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Cost of excess WIP (open orders) for service

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  • #46378

    aschay
    Participant

    I am hoping someone who has applied the concepts of Lean in a service environment might be able to help me with this.
    I am trying to create a simple model of how costs increase when there is excess WIP (or open orders in a transactional service environment).  If someone has done this, can you please advise what variables you have looked at that you believed contributed to the cost of carrying the excess WIP? 
    thanks very much!

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    #153063

    qualitycolorado
    Participant

    Aschay,Have you tried applying “Little’s Law” to your situation?http://www.factoryphysics.com/Principle/LittlesLaw.htmLittle’s Law, and some of your specific numbers for your specific situation, should help you calculate some costs.Best regards,
    QualityColorado

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    #153072

    aschay
    Participant

    Thank you for your response!  Yes, Little’s Law makes a lot of sense to me.  & I understand that I would use it this way in a service environment:  lead time = orders/completion rate
    My goal will obviously be to reduce lead time, but I would like to be able to justify financially why a higher number of orders in the system (lower lead time) drains resources and increases costs.  I am just wondering how best to do that in a service environment.  reduced lead times would ostensibly increase customer satisfaction – but its difficult to put a hard number to that.  reduced lead times would lead to faster invoicing, but again, its hard to put dollars on this – or perhaps I just need a hand as to how to draw the relationship.
    Also…has anyone used Little’s law as a predictor of what would happen to lead time should orders increase and completion rate stay the same?  I am guessing that the answer is yes…but I am a bit new to this and would just like to confirm the predictive value.
    thanks all!!  this is a terrific board.

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    #153075

    Jim Shelor
    Participant

    Unfortunately, in a service industry all the savings from the type of thing you are trying to do are soft. 
    Let’s take an example.  Two banks offer mortgage loans at the same interest rate.  Bank 1 takes 30 days to close and bank 2 takes 60 days to close.  Bank 1 is obviously going to get the bigger market share.
    Now bank 2 conducts a project to cut the closing time.  They are able to initially cut the closing time to 40 days.  They are probably going to get back some of the market share, but there is no way to predict how much.  What if they reduced the closing time all the way to 30 days?  Are they now going to get half the market share?  There is no way to accurately predict that.
    One thing you can do is talk with your financial and marketing departments and get agreement that you all think there will be a soft savings and how much you all think the soft savings would be.
    The number for savings (or increased market share) you will get will be lower than you would like it to be because finance and marketing tend to be overly conservative with predictions like that.  But with marketing and finance agreeing with you, you are in a better position to justify your project.
    I hope this helps.

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    #153078

    aschay
    Participant

    that does help – thank you.
    do you put any stock in the formula of order turns & annual contribution to margin?  that is if you know margin per order and you increase the completion rate of each order you can extrapolate to show that you have increased contribution to margin through reduced lead time?
    also, would you advise using little’s law as a predictor of what may happen to lead time if orders increase and completion rate stays the same?
    thanks again!

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    #153079

    Stephen
    Member

    I have published a number of Industry white Papers on the subject of Lean In services. Contact me directly if you wish.  Also google ‘sense and respond fujitsu’ to see more…
     
    Stephen Parry Author of sense and respond the journey to customer purpose.

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    #153080

    aschay
    Participant

    Thank you for the offer Stephen!  I would love to contact you directly.  What would be the most convenient way for you?
    A.  Schay

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    #153081

    Jim Shelor
    Participant

    Little’s Law is definitely the way to go to do your predictions.
    As far as reduced lead time causing increased margin, you cannot make that extrapolation based simply on reduced lead time.  You can show a minimal effect by the fact that the reduced lead time reduces, and hopefully eliminates the order backlog.  However, the margin is related to orders received, not the lead time to process the orders.  You would have to be able to show a connection between the reduced lead time and an increase in the number of orders received.
    This is again a soft gain, and I would again turn to getting finance and marketing to agree on the numbers to assign to that gain.
    Hope this helps.

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    #153082

    aschay
    Participant

    Thanks Jim.  I appreciate the clarification.

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    #153163

    Stephen Parry
    Member

    Stephen Parry can be contacted via [email protected]
    Ref, Lean Service Cases, Lean Service Research, and Lean Service Industry White Papers.
    Regards
    Stephen.
    Stephen Parry is author of Sense and Respond. The Journey to Customer Purpose. How Lean can help determine your service strategies, organisational structures and change programs.
    Former Head of Strategy and Change at Fujitsu Services
    http://www.seebusinessdifferently.com

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    #153557

    DOn Anthony
    Participant

    USe QUeuing Theoretical application and the dollar amount will become evident either in underutilized employees, delays in customer service, or time spent in the queu waiting on transaction to be cvompleted

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    #153575

    texan
    Member

    A couple of things to consider:
    Leaning the process and reducing the WIP will likely result in less rework ($) and fewer errors ($).  These can be turned into hard dollar savings by calculating people time you have saved.  The unneeded people can move to another revenue generating or cost saving area.
    Increased business / market share is good to track if speed of order entry is a CTQ for your customers.
    Don’t forget about cash flow.  Each day an order waits in queue is a day that the company was missing the cash from that order.  The relationship here is not always direct – it depends on your business.
    These are things to explore with your finance folks.
     

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    #153597

    Sheila
    Member

    Hello,
    I would recommend looking at 2 graphs. 
    #1:  The number of customer contacts you experience (calls & emails) every hour you are open. 
    #2:  The number of headcount actively responding to customer contacts vs. average wait time (using data from Graph #1).   
    Calculate on graph #2 where you are at with your current headcount. 
    Work with Finance to determine the cost of a call/email.  Then determine the cost of adding more people with the starting salary for a new hire on the phone.  Finally, determine your breakeven point and decide where you want to be.

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    #153641

    Aguilar
    Member

    Achay.
    I’ve seen all different answers and all are reasonable to me, some graphs and relationships could help you to determine the supposed cost of excess of WIP what ever be the environment , but the bottom line is that financially in WIP reduction projects there is no direct relationship of hard savings neither in process nor in services environments, why? because you do your budget for a complete year based on estimated or calculated resources needed plus an  extra % to afford picks based at the same time in sales forecasted, then, what ever you do to avoid extra costs will be cost avoidance (soft) which are good too but not as well reconized by finaces as hard savings . In a process environment the real benefits of reducing WIP will come from freeing cash flow of raw material and from reducing excess of purchasing and carry labor from the base budgeted (including the extra budgeted) . In a service environment the financial concept I’ve used to calculate potential benefits is the cost of the opportunity, that is, for instance, how much sales I loose when  have a lot of quotations or potential purchase orders without complete (WIP)?.  
    Hope this help. 
     
     
     
     

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