{"id":2869,"date":"2013-03-02T12:18:35","date_gmt":"2013-03-02T12:18:35","guid":{"rendered":"http:\/\/www.saasoft.com\/blog\/?p=2869"},"modified":"2022-01-11T07:58:19","modified_gmt":"2022-01-11T07:58:19","slug":"the-seventh-flow","status":"publish","type":"post","link":"https:\/\/hcse.blog\/?p=2869","title":{"rendered":"The Seventh Flow"},"content":{"rendered":"

\"texting_a_friend_back_n_forth_150_wht_5352\"<\/a>Bing Bong<\/em><\/strong><\/p>\n

Bob looked up from the report he was\u00a0reading and saw the\u00a0SMS was from\u00a0Leslie, one of his Improvement Science Practitioners.<\/p>\n

It said “Hi Bob, would you be able to offer me\u00a0your perspective\u00a0on another barrier to improvement\u00a0that I have come up against<\/em>.”<\/p>\n

Bob thumbed\u00a0a reply immediately “Hi Leslie. Happy to help. Free now if you would like to call. Bob<\/em>“<\/p>\n

Ring Ring<\/strong><\/em><\/p>\n

<Bob> <\/em>Hello, Bob here.<\/p>\n

<Leslie><\/em> Hi Bob. Thank you\u00a0for responding so quickly. Can I describe the problem?<\/p>\n

<Bob> Hi Leslie – Yes, please do.<\/p>\n

<Leslie><\/em> OK. The essence of it is that I have discovered that our current method of\u00a0cash-flow\u00a0control\u00a0is preventing improvements\u00a0in safety, quality, delivery and\u00a0paradoxically in productivity too.\u00a0I have tried to\u00a0talk to the Finance department and all I get\u00a0back is “We have always done it this way. That is what we are taught. It works. The rules are not negotiable and the problem is not Finance<\/em>“. I am at a loss what to do.<\/p>\n

<Bob><\/em> OK. Do not worry. This is a common issue that every ISP discovers at some point. What led\u00a0you to your conclusion that the current methods are creating a barrier to change?<\/p>\n

<Leslie><\/em> Well,\u00a0the penny dropped when I started using the modelling tools you have shown me.\u00a0 In particular when predicting the impact\u00a0of process improvement-by-design changes on the financial performance of the system.<\/p>\n

<Bob><\/em> OK. Can you be more specific?<\/p>\n

<Leslie><\/em> Yes.\u00a0The project was to design a new ambulatory diagnostic facility\u00a0that will allow much more of the\u00a0complex diagnostic work to be done on an\u00a0outpatient\u00a0basis.\u00a0 I\u00a0followed the 6M Design approach\u00a0and looked first at\u00a0the physical space design. We needed that to brief the architect.<\/p>\n

<Bob><\/em> OK. What did that show?<\/p>\n

<Leslie><\/em> It showed that the physical layout had a very significant impact on the flow in the process and that by getting all the pieces arranged in the right order we could create a physical design that felt spacious without actually requiring a lot of space. We called it the “Tardis Effect<\/em>“.\u00a0The most marked impact\u00a0was on the size of the waiting areas – they were really small compared with what we have now which\u00a0are much bigger and yet still feel cramped and chaotic.<\/p>\n

<Bob><\/em>\u00a0OK. So how does that physical space design link to the finance question?<\/p>\n

<Leslie><\/em> Well, the obvious\u00a0links were that the new design would have a smaller physical foot-print\u00a0and at the same time give a higher throughput. It will cost less to build and will generate more\u00a0activity than if we just copied the old design into a shiny new building.<\/p>\n

<Bob><\/em> OK. I am sure that the Capital Allocation Committee and the Revenue Generation Committee will have been pleased with that outcome. What was the barrier?<\/p>\n

<Leslie><\/em> Yes, you are correct. They were\u00a0delighted because it left more in\u00a0the Capital Pot\u00a0for other equally worthy projects. The problem was not capital it was revenue.<\/p>\n

<Bob><\/em> You said that\u00a0activity was predicted to increase. What was the problem?<\/p>\n

<Leslie><\/em>Yes – sorry, I was not clear – it was not the increased activity that was the problem – it was how to price the activity and \u00a0how to distribute the revenue generated. The Reference Cost Committee and Budget Allocation Committee were the problem.<\/p>\n

<Bob><\/em> OK. What was the problem?<\/p>\n

<Leslie><\/em> Well the estimates for the new operational budgets were basically the current budgets multiplied by the ratio of the\u00a0future planned and historical actual activity. The rationale was that the major costs are people and consumables so the running costs should scale linearly with activity. They said the price should stay as it is now because the quality of the output is the same.<\/p>\n

<Bob><\/em> OK. That does sound like a reasonable perspective. The variable\u00a0costs will track with the activity if nothing else changes. Was it apportioning the overhead costs as part of the Reference Costing that was the problem?<\/p>\n

<Leslie><\/em> No actually. We have not had that conversation yet. The problem was\u00a0more fundamental. The problem is that the current budgets are wrong.<\/p>\n

<Bob><\/em> Ah! That statement\u00a0might come across as a bit\u00a0of a challenge to the Finance Department. What was their reaction?<\/p>\n

<Leslie><\/em> To para-phrase it was “We are just breaking even in the current\u00a0financial year so the current budget must be correct<\/em>. Please do not dabble in things that you clearly do not understand.”<\/em><\/p>\n

<Bob><\/em>\u00a0OK. You can see their point. How did you reply?<\/p>\n

<Leslie><\/em> I tried to explain the concepts of\u00a0the Cost-Of-The-Queue and\u00a0how that cost was\u00a0incurred by one part of the system with one budget\u00a0but that the queue was created by a different part of the system with a different budget. I tried to explain that just because the budgets were 100%\u00a0utilised\u00a0does not mean that the budgets were optimal.<\/p>\n

<Bob><\/em> How was that explanation received?<\/p>\n

<Leslie> They did not seem to understand\u00a0what I was getting at and kept saying “Inventory is an asset on the balance sheet.\u00a0If profit is zero we must have planned our budgets perfectly.\u00a0We cannot shift money between budgets within year if the budgets are already perfect. Any variation will average out. We have to stick to the financial plan and projections for the year. It works. The problem is not Finance – the problem is you.<\/em>“<\/p>\n

<Bob><\/em> OK. Have you\u00a0described the Seventh\u00a0Flow and put it in context?<\/p>\n

<Leslie><\/em> Arrrgh! No! Of course! That is\u00a0how I should have approached it. Budgets are Cash-Inventories and what we need is Cash-Flow to where and when it is needed and in just the right amount according to the Principle of Parsimonious Pull. Thank you. I knew you would ask the crunch question. That has given me a\u00a0fresh perspective on it. I will have another go.<\/p>\n

<Bob><\/em> Let know how you get on. I am curious to hear the next instalment of the story.<\/p>\n

<Leslie> <\/em>Will do.\u00a0Bye for now.<\/p>\n

Drrrrrrrr<\/strong><\/em><\/p>\n

\"construction_blueprint_meeting_150_wht_10887\"<\/a>Creating a productive and stable system design requires considering Seven Flows at the same time. The Seventh Flow is cash flow<\/strong>.<\/p>\n

Cash is like energy – it is only doing useful work when it is flowing.<\/p>\n

Energy is often described as two forms – potential energy and and kinetic energy.\u00a0\u00a0The ‘doing’ happens when one form is being converted from potential to kinetic. Cash in the budget is like potential energy – sitting there ready to do some business.\u00a0\u00a0Cash flow\u00a0is like kinetic energy – it is the business.<\/p>\n

The most versatile form of energy that we use is electrical energy. It is versatile because it can easily be converted into other forms – e.g. heat, light and movement. Since the late 1800’s our whole society has become highly dependent on electrical energy.\u00a0 But electrical energy is tricky to store and even now our battery technology is pretty feeble. So, if we want to store energy we use a different form – chemical energy.\u00a0\u00a0Gas, oil and coal – the fossil fuels – are all ancient stores of chemical energy that were originally derived from sunlight captured by vast carboniferous forests over millions of years. These carbon-rich fossil fuels are convenient to store near where they are needed, and when they are needed. But fossil fuels have a number of drawbacks: One is that they release their stored carbon when they are “burned”.\u00a0 Another is that they are not renewable.\u00a0 So, in the future we will need to develop better ways to capture, transport, use and store the energy from the Sun that will flow in glorious abundance for millions of years to come.<\/p>\n

Plants discovered millions of years ago how to do this sunlight-to-chemical energy conversion and that biological legacy is built into every cell in every plant on the planet. Animals just do the reverse trick – they convert chemical-to-electrical. Every cell in every animal on the planet is a microscopic electrical generator that “burns” chemical fuel – carbohydrate. The other products are carbon dioxide and water. Plants use sunlight to recycle and store the carbon dioxide. It is a resilient and sustainable design.<\/p>\n

\"plant_growing_anim_150_wht_9902\"<\/a>Plants seemingly have it easy – the sunlight comes to them – they just sunbathe all day!\u00a0 The animals have to work a bit harder – they have to move about gathering their chemical fuel. Some animals just feed on plants, others feed on other animals, and we do a bit of both. This food-gathering is a more complicated affair – and it creates a problem. Animals need a constant supply of energy – so they have to carry a store of chemical fuel around with them. That store is heavy so it needs energy to move it about.\u00a0 Herbivors can be bigger and less intelligent because their food does not run away.\u00a0 Carnivors need to be more agile; both physically and mentally. A balance is required. A big enough fuel store but not too big.\u00a0 So, some animals have evolved additional strategies. Animals have become very good at not wasting energy – because the more that is wasted the more food that is needed and the greater the risk of getting eaten or getting too weak to catch the next meal.<\/p>\n

To illustrate how amazing animals are at energy conservation we\u00a0just need to look at an animal structure like the heart. The heart is there to pump blood around. Blood carries chemical nutrients and waste from one\u00a0“department” of the body to another – just like ships, rail, roads and planes\u00a0carry stuff around the world.<\/p>\n

\"cardiogram_heart_working_150_wht_5747\"<\/a>Blood is a\u00a0sticky, viscous fluid that requires\u00a0considerable energy to pump around the body and, because it is pumped continuously by the heart, even a small improvement in the energy efficiency of the circulation design has a big long-term cumulative effect. The flow of blood to any part of the body must match the requirements of that part.\u00a0 If the blood flow to your brain\u00a0slows down for\u00a0even few seconds the brain cannot work properly and you lose consciousness – it is called “fainting”.<\/p>\n

If the flow of blood to the brain is stopped for just a few minutes then the brain cells actually die. That is called a “stroke”. Our brains use a lot of electrical energy to do their job and our brain cells do not have big stores of fuel – so they need constant re-supply. And our brains are electrically active all the time – even when we are sleeping.<\/p>\n

Other parts of the\u00a0body are similar. Muscles for instance. The difference is that the supply of blood that muscles need\u00a0is very<\/strong> variable – it is low when resting and goes up with exercise. It has been estimated that the change in blood flow for a muscle can be 30 fold!\u00a0 That\u00a0variation creates a design problem for the body because we\u00a0need to maintain the blood flow to brain at all times but\u00a0we only want\u00a0blood to be flowing to the muscles in just the amount that they need, where they need it and when they need it. And we want to minimise the energy required to pump the blood at all times. How then is the total and differential allocation of blood flow decided and controlled?\u00a0 It is certainly not a conscious process.<\/p>\n

\"stick_figure_turning_valve_150_wht_8583\"<\/a>The answer is that the brain and the muscles control their own\u00a0flow. It is called autoregulation<\/strong>.\u00a0 They open the tap when needed and\u00a0just as importantly they close the tap when not needed. It is called the Principle of Parsimonious Pull.\u00a0The brain directs which muscles are active but it does not direct the blood supply that they need. They are left to do that themselves.<\/p>\n

So, if we equate blood-flow and energy-flow to cash-flow then we arrive at a surprising conclusion. The optimal design, the most energy and cash efficient, is where the separate parts of the system continuously determine the energy\/cash flow required for them to operate effectively. They control the supply. They autoregulate their cash-flow. They pull only what they need when they need it.<\/p>\n

BUT<\/strong><\/p>\n

For this to work then every part of the system needs to\u00a0have a collaborative and parsimonious pull-design\u00a0philosophy – one\u00a0that wastes as little energy and cash as possible.\u00a0 Minimum waste of energy requires careful design – it is called ergonomic<\/strong> design. Minimum waste of cash requires careful design – it is called economic<\/strong> design.<\/p>\n

\"business_figures_accusing_anim_150_wht_9821\"<\/a>Many socioeconomic systems are fragmented and have parts that behave in a “greedy” manner and that compete with each other for resources. It is a dog-eat-dog design. They would use whatever resources they can get for fear of being starved. Greed is Good. Collaboration is Weak.\u00a0 In such a competitive situation a rigid-budget design is a requirement<\/strong> because it helps prevent one part selfishly and blindly destabilising the whole system for all. The problem is that\u00a0this rigid financial design\u00a0blocks\u00a0change so it blocks improvement.<\/p>\n

This means that greedy, competitive, selfish systems are unable to self-improve.<\/p>\n

So, when the world changes too much and their survival depends on change then they risk becoming extinct just as the dinosaurs did.<\/p>\n

\"red_arrow_down_crash_400_wht_2751\"<\/a>Many will challenge this assertion by\u00a0saying “But competition drives up\u00a0performance<\/em>“.\u00a0 Actually, it is not as simple as that. Competition will weed out the weakest who “die” and remove themselves from the equation – apparently increasing the average. What actually drives improvement is customer choice. Organisations that are able to self-improve will create higher-quality and lower-cost products and in a globally-connected-economy the customers will vote with their wallets. The greedy and selfish competition lags behind.<\/p>\n

So, to ensure survival in a global economy the Seventh Flow cannot be rigidly restricted by annually allocated departmental budgets. It is a dinosaur design.<\/p>\n

And there is no difference between public and private organisations. The laws of cash-flow physics are universal.<\/p>\n

How then is the cash flow controlled?<\/p>\n

The “trick” is to design\u00a0a monitoring and feedback component\u00a0into the\u00a0system design. This is called the Sixth Flow – and\u00a0it must be designed so that just the right amount of cash is pulled to the just the right places\u00a0and at just the right time and for just as long as needed\u00a0to\u00a0maximise the revenue.\u00a0 The rest of the design – First Flow to Fifth Flow ensure the total amount of cash needed is a minimum.\u00a0 All Seven\u00a0Flows are needed.<\/p>\n

So the\u00a0essential ingredient for financial stability and survival is Sixth and Seventh Flow Design capability. That\u00a0skill has another name – it is called\u00a0Value Stream Accounting<\/strong> which is a component of complex adaptive systems engineering (CASE).<\/p>\n

What? Never heard of Value Stream Accounting<\/a>?<\/p>\n

Maybe that is\u00a0just another Error of Omission?<\/p>\n\n\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Bing Bong Bob looked up from the report he was\u00a0reading and saw the\u00a0SMS was from\u00a0Leslie, one of his Improvement Science Practitioners. It said “Hi Bob, would you be able to offer me\u00a0your perspective\u00a0on another barrier to improvement\u00a0that I have come up against.” Bob thumbed\u00a0a reply immediately “Hi Leslie. Happy to help. Free now if you … <\/p>\n

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