasted time) by applying the basic principles of Lean thinking.
The planning loop trap is the relationship between forecasting errors and long lead times. Changes in customer demand results in forecast errors which impacts the lead times in a traditional manufacturing environment. As the forecasting errors grow inventories increase; more unscheduled jobs are expedited squeezing out the scheduled jobs. Forecasting errors also increases the need for even longer lead times, and the planning loop swells—driving up costs, increasing delays, and creating inefficiencies in the value-delivery system.
You can overcome the planning loop trap by utilizing lean tools and techniques to produce at the rate of customer demand and enjoy the following benefits:
- Dramatic reduction in inventories
- Reduced operating costs
- Reduction in delays
- Improved customer response time
- Improved efficiency
The planning loop is a time trap. Lean thinking forces you to look at this time trap and develop solutions to eliminate the trap and never get caught in it again.
Willie L. Carter is the president of Quantum Associates, Inc. He helps management unlock the full promise, energy and speed of their processes. Carter is a Certified Lean Sensei, a Certified Manager of Quality/Organizational Excellence, an experienced facilitator, coach, and author of the book, “Process Improvement for Administrative Departments: The Key to Achieving Internal Customer Satisfaction.” His company Quantum Associates, Inc helps executives improve their processes to unleash organizational velocity creating a faster enterprise.