Reinertsen Agile Day Atlanta Intro to SGLPD 5-8-2015

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Second Generation
Lean Product Development
Agile Day Atlanta
Atlanta, GA
May 8, 2015
Donald G. Reinertsen
Reinertsen & Associates
600 Via Monte D’Oro
Redondo Beach, CA 90277 U.S.A.
(310)-373-5332
Internet: Don@ReinertsenAssociates.com
Twitter: @dreinertsen
www.ReinertsenAssociates.com

2Copyright 2015, Reinertsen & Associates
Seven Big Ideas of 2GLPD
1. Understand your economics.
2. Manage your queues.
3. Exploit variability.
4. Enable smaller batches.
5. Control WIP and start rates.
6. Prioritize based on economics.
7. Accelerate feedback.

1. Understand Your Economics
• In product development all difficult
decisions involve multiple variables.
• Making decisions that affect multiple
variables requires quantification.
• Doing such quantification, to a useful
level of accuracy, is surprisingly easy.

Should we operate our testing process
at 80 percent utilization with a 2 week
queue, or at 90 percent utilization with
a 4 week queue?
A Typical Question

Making Economic Decisions
Waste
Cycle Time
Variability
Efficiency
Unit Cost
Value-Added
Revenue
Life Cycle
Profits
Economic SpaceProxy Variable Space
Transformations

The Modeling Process
Create Baseline Model
Determine Total Profit Impact of Missing a MOP
Calculate Sensitivity Factors
Model
Expense
Overrun
Model
Schedule
Delay
Model
Value
Shortfall
Model
Cost
Overrun
Model
Risk
Change

The Model Output
Life-Cycle Profit Impact
-$80,000
-$500,000
-$100,000
-$150,000
-$40,000
1 Percent
Expense
Overrun
1 Percent
Product Cost
Overrun
1 Percent Value
Shortfall 1 Month Delay
1 Percent
Increase in Risk

Range of Cost of Delay Estimates
Poor Intuition
Average Intuition
Best Case Intuition
Average Analysis
Quality Analysis
Any Analysis Beats Intuition
200:1
50:1
10:1
2:1
1.2:1
Source: Reinertsen & Associates Clients

Managing Weight vs. Product Cost
Engineer Supervisor Program
Manager
Boeing 777 Weight Reduction
Decision Authority
$300
$2,500
$600
Dollars
per Pound

2. Manage Your Queues
• Many product developers assume higher
utilization leads to faster development.
• They neither measure nor manage the
invisible queues in their process.
• Consequently, they underestimate the true
cost of overloading their processes.
• Such overloads severely hurt all aspects
of development performance.

Traffic at rush hour
illustrates the classic
characteristics of a
queueing system.
PhotoCopyright2000Comstock,Inc.

The Effect of Capacity Utilization
Queue Size vs. Capacity Utilization
0
5
10
15
20
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Capacity Utilization
QueueSize
Notes: Assumes M/M/1/ Queue,  = Capacity Utilization




1
2
qL

Total Cost
Cost of Delay
Cost of Excess Capacity
Managing Queues
Excess Product Development Resource
Dollars
Minimize Total Cost to
Maximize Profits

Longer Cycle Time
Lower Quality
More Variability
Increased Risk
More Overhead
Less Motivation
Queues Create...
Why Queues Matter
Managing Queues is the
key to improving product
development economics.

3. Exploit Variability
• In manufacturing it is always desirable to reduce
variability.
• In product development eliminating variability
eliminates innovation.
• We must understand the specific conditions that
make variability valuable and manage our
process to create these conditions.
• We need development processes that function in
the presence of variability.

Payoff vs. Price
Price
Payoff
Expected Price
Price
Probabilty
Asymmetric Payoffs and Option Pricing
Strike
Price
Expected Payoff
Price
Expected
Payoff
Strike
Price
x
=

Higher Variability Raises This Payoff
Price
Expected
Payoff
Payoff SD=15 Payoff SD=5
Option Price = 2, Strike Price = 50,
Mean Price = 50, Standard Deviation = 5 and 15
Strike
Price

4. Enable Smaller Batches
• When work products are invisible, batch sizes are
invisible.
• When batch sizes are invisible, product developers
pay little attention to them.
• Many companies institutionalize large batch sizes.
• Batch size reduction is attractive because it is fast,
easy, cheap, granular, leveraged, and reversible.
• It is a great starting point for LPD.
Batch Size Queues Cycle Time
X 0.5 X 0.5 X 0.5

Small BatchesLarge Batch
Unreviewed Drawings
Drawing Review Process
200
20
10 Weeks 1 Week

Small BatchesLarge Batch
Unreviewed Drawings
Drawing Arrival Rate
200
20
10 Weeks 1 Week
Who’s First?
Who’s Last?

Cheaper
Correction
Cheaper
Debug
Lower Cost
Changes
Better
Economics
Fewer Status
Reports
Faster Cycle
Time
Early
Feedback
Faster Learning
Less Requirements
Change
Less Debug
Complexity
More Efficient
Debug
Cheaper
Testing
Less Non-
Value-
Added
Better
Code
Fewer
Open
Bugs
More Uptime
Higher Validity
Smaller
Changes
Benefits of Small Batch Testing

Setting Batch Size
Economic Batch Size
0
5
10
15
20
25
1 2 3 4 5 6 7 8 9 10
Items per Batch
Cost
Transaction Cost Holding Cost Total Cost

5. Control WIP and Start Rates
• Many developers incorrectly assume that
the sooner they start work, the sooner
they will finish it.
• They are constantly tempted to start too
much work.
• This dilutes resources and causes long
transit times through their processes.
• A long transit time hurts efficiency,
quality, and responsiveness.

Little’s Formula
• By constraining WIP in development
processes we can control cycle time.
• This approach, which is known as Lean
Kanban, is currently growing rapidly in
software development.






RateDepartureAverage
QueueinCustomersofNumberAverage
QueueinTimeWaitAverage
q
q
q
q
L
W
L
W

1
2
3
4
1
2
3
4
COD Savings of Project 1 and 2 Late Start Advantages
for Project 3 and 4
Control Number of Active Projects

Avoiding Long Planning Horizons
Datum
Search Area
D = Vt
D = Vt
A =V2 t2
Planning Horizon
Error

Visual WIP Control Boards
Ready
Queue Coding
Ready
to Test Testing
Test
Complete
A D
E
C
B
WIP Constraint = 10 units
WIP constraints can be local, regional, or global.

6. Sequence Work Correctly
• The sequence in which work is processed is
called the queueing discipline.
• By changing the queueing discipline we can
reduce the cost of a queue without
decreasing the size of the queue.
• Since manufacturing has homogeneous flows
it always uses FIFO (First-In-First-Out).
• For the non-homogeneous flows of product
development other approaches have better
economics.

Cost
of
Delay
Time
2
Cost
of
Delay
Delay Cost
First-In First-Out
Last-In First-Out
Project Duration
Cost of
Delay
1 3 3
2 3 3
3 3 3
Use FIFO for Homogeneous Flow
1
3
2
3
1

Cost
of
Delay
Time
Cost
of
Delay
Delay Cost
High Weight First
Low Weight First
1
2
3
Project Duration
Cost of
Delay
Weight =
COD/
Duration
1 1 10 10
2 3 3 1
3 10 1 0.1
1
23
Weighted Shortest Job First (WSJF)
160 7
96 Percent
Reduction!

7. Create Faster Feedback
• When queues and batch sizes are large
feedback is slow.
• Slow feedback hurts quality, efficiency,
and cycle time.
• Feedback speed has enormous economic
leverage in product development, but it is
rarely explicitly managed.

The Front-Loaded Lottery
• A lottery ticket pays $3000 to the winning
three digit number.
• You can pick the numbers in two ways:
• Pay $3 to select all three digits at once.
• Pay $1 for the first digit, find out if it is
correct, then choose if you wish to pay
$1 for the second digit, and then choose
if you wish to pay $1 for the third digit.

100%
Probability
of
Occurrence
Value of Feedback
Cumulative Investment
100%
10%
Savings
= $0.90
$1 $2
10%
0 $3
Savings
= $0.99
1%
Spend
$1.00

1. Understand your economics.
2. Make your queues visible and control them.
3. Create a process to exploit variability.
4. Enable smaller batches.
5. Control cycle time by controlling WIP.
6. Sequence work based on economics.
7. Accelerate feedback with smaller batches.
Seven Big Ideas of 2GLPD

1991 / 1997 1997 2009
Going Further
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Reinertsen Agile Day Atlanta Intro to SGLPD 5-8-2015

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