As you know the fundamental equations of Throughput Accounting are:
TH = Revenue - Totally Variable Expenses
Net Profit :
NP = Throughput - Operating Expense
Return on Investment :
ROI = Net Profit / Investment
So the question really is, how does reducing WIP impact the above.
There are two ways to answer.
One is to consider the immediate “investment” you make when acquiring information so that you know what to do. Call it Story Writing, Requirements Elicitation, Analysis, etc. This increases the
Investment denominator in the ROI. So reduce any upfront work, and you have better ROI. But it can get ugly quickly because you will be tempted to do allocations, and fall back into the world of cost accounting.
Another way is to reason in terms of
If your Financial Throughput (
TH) is proportional to your Operational Throughput (
TP), it is easy. And if it is not (because maybe you have a subscription based SaaS-like service, then you need to work out with marketing what the connection is between sales funnels, life-time-revenue, and other such variable, with TP).
With Little’s Law we now that:
TP = WIP / FT
So if you can produce an X% reduction on
FT, you will get an improvement on
TP that is given by:
And how do you reduce
FT… As per usual TameFlow Approach: First reduce Wait Time and second improve on the constraint. To reduce the
Wait Time the only recipe is to reduce
WIP, and you minimize
WIP by knowing where Herbie is an applying Drum-Buffer-Rope scheduling, and get as close as possible to One Piece Flow.