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The Three Bucket Theory --Dickeson

September 2002
We have three buckets for inventories: Raw, Wip and Fig—Raw materials, Work in process and Finished goods. Once the Fig is invoiced, it moves from finished goods to sales and is a claim for payment—an account receivable. Cash goes out of the box for raw materials; cash comes back into the box when the claim is collected. We're looking at three materials inventories and a receivable—a four-step cash-to-cash cycle.

This is a true, simple, unvarnished look at the effectiveness and efficiency of a printing business. Throughput velocity is measured by the number of days The Three materials inventories and accounts receivable claims exist. It's constraint management a la Eli Goldratt. Whatever impedes the cash-to-cash flow is a constraint.

We're not talking accounting. We're talking about production cycle measurement. How long do materials hang around before you collect the money? This not only measures the liquidity, it measures conversion speed of the production process of the company. It's a global view—an ERM approach (Enterprise Resource Management). It's an acid test of management competence.

My preference is to report these measurements on a weekly basis in a rolling 13-week quarter context. Few, if any, printing companies are able to do this because they lack weekly data. The perceiver group for inventory throughput is DMOH (Days Materials On Hand.)

Calculation of DMOH is easy: divide the sum of Raw, Wip and Fig inventories by the sum of the week's materials usage. If you do it with weekly data, multiply the result by seven (days). If it's done by month, multiply by number of days in the month. Now do it separately for each of the three inventory classifications. The result is four sets of index numbers—four perceivers—to support management decisions.

You can do this on a rolling 13-week basis and accompany it with a chart and trend line. The cartoon (graphic) is always what you look at first. If DMOH is trending down, "Happy, Happy" as Chef Emeril Lagasse would say. The fewer the days, the faster the cash pops back into the box.

Look at the perceivers for the week just past; make a little plan for the coming week to keep the tilt downward. Execute the plan. Did it work? Days On Hand still going down? No? Try something else next week. Continuous improvement, said Dr. Deming. Constraint lifted; go to the next constraint, said Dr. Goldratt.

Take the Wip, for instance. When the materials are committed to a job and move out of Raw inventory, time starts to run on work in process. The Wip clock stops when deliverable product is completed. Wip time is a true measure of production JIT—just in time.

Taichi Ohno taught us to use yellow Kanban cards to "pull" materials through production rather than "pushing" them up into queues. Eli Goldratt teaches us that the rate of production conversion of Raw to Fig is the key to success. In effect, they're both saying that the DMOH of the Wip measures the rate of conversion—the productivity of the enterprise.

We've been speaking of global Wip—total work in process by week. Let's drill down in the data for a local view—by job. Can you tell me the Wip dwell time on a job-by-job basis for your plant? No? I doubt that any Management Information System supplier is providing this. We've never demanded it.

What would we learn? We'd discover more detail of throughput constraint properties, wouldn't we? What would we do about it? What actions would we take? Think about it. Want continuous improvement of productivity? Isn't this a prime place to look? Forget that job cost stuff and look at the Wip lag in days or hours, both locally and globally.

There's an elephant in your conference room. Look at your Fig DMOH. The minute deliverable product is completed it leaves the Wip and the finished goods inventory clock begins ticking. It ticks in Fig until the sale is booked and it enters the A/R (Accounts Receivable) classification. What Fig time says is: "This is how long it's taking us to get invoices for our jobs into e-mail." We're measuring a liquidity constraint. (Don't do this unless you're lying down and someone who knows CPR is standing by.) Again, view the days or hours globally for the enterprise and drill down locally by job.

Okay. What are the invoicing constraints? What's keeping us from cutting the invoice in the same procedure as the packing slip? Is it because the controller insists on seeing the completed job cost file before preparing the invoice? Completing that job cost file requires being sure that invoices from outside vendors are in and tally with the estimates, purchase orders and receiving slips, doesn't it? It requires that every AA be in the file and listed. A dear friend in printing said that he'd struggled a lifetime trying to accelerate invoices and he'd succeeded in reducing the lag to 14 business days!

I'm saying that Fig lag is an UNACCEPTABLE constraint on cash flow. If you measure and report the Fig weekly it will eventually go away due to the nausea of seeing useless cash waste every Monday morning. But, your A/R inventory may increase if you don't accelerate your collection process!

We haven't said anything about raw materials inventory. Most of us think that's what Just In Time is about. That's only partly right. We want to keep our DMOH for raw down by receiving materials as near scheduled production time as possible. But we put in some safety buffers for raw materials that are too extended. Like wearing both a belt and suspenders to hold up our Dockers. There's both a global and local view of Raw DMOH. The local drill down is by lot and type. How many days or hours has that lot been on hand?

Accounts Receivable inventory? Yes, it's an inventory of claims and is the fourth hurdle between cash out and cash in. Compute DSOH (Days Sales On Hand) by dividing the receivables balance by the week's sales. Multiply by seven for a week.

What can I say about A/R that hasn't been said—ad nauseum. It's global and local DSOH analysis once again. Measure and manage. Collection lag can kill—it has and it does.

All this is just for the bean counters, you say? No way. The four inventories and Days On Hand perceivers are for enterprise managers!

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Tucson, AZ. He can be reached by e-mail at roger@prem-associates.com, by fax at (520) 903-2295, or on the Web at http://www.prem-associates.com.
 

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