compromise the integrity of the relevance of the information.
Prerequisite #1: Understanding Relevant Ranges
The concept of relevant range comes from economics and management accounting. Relevant range refers to the time period in which assumptions are valid. Trying to force fit assumptions (and metrics derived from those assumptions) into an inappropriate time range directly results in distortions to relevant information, creates variability, and thus causes a breakdown in the flow of relevant materials and services.
The assumptions and information that are valid and relevant within different time ranges will differ dramatically and these differing ranges are utilized by different personnel. For example:
Forecasts are highly relevant in thinking about the future, they are essentially useless with regard to what needs to be done today.
Fixed expenses are variable in the longer range, not in the close-in range (that is why they are called “fixed”).
Work order delays are relevant for the current schedule, not for an executive trying to determine the company’s strategy for the next year.
A machine breakdown is relevant for a maintenance crew’s activity, not what the company thinks it will sell in Q3.
There are at least three distinct relevant ranges that we must deal with: operational, tactical, and strategic. The specific time value of each relevant range will differ between companies depending on the circumstances involved in that company. Chapter 3 will describe a way to discretely determine these ranges for every organization.
Prerequisite #2: Tactical Reconciliation Between Relevant Ranges
While the assumptions and information that are relevant for decision making differ between ranges, there is still an absolute need to reconcile these differences on an ongoing and iterative basis; the signals at all levels must align and reconcile. Strategy must be influenced by defined operational capability and performance as well, considering how the operating model might perform under additional predicted scenarios. Operational capability must be influenced by predicted scenarios and/ or strategic expectations in future time periods to ensure that the operational capability supports the strategy. But how does this reconciliation actually occur in a true bidirectional fashion?
Between the strategic and operational ranges is the tactical range. As we will see in Chapters 3 and 5, this tactical range is unique, and for it to perform the necessary reconciliation it must become a bidirectional reconciliation hub for the key characteristics of a CAS.
Prerequisite #3: A Flow-Based Operating Model
A flow-based operating model is an operating model specifically designed on the fundamental principle of flow. Chapter 1 firmly established two things:
Promoting and protecting flow is the key to increased return on investment. This is the very essence of Plossl’s Law.
Flow can be a unifying factor, not just in operations but also between functions, to advance their individual primary objectives.
A flow-based operating model makes the following critical assumptions:
Assets must be as closely synchronized to actual demand as possible. The cost of being wrong has grown dramatically with the rise of complexity and volatility. Synchronizing assets as close as possible to actual demand minimizes that risk.
Variability cannot be eliminated but its impact on system flow can be effectively controlled and mitigated with the right operating model design. Every process, even when under statistical control, still experiences variability within its control limits; that is a given. The accumulation of this variability between processes is really the only relevant thing when it comes to managing system performance.
Focusing on precisely synchronized planning and scheduling across all materials and resources is largely wasted effort. Most MRP and shop-floor schedules are unrealistic as soon as they are released. Constantly rescheduling to attempt to account for variation actually introduces additional variability and subsequent confusion.
Some level of inventory is required at some stage in the supply chain because the customer tolerance time is insufficient to procure and make everything to order. Inventory cannot be entirely eliminated. At the same time, inventory should not be everywhere. The choice of where to place inventory is highly strategic since it determines the customer lead time and the level of working capital.
Batching decisions should be based on flow considerations instead of cost considerations. Batches are an actual bona fide limitation for most companies. How those batch sizes are determined, however, is a choice. Unfortunately, the vast majority of batching decisions are driven by cost performance metrics instead of flow-based determinants.
Some level of protective capacity must exist in any environment with multiple interacting resources. Resources have disparate levels of capacity relative to their respective required tasks and volume. The perfectly balanced line is still a mythical creature with an enormous price tag. This disparity means that precaution must be taken against misusing or wasting points of additional capacity.
Inventory is an asset and should be treated as any other asset on the balance sheet. Some lean enthusiasts like to promote that inventory is a liability; however, whether inventory is an asset or a liability depends on the position and quantity of that inventory. Production assets such as machines are added only when there is a positive return on investment. Inventory targets must be the result of a strategic choice for return on investment as well.
Capability must be established based on the expected future for the company. Since it is not possible to predict the future precisely, the capability range is established by the combination of inventory placement and protective capacity. The size of this range is dependent on the uncertainty of the future. The establishment of this range is dependent on a comprehensive risk assessment of the market and supply chain.
The objective of the operating model is to maximize margin by focusing on increasing service levels, enable premium pricing by providing a unique competitive market position, leverage constrained resources, and identify available capacity that can be used for incremental margin positive opportunities. This is in contrast to the more common expectation that the operating model
