The Theory of Chains

Starring:
The Chain as “itself”

The Theory of Chains

The Theory of Chains
Some (possibly overly simplistic but hopefully not too
condescending) stories to help us think
about what we are here for…

Part 1
The fable of the two mules


Let’s start with the famous fable of two mules who were
tied together.


They each wanted grass, but neither could get any because
they were pulling in opposite directions.


They pulled...


They pulled... And pulled...


What were they doing wrong? What is the solution?


The answer is obvious!


They need to try harder!


They need to be more efficient!


For anyone who doesn’t know
this story...
The moral is that co-operation is
better than struggle.


For anyone who doesn’t know
this story...
The moral is that co-operation is
better than struggle.

But that’s not my moral...

Part II
Efficiency vs. Effectiveness

Efficiency

This is an efficient light bulb!

Effectiveness

Effectiveness is about the direction, not the speed!

Efficient

Ineffective

Effective

Inefficient
A helpful and un-ironic four-quadrant diagram

Efficient

Die Slowly
Ineffective

Effective

Die Quickly
Inefficient

Efficient

Die Slowly

Thrive

Ineffective

Effective

Die Quickly

Survive

Inefficient


“Efficiency is doing things right; effectiveness is doing the
right things.”
“There is surely nothing quite so useless as doing with
great efficiency what should not be done at all.”

“The most serious mistakes are not being made as a result
of wrong answers. The true dangerous thing is asking the
wrong question.”
-- Peter Drucker.

The chain

Can you see a problem with this chain?

The chain

Give up? The answer is...

The chain

The links are wasting metal and
heavier than they need to be.

The chain

I reduced my
diameter by
2mm

I replaced my
steel with
aluminium

A more efficient chain!

The chain

I reduced my
diameter by
2mm

I replaced my
steel with
aluminium

Time for the first
overly-simplistic
business analogy....

The chain

Finance

Sales

???

Fulfilment

IT

The chain

We were
15%
more
efficient

We
saved
£100K

Finance

Sales

???

Fulfilment

A more efficient business!

We cut
costs by
10%

IT

The chain

I’ll lend you
some of my
metal
Me too!

Help the weakest link get stronger.

The chain

I’ll lend you
some of my
metal
Me too!

Help the weakest link get stronger.
There is no point making other links efficient
until the weakest link is strengthened..

The chain

• What is the goal of a chain?

The chain


To be strong

The chain

• Is there always a weakest link?

The chain


Yes!

The chain

• What is the most effective action to take?

The chain

• What is the most effective action to take?
Make the weakest link stronger

The bucket brigade

Meet Mr. Blue.

The bucket brigade

Meet Mr. Blue. And Mr Pink.

The bucket brigade

Meet Mr. Blue. And Mr Pink. And Mr Green.

The bucket brigade

They are forming a human chain – a bucket brigade.

The bucket brigade

Water
input

Water comes in one end....

The bucket brigade

Water
input

Water
output

... And goes out the other.

The bucket brigade

Water
input

But what happens...

Water
output

The bucket brigade

Water
input

... if Mr Blue is faster than Mr Pink?

Water
output

The bucket brigade

Water
input

Water
output

A big puddle coming soon.

... if Mr Blue is faster than Mr Pink?

The bucket brigade

Water
input

And what happens...

Water
output

The bucket brigade

Water
input

... if Mr Green is faster than Mr Pink?

Water
output

The bucket brigade

Water
input

Water
output

Mr Green does a lot of waiting.
He is quite bored now.
Even Twitter has lost its charm.

... if Mr Green is faster than Mr Pink?

The bucket brigade

Water
input

• What is the goal of a bucket brigade?

Water
output

The bucket brigade

Water
input

Water
output

To move as much water as possible in as
little time as possible.
Throughput, not efficiency.

The bucket brigade

Water
input

Water
output

• What (or rather who) determines the throughput?

The bucket brigade

Water
input

Water
output

The slowest person

The bucket brigade

Water
input

Water
output


The bucket brigade

Water
input

Water
output


Yes! There is always a slowest person

The bucket brigade

Water
input

•
•
•
•

Water
output

What is the goal of a bucket brigade?
What (or rather who) determines the throughput?
Is there always a weakest link?
What is the most effective action to take?

The bucket brigade

Water
input

•
•
•
•

Water
output


The bucket brigade

Water
input

•
•
•
•

Water
output

Make the slowest person faster

The bucket brigade

Water
input

Question: Which person never gets a rest?
What happens if he does rest?

Water
output

The bucket brigade

Water
input

Water
output

Question: Which person never gets a rest?
What happens if he does rest?

Hint

The bucket brigade

Water
input

Water
output

Question: Which people always get a chance to be idle?
What happens if you insist that they always keep working?

The bucket brigade

Water
input

Water
output

Hint

Question: Which people always get a chance to be idle?
What happens if you insist that they always keep working?

The bucket brigade

Water
input

Water
output

Part V
What is the goal of a business?

How a business works

Stuff we
buy

Our business

Inventory/Investment

Stuff we
sell

Operating expenses

The goal of a business

Throughput

Goal: Try to
increase this bit

Our business


Operating expenses


Throughput
Our business


Operating expenses

These numbers are related, often in unobvious ways.
Changing one affects all the others. It’s a balancing act!


Throughput
Our business


Operating expenses

Some common metrics to help you relate the numbers and do the balancing act...


Throughput
Our business


Operating expenses


Net profit (NP) = Throughput (T) - Operating expense (OE)


Throughput
Our business


Operating expenses


Return on investment (ROI) = Net profit (NP) ÷ Investment (I)


Throughput
Our business


Operating expenses


Productivity = Throughput (T) ÷ Operating Expense (OE)


Throughput
Our business


Operating expenses


Investment Turns = Throughput (T) ÷ Investment (I)

What if a bucket brigade
was like a business?
Another overly-simplistic
business analogy....

If the bucket brigade were a business...

Water
input

If the bucket brigade were a business, what questions would we ask?

Water
output


Water
input

What is the throughput?

Water
output


Water
input

Water
output

How long does it take a bucket to move through the
system (“flow time”)? a.k.a "latency"


Water
input

Water
output

system (“flow time”)?
What is the current inventory?


Water
input

Water
output

What are the operating expenses?

Real Numbers
Mr Blue can do
2 Buckets/hour

Each worker
costs $12/hour

Mr Pink can do
1 Bucket/hour

Mr Green can do
3 Buckets/hour

Each bucket sells for
a markup of $24

Let’s look at some real numbers!

Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24


$12/hour

3 Buckets/hour

$24

$12/hour

$24

Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

What is the throughput? 1 bucket/hour (Mr Pink is to blame)

Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24


Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

system (“flow time”)? Mr Blue takes 30 min per bucket, and

Mr Green takes 20 min, so it takes a
bucket 1h 50m to go through the system.

Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24


Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

Little’s law: inventory = throughput * flow time.
So inventory = 1 bucket/hour x 1.83 hours => 1.83 buckets

Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

What are the operating expenses?

Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

What are the operating expenses? $12/hour x three people =
$36/hour

Real Numbers

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

Throughput
(buckets/hr)
(money/hr)

Flow
time

Inventory
(buckets)

Opex
(money/hr)

Net Profit
(money/hr)
= T - OE

Inventory
turns
= T/I

1/hr or $24/hr

1h 50m

1.83

$36/hr

-$12/hr

0.54

Here are all the numbers....

Oh noes.... We’re losing money!

Real Numbers
We’re losing money – what should we do?

Real Numbers
Let’s step back and look at the problem...

Real Numbers
Mr Pink is working flat out but look at all the idle people!
Mr Blue is only working ½ time.
And Mr Green is working only a third of the time. Lazy sod!

Real Numbers
Mr Pink is working flat out but look at all the idle people!
Mr Blue is only working ½ time.
And Mr Green is working only a third of the time.

There’s your problem right there!

Real Numbers
What to do?
Option 1: Panic!

Real Numbers
What to do?
Option 1: Panic!
Option 1: Reduce wages or staff (helps with operating expenses)
Especially the lazy ones like Mr Pink...

Real Numbers
What to do?
Option 2: Hire extra people (helps with throughput, maybe?)

Real Numbers
What to do?
Option 2: Hire extra people (helps with throughput, maybe?)

Option 3: Change the process (but how?)

Fixing the problem by reducing staff

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

Let’s start with option 1: “Reduce staff on the non-bottlenecks”
A.k.a. Don’t pay people to be idle.


As it happens, around this time, Mr Blue had
a very unfortunate industrial accident – he
was cut in half.


was cut in half.
Luckily he can still work at 2 buckets/hour,
But since there is only half of him, his average
throughput is now 1 bucket/hr.


was cut in half.
Luckily he can still work at 2 buckets/hour,
But since there is only half of him, his average
throughput is now 1 bucket/hr.
As a result, the cruel capitalists who employ
him have decided to slash his salary in half as
well -- to only $6/hr.


By coincidence Mr Green also had a very
unfortunate industrial accident – he was cut
into one third.


By coincidence Mr Green also had a very
unfortunate industrial accident – he was cut
into one third.
His productivity is only a third now. Just like
Mr Blue, his average is now 1 bucket/hr.
The cruel capitalists have decided to slash his
salary even more -- to only $4/hr.


1 Bucket/hour

$24

$6/hour

1 Bucket/hour

$24

$12/hour

1 Bucket/hour

$24

$4/hour

$24

Here is the new setup.

Mr Blue and Mr Green have been rehired at lower wages,
corresponding to their lower throughput.


1 Bucket/hour

$24

$6/hour

1 Bucket/hour

$24

$12/hour

1 Bucket/hour

$24

$4/hour

What is the throughput? Still 1 bucket/hour

$24


1 Bucket/hour

$24

$6/hour

1 Bucket/hour

$24

$12/hour

1 Bucket/hour

$24

$4/hour

$24

system (“flow time”)? Mr Blue and Mr Green have lower

throughputs, but their latency is still the
same. so the flow time is unchanged at 1h
50min.


1 Bucket/hour

$24

$6/hour

1 Bucket/hour

$24

$12/hour

1 Bucket/hour

$24

$4/hour

$24

Same as before.


1 Bucket/hour

$24

$6/hour

1 Bucket/hour

$24

$12/hour

1 Bucket/hour

$24

$4/hour

$24

What are the operating expenses? $6 + $12 + $4 =
$22/hour


1 Bucket/hour

$24

Throughput
(buckets/hr)
(money/hr)

1/hr or $24/hr

$6/hour

Flow
time

1h 50m

1 Bucket/hour

$24

$12/hour

1 Bucket/hour

$24

$4/hour

Inventory

Opex

Net Profit

(buckets)

(money/hr)

(money/hr)
= T - OE

1.83

Here are the new numbers...

$22/hr

+$2/hr

$24

Inventory
turns
= T/I

0.54

Fixing the problem by adding staff

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

Now try option 2: “Adding extra staff on the bottleneck”
That is -- bring the weakest links up to speed


2 Buckets/hour

$24

$12/hour

3 Buckets/hour

$24

$36/hour

3 Buckets/hour

$24

$12/hour

We’ll hire 2 people to help Mr Pink.

This team’s throughput is now 3 buckets/hour!

$24


2 Buckets/hour

$24

$12/hour

3 Buckets/hour

$24

$36/hour

But now Mr Blue is the bottleneck.

3 Buckets/hour

$24

$12/hour

$24


2 Buckets/hour

$24

$12/hour

3 Buckets/hour

$24

$36/hour

3 Buckets/hour

$24

$12/hour


Luckily he has a half-brother who can help.

$24


2 Buckets/hour

$24

$12/hour

3 Buckets/hour

$24

$36/hour

3 Buckets/hour

$24

$12/hour


Luckily he has a half-brother who can help.
Literally!

$24


3 Buckets/hour

$24

$18/hour

3 Buckets/hour

$24

$36/hour

3 Buckets/hour

$24

$12/hour

$24

Mr Blue’s throughput is now 3 buckets/hour as well.


3 Buckets/hour

$24

Throughput
(buckets/hr)
(money/hr)

3/hr or $72/hr

$18/hour

Flow
time

1h 50m

3 Buckets/hour

$24

$36/hour

3 Buckets/hour

$24

$12/hour

Inventory

Opex

Net Profit

(buckets)

(money/hr)

(money/hr)
= T - OE

5.5

$66/hr

Here are the numbers for this approach.

+$6/hr

$24

Inventory
turns
= T/I

0.54


Moral: Adding staff can be more profitable than
reducing staff – if you know where to add them.
Adding also gives economies of scale, because there
are other fixed costs like buildings, etc., which don’t
need to be scaled at the same rate.


Question:
Under what circumstances can you NOT add staff?



But can we do even better?

Fixing the problem by changing the process

2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

Option 3 is “changing the process”. What does that look like?


2 Buckets/hour

$24

$12/hour

1 Bucket/hour

$24

$12/hour

3 Buckets/hour

$24

$12/hour

$24

What happens if we get rid of the second step in the process
and merge it into the first?


What happens if we get rid of the second step in the process
and merge it into the first?


Mr Blue and Mr Pink now work together on step 1.

Their combined throughput is now 3 buckets/hour.


3 Buckets/hour

$24

$12/hour

$12/hour

3 Buckets/hour

$24

$12/hour

Mr Blue and Mr Pink now work together on step 1.

Their combined throughput is now 3 buckets/hour.

$24


3 Buckets/hour

$24

$12/hour

$12/hour

3 Buckets/hour

$24

$12/hour

What is the throughput? 3 buckets/hour

$24


3 Buckets/hour

$24

$12/hour

$12/hour

3 Buckets/hour

$24

$12/hour

$24

system (“flow time”)? Mr Blue and Mr Pink have a combined

latency of 40 mins so the total flow time
is now 1 hour.


3 Buckets/hour

$24

$12/hour

$12/hour

3 Buckets/hour

$24

$12/hour

$24

Little’s law: inventory = throughput * flow time.
So inventory = 3 bucket/hour x 1 hours => 3 buckets


3 Buckets/hour

$24

$12/hour

$12/hour

3 Buckets/hour

$24

$12/hour

$24

What are the operating expenses? $12 x three = $36/hour


3 Buckets/hour

$24

Throughput
(buckets/hr)
(money/hr)

3/hr or $72/hr

$12/hour

Flow
time

1h

$12/hour

3 Buckets/hour

$24

$12/hour

Inventory

Opex

Net Profit

(buckets)

(money/hr)

(money/hr)
= T - OE

3

$36/hr

+$36/hr

$24

Inventory
turns
= T/I

1

Summary of different approaches

Option

Throughput
(buckets/hr)
(money/hr)

Flow
time

Inventory

Opex

Net Profit

(buckets)

(money/hr)

(money/hr)
= T - OE

Inventory
turns
= T/I

Original

1/hr or £24/hr

1h 50m

1.83

£36/hr

-£12/hr

0.54

Reduce
Staff

1/hr or £24/hr

1h 50m

1.83

£22/hr

+£2/hr

0.54

Increase
Staff

3/hr or £72/hr

1h 50m

5.5

£66/hr

+£6/hr

0.54

Change
Process

3/hr or £72/hr

1h

3

£36/hr

+£36/hr

1.0

Summary of different approaches

Moral: Changing the process can have much greater
impact than just tweaking efficiencies.

What is the goal of IT?

Sales

IT

Supply Chain

What is the most effective action
for IT to take?


Sales

IT

Supply Chain


Sales

IT

Supply Chain

IT should not be a cost centre


Throughput
The business


Operating expenses

IT should add value to the business

What is the goal of your team?


Sales

Your team

Supply Chain

What is the most effective action
for your team to take?


Throughput
The business


Operating expenses

Where can your team add value to the business?

For example, how might an HR team add value?

For example, how might an HR team add value?
How can HR help throughput?
• Reduce purchase costs by hiring or training expert purchasers.
• Better throughput by encouraging employee feedback and
learning.
• Promoting and managing continuous improvement.

How can HR help capex?
- Reduce need for facilities by helping people work remotely.

How can HR help opex?
• Reduce turnover with better working conditions, training,
employee morale.

What next?

“The Goal”
by Eliyahu M. Goldratt & Jeff Cox

And find out about
• Value Streams
• The “Theory Of Chains”
• Lean Enterprise/Lean Accounting
• The Toyota Way

Thank you!
Contact me @ScottWlaschin

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