Rules of Response

Rules of Response

          
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Rules of Response

Operations, Strategy
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    Corporate operations – their value-delivery systems – are subject to a challenging set of rules. These are the rules of response. Managements that appreciate the significance of these rules and use them to their benefit can achieve startling gains.

    The rules of response are:

    • The .05 to 5 Rule

    • The 3/3 Rule

    • The 1/4-2-20 Rule

    • The 3 x 2 Rule

    The .05 to 5 Rule

    Across a spectrum of businesses, the amount of time required to execute a service or to order, manufacture, and deliver a product is far less than the actual time the service or product spends in the value-delivery system. For example, a manufacturer of heavy vehicles takes forty-five days to prepare an order for assembly, but only sixteen hours to assemble each vehicle. The vehicle is actually being worked on less than 1 percent of the time it spends in the system.

    The .05 to 5 Rule highlights the poor “time productivity” of most organizations. Most products and many services are actually receiving value for only 0.05 to 5 percent of the time they are in the value-delivery systems of their companies.

    The 3/3 Rule

    During the 95 to 99.95 percent of the time a product or service is not receiving value while in the value-delivery system, the product or service is waiting.

    The waiting time has three components. These are the amounts of time lost while waiting for:

    • completion of the batch a particular product or service is part of,

    • completion of the batch ahead of the batch a particular product or service is part of, and

    • management to get around to making and executing the decision to send the batch on to the next step of the value-adding process.

    Generally the 95 to 99.95 percent of time lost divides almost equally among these three categories.

    The amount of time lost is affected very little by working harder. But working smarter has tremendous impact. Companies that reduce the size of the batches they process – whether the batches are physical goods or packets of information – and streamline the work flows significantly reduce the time lost in their value-delivery systems. For example, when a manufacturer of hospital equipment reduced standard production lot sizes by half, the time required to manufacture the product declined by 65 percent. After the production flow was streamlined to reduce material handling and the number of intermediate events requiring scheduling was reduced, the total time was reduced by another 65 percent.

    While these improvements are dramatic, this company barely escaped the .05 to 5 Rule. Its time productivity increased over 200 percent – from 3 percent to 7 percent.

    The 1/4-2-20 Rule

    Companies that attack the consumption of time in their value-delivery system experience remarkable performance improvements. For every quartering of the time interval required to provide a service or product, the productivity of labor and of working capital can often double. These productivity gains result in as much as a 20 percent reduction in costs.

    A U.S. manufacturer of a consumer durable has reduced its time interval from five weeks to slightly more than one week. Labor and asset productivity have more than doubled. Costs are down considerably, and profits are approaching extraordinary levels.

    The 3 x 2 Rule

    Companies that cut the time consumption of their value-delivery systems turn the basis of competitive advantage to their favor. Growth rates of three times the industry average with two times the industry profit margins are exciting – and achievable – targets.

    A manufacturer of a prefinished building material reduced the time required to meet any and all customer orders to less than ten days. Most orders can be on the customer's site one to three days from when they are placed.

    The other competitors require thirty to forty-five days to fill any and all orders.

    The fast-response competitor has grown over 10 percent a year for the last ten years, to become the market leader. The average industry growth rate has been less than 3 percent over the same period. The pretax return on net assets of the fast-response competitor is 80 percent – more than double the industry average.

    Summary

    The rules of response apply to both service and product businesses. Managements that have invested the time it takes to understand how the rules of response apply to their businesses and that aggressively use the rules to their advantage are:

    • growing much faster and more profitably than their competitors,

    • becoming closer and more essential to their customers, and

    • taking leadership positions in their industries.

    And perhaps the greatest benefit of all is the excitement of new growth in core businesses.

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