Let’s expand this view to the organization as a whole. An organization is typically divided into functions, each with its own primary objective. Figure 1-5 is another simple table showing the typical functions of a manufacturing and/or supply chain–centric company.
FIGURE 1-5 Typical organizational functions
All the functional objectives in Figure 1-5 require flow to be promoted and protected. When things are flowing well, shareholder equity, sales performance, market awareness, asset utilization, and innovation are promoted and protected.
Additionally, flow is a unifying theme within most major process improvement disciplines and their respective primary objectives:
• Theory of Constraints (Goldratt) and its objective to drive system throughput
• Lean (Ohno) and its objective to reduce waste
• Six Sigma (Deming) and its objective to reduce variability
All these objectives are advanced by focusing on flow. When considered with Plossl’s first law of manufacturing, the convergence around flow is really quite staggering. There should be little patience for ideological battles and turf wars between disciplines. It is a waste of time and counterproductive to bicker—they all need the same thing to achieve their desired goal. Among these disciplines, flow becomes a common objective from a common strategy based on simple common sense grounded in basic physics and economic principles.
The concept and power of flow is not new. It powered the rise of industrial giants and gave us the corporate management structure in use today. Leaders such as Henry Ford, F. Donaldson Brown, and Frederick Taylor made it the basis for strategy and management.
And yet what about “cost”? The calculation of standard unit cost attempts to assign a cost to an individual product or resource based on volume and rate over a particular time period. When things flow well over a given period, cost performance will be favorable. Thus, emphasizing flow should even work for the cost accountants’ objectives! This critical realization will be explored in more depth in Chapter 6 as well as in Appendix D.
Returning to the specific function of planning, Plossl’s law, while incredibly simple, should not be taken lightly. This one little statement has always defined the way to drive return on shareholder equity, and it was articulated by one of the main architects of conventional planning systems. Thus, the real reason why we plan can and should be simply stated as to ensure the protection and promotion of flow.
If the purpose of planning is to ensure the protection and promotion of flow, then planning systems should do just that. However, in reality, do conventional planning systems really ensure the protection and promotion of flow in today’s environments? The evidence overwhelmingly suggests that they do not.
Let’s examine this issue from four distinct perspectives:
• The macroeconomic level. Has the proliferation of conventional planning systems driven better return on investment performance for one of the world’s largest economies?
• The user level. Do the people that interact with conventional planning systems believe in those computer systems’ abilities to enable flow?
• The organizational level. Do the companies that use conventional planning systems exhibit the characteristics of good flow performance as evidenced by sustainable ROI?
• The supply chain level. Do supply chains featuring a collection of conventional planning systems exhibit the characteristics of good flow performance?
The Macroeconomic Level
It is no secret that the United States led the adoption of manufacturing information systems starting with MRP in the 1960s. The vast majority of those “700 manufacturing companies or plants that have implemented, or are committed to implementing, MRP systems” were located in the United States. The roots of MRP continued to run deep in the United States through the time in which this book was written; it is simply how planning occurs in most U.S. manufacturing companies of any size and scale. One would think this should provide an incredible advantage for the U.S. economy.
While these systems are expensive to purchase, implement, and maintain, the value of these formal planning systems has always been sold on the basis of the ability to better leverage the assets of a business. So, did the widespread adoption of MRP and its subsequent derivative information systems enable the U.S. economy to better manage assets?
In late 2013 Deloitte University Press released a report written by John Hagel III, John Seely Brown, Tamara Samoylova, and Michael Lui that is quite eye-opening when considered against the progression and adoption rates of information systems.8 Figure 1-6 is a chart from that report depicting the return on asset performance of the U.S. economy since 1965.
The graphic clearly depicts a steady decrease on return on assets for the U.S. economy from 1965 to 2012. But this is not the whole story. During this time period the same report shows that labor productivity (as measured by the Törnqvist aggregation) more than doubled! What is most interesting about this graphic in relation to information systems is that by 1965 we had the modern acronym MRP, but massive proliferation of information systems did not occur until after 1975 and, in particular, after 1980 with MRPII.
U.S. firm’s ROA fell to a quarter of its 1965 levels in 2012. To increacse, or even maintain, asset profitability, firms must find new ways to create value from their assets.
Graphic: Deloitte University Press | DUPress.com Source: Compustat, Deloitte analysis
FIGURE 1-6 Return on asset peformance for the U.S. economy
Obviously, there are many factors at play with this return on asset decrease, but this report would certainly lead one to conclude that the impact of the widespread adoption of MRP, MRP II, and ERP systems (at least in the United States) has not significantly helped companies manage themselves to a better return on asset performance. Indeed, when this decline is taken in combination with the increase in labor productivity, it suggests that companies may be actually accelerating in exactly the wrong direction.
But, admittedly, this is just one point of data; it is a high-level view with many unrelated factors contributing to these effects. What additional evidence do we have that conventional planning approaches are not protecting and promoting the flow that we need to drive better return on investment?
The User Level
Rather than examining the performance of an entire economy over a period of time, let’s examine a much more granular level—the day-today actions of the people charged with making decisions about how to utilize assets: the planners themselves. One hallmark of supply chains is the presence of supply orders. Supply orders are the purchase orders, stock transfer orders, and manufacturing orders that dictate and authorize the flow and activities of any supply chain. They are the signals to produce, buy, and move.
The very purpose of a planning system is to ultimately determine the timing, quantity, and collective synchronization of the supply orders up, down, and across the levels of the network. Inside most manufacturers there are tiers within the planning system where stock transfer orders could prompt manufacturing orders, which in turn could prompt purchase orders. Additionally, within