Max "T" with a planned, finite, and controlled amount of "I" and "OE".

(excerpts from The Pipeline)

“Look”, said the CEO.  “Every important measure of operating performance – Cycle Time, Productivity, Inventory Turn – and every important measure of financial performance – Net Income and Return on Assets – can be calculated using just three terms, which describe anything and everything that happens to money in this company:

“Throughput, Inventory, Operating Expense.

“Does it bother me that we may need to modify the DuPont Formula?  No.  Does it bother me that we may need to change our thinking on cost behavior and cost reporting?  No.  What would bother me is if any Teammate or Leader did not understand the connection.

“If we make operating decisions, each day, every day, that maximize the rate of closings, with a planned, finite, and controlled level of work-in-process, and we do it by leveraging our investment in our production capacity – if we focus on doing those three things well – we will have shorter, faster cycle times, higher productivity, and faster inventory turns.  And, if we have shorter, faster cycle times, higher productivity, and faster inventory turns, we will be more profitable, we will earn a higher economic return, and we will generate more cash.

“RB Builders has already taken steps in that direction”, he continued.  “As part of our new, more focused, more results-based approach, we have already moved to limit and control the amount of work-in-process and the cost of our production capacity.  The improvements in operating performance and business outcomes that we are targeting under this new approach will have to be obtained without any increase in work-in-process or production resources.

“Personally – I believe we should be looking for the opportunity and justification to reduce the level of work-in-process even further, in order to operate as closely as possible to a zero working capital position.  But – I also understand that we need to take this one step at a time, so that we learn from the outcomes and incorporate that learning into successive projects, so that we can innovate, so that we can continuously increase our capability and capacity to improve.  If reducing work-in-process further will make us faster, if fully utilizing our existing capacity will make us more productive, I think we will come to that conclusion over time and take the right steps.

“I also understand that we need to live in the Throughput World, not in the Cost World.  There is no theoretical limit to the Revenue and Gross Income we can generate, but there are limitations to the amount of capacity – the amount of work-in-process and resources  we will ever have or ever be able to safely eliminate.

“Max “T”, with a planned, finite, and controlled amount of “I” and “OE”.  That is what we want, because that is what improves operating performance and business outcomes.”