reinertsen lk france 2015 11 4-15

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An Introduction to

Second GenerationLean Product Development

Lean Kanban France 2015Paris, FranceNovember 4, 2015

Donald G. ReinertsenReinertsen & Associates

600 Via Monte D’OroRedondo Beach, CA 90277 U.S.A.

(310)-373-5332Internet: Don@ReinertsenAssociates.com

Twitter: @dreinertsenwww.ReinertsenAssociates.com

2Copyright 2015, Reinertsen & Associates

Seven Big Ideas of 2GLPD

1. Understand your economics.2. Manage your queues.3. Exploit variability.4. Enable smaller batches.5. Control WIP and start rates.6. Prioritize based on economics.7. Accelerate feedback.

3Copyright 2015, Reinertsen & Associates

1. Understand Your Economics

• In product development all difficult decisions involve multiple variables.

• Making decisions that affect multiple variables requires quantification.

• Doing such quantification, to a useful level of accuracy, is surprisingly easy.

4Copyright 2015, Reinertsen & Associates

Should we operate our testing process at 80 percent utilization with a 2 week queue, or at 90 percent utilization with a 4 week queue?

A Typical Question

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Making Economic Decisions

Waste

Cycle Time

Variability

Efficiency

Unit Cost

Value-Added

Revenue

Life CycleProfits

Economic SpaceProxy Variable Space

Transformations

6Copyright 2015, Reinertsen & Associates

The Modeling ProcessCreate Baseline Model

Determine Total Profit Impact of Missing a MOP

Calculate Sensitivity Factors

ModelExpenseOverrun

ModelSchedule

Delay

ModelValue

Shortfall

ModelCost

Overrun

ModelRisk

Change

7Copyright 2015, Reinertsen & Associates

The Model OutputLife-Cycle Profit Impact

-$80,000

-$500,000

-$100,000-$150,000

-$40,000

1 PercentExpenseOverrun

1 PercentProduct Cost

Overrun1 Percent Value

Shortfall 1 Month Delay1 Percent

Increase in Risk

8Copyright 2015, Reinertsen & Associates

Range of Cost of Delay Estimates

Poor Intuition

Average Intuition

Best Case Intuition

Average Analysis

Quality Analysis

Any Analysis Beats Intuition

200:1

50:1

10:1

2:1

1.2:1

Source: Reinertsen & Associates Clients

9Copyright 2015, Reinertsen & Associates

Managing Weight vs. Product Cost

Engineer Supervisor ProgramManager

Boeing 777 Weight Reduction Decision Authority

$300

$2,500

$600

Dollars per Pound

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2. Manage Your Queues

• Many product developers assume higher utilization leads to faster development.

• They neither measure nor manage the invisible queues in their process.

• Consequently, they underestimate the true cost of overloading their processes.

• Such overloads severely hurt all aspects of development performance.

Traffic at rush hour illustrates the classic characteristics of a queueing system.

Pho

to C

opyr

ight

200

0 C

omst

ock,

Inc.

12Copyright 2015, Reinertsen & Associates

The Effect of Capacity Utilization

Queue Size vs. Capacity Utilization

0

5

10

15

20

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%Capacity Utilization

Que

ue S

ize

Notes: Assumes M/M/1/ Queue, = Capacity Utilization

1

2

qL

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Total Cost

Cost of Delay

Cost of Excess Capacity

Managing Queues

Excess Product Development Resource

Dollars

Minimize Total Cost to Maximize Profits

14Copyright 2015, Reinertsen & Associates

Longer Cycle Time

Lower Quality

More Variability

Increased Risk

More Overhead

Less Motivation

Queues Create...

Why Queues Matter

Managing Queues is the key to improving product development economics.

15Copyright 2015, Reinertsen & Associates

3. Exploit Variability

• In manufacturing it is always desirable to reduce variability.

• In product development eliminating variability eliminates innovation.

• We understand the specific conditions that make variability valuable and manage our process to create these conditions.

• We need development processes that function in the presence of variability.

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Payoff vs. Price

Price

Payo

ff

Expected Price

Price

Prob

abilt

yAsymmetric Payoffs and Option Pricing

Strike Price

Expected Payoff

Price

Expe

cted

Pa

yoff Strike

Price

x

=

17Copyright 2015, Reinertsen & Associates

Higher Variability Raises This Payoff

Price

Expected Payoff

Payoff SD=15 Payoff SD=5

Option Price = 2, Strike Price = 50, Mean Price = 50, Standard Deviation = 5 and 15

Strike Price

18Copyright 2015, Reinertsen & Associates

Performance

Payoff

Target

Fast Feedback Enables Exploitation of Good Outcomes

Fast FeedbackReduces Loss

from Bad Outcomes

We Can Change Payoff Functions

Gain

Loss

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Requirements Resources

Schedule

• Cost• Performance

Project Control Triangle

Variability Substitution

Possible Constraints1. Requirements and Resources2. Schedule and Resources3. Requirements and Schedule

Variability on one axis can be transformed into variability on another.

20Copyright 2015, Reinertsen & Associates

4. Enable Smaller Batches

• When work products are invisible, batch sizes are invisible.

• When batch sizes are invisible, product developers pay little attention to them.

• Many companies institutionalize large batch sizes.• Batch size reduction is attractive because it is fast,

easy, cheap, granular, leveraged, and reversible.• It is a great starting point for LPD.

Batch Size Queues Cycle Time

X 0.5 X 0.5 X 0.5

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Small BatchesLarge Batch

Unreviewed Drawings

Drawing Review Process

200

20

10 Weeks 1 Week

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Small BatchesLarge Batch

Unreviewed Drawings

Drawing Arrival Rate

200

20

10 Weeks 1 Week

Who’s First?Who’s Last?

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Cheaper Correction

Cheaper Debug

Lower Cost Changes

Better Economics

Fewer Status Reports

Faster Cycle Time

Early Feedback

Faster Learning

Less Requirements Change

Less Debug Complexity

More Efficient Debug

Cheaper Testing

Less Non-Value-Added

Better Code

Fewer Open Bugs

More Uptime

Higher Validity

Smaller Changes

Benefits of Small Batch Testing

24Copyright 2015, Reinertsen & Associates

Setting Batch Size

Economic Batch Size

0

5

10

15

20

25

1 2 3 4 5 6 7 8 9 10

Items per Batch

Cost

Transaction Cost Holding Cost Total Cost

25Copyright 2015, Reinertsen & Associates

Typical Batch Size Problems• Megaprojects• Project funding• Project phases• Requirements

definition• Project planning• Testing

• Capital spending Drawing release

• Design reviews• Manufacturing release • Market research• Prototyping• Post Mortems

Batch sizes are often too large when we incorrectly assume large batches create economies of scale.

Large batches are like rabbits in Australia, only worse.

26Copyright 2015, Reinertsen & Associates

5. Control WIP and Start Rates

• Many developers incorrectly assume that the sooner they start work, the sooner they will finish it.

• They are constantly tempted to start too much work.

• This dilutes resources and causes long transit times through their processes.

• A long transit time hurts efficiency, quality, and responsiveness.

27Copyright 2015, Reinertsen & Associates

Little’s Formula

• By constraining WIP in development processes we can control cycle time.

• This approach, which is known as Lean Kanban, is currently growing rapidly in software development.

Rate Departure Average

Queuein Customers ofNumber Average

Queuein Time Wait Average

q

q

qq

L

W

LW

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1234

12

34

COD Savings of Project 1 and 2 Late Start Advantages for Project 3 and 4

Control Number of Active Projects

Många barn och lite mat ger tunna smörgåsar.

29Copyright 2015, Reinertsen & Associates

Avoiding Long Planning Horizons

Datum

Search Area

D = Vt

D = Vt

A =V2 t2

Planning Horizon

Error

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Visual WIP Control Boards

ReadyQueue Coding

Readyto Test Testing

TestComplete

A D

E

C

B

WIP Constraint = 10 unitsWIP constraints can be local, regional, or global.

31Copyright 2015, Reinertsen & Associates

6. Sequence Work Correctly

• The sequence in which work is processed is called the queueing discipline.

• By changing the queueing discipline we can reduce the cost of a queue without decreasing the size of the queue.

• Since manufacturing has homogeneous flows it always uses FIFO.

• For the non-homogeneous flows of product development other approaches have better economics.

32Copyright 2015, Reinertsen & Associates

The TPS Emergency Room

• We desire to rigorously imitate the practices of Toyota.

• All arriving patients will be processed on a FIFO basis.

• We will set strict limits on WIP.

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Cost of

Delay

Time

2

Cost of

Delay

Delay Cost

First-In First-Out

Last-In First-Out

Project DurationCost of Delay

1 3 32 3 33 3 3

Use FIFO for Homogeneous Flow

1

3

23

1

34Copyright 2015, Reinertsen & Associates

Cost of

Delay

Time

Cost of

Delay

Delay Cost

High Weight First

Low Weight First

12

3

Project DurationCost of Delay

Weight = COD/

Duration1 1 10 102 3 3 13 10 1 0.1

1

23

Weighted Shortest Job First (WSJF)

160 796 Percent Reduction!

35Copyright 2015, Reinertsen & Associates

7. Create Faster Feedback

• When queues and batch sizes are large feedback is slow.

• Slow feedback hurts quality, efficiency, and cycle time.

• Feedback speed has enormous economic leverage in product development, but it is rarely explicitly managed.

36Copyright 2015, Reinertsen & Associates

The Front-Loaded Lottery• A lottery ticket pays $3000 to the winning

three digit number. • You can pick the numbers in two ways:

• Pay $3 to select all three digits at once.• Pay $1 for the first digit, find out if it is

correct, then choose if you wish to pay $1 for the second digit, and then choose if you wish to pay $1 for the third digit.

37Copyright 2015, Reinertsen & Associates

100%Probability

of Occurrence

Value of Feedback

Cumulative Investment

100%

10%

Savings= $0.90

$1 $2

10%

0 $3

Savings= $0.99

1%

Spend $1.00

38Copyright 2015, Reinertsen & Associates

1. Understand your economics.2. Make your queues visible and control them.3. Create a process to exploit variability.4. Enable smaller batches. 5. Control cycle time by controlling WIP.6. Sequence work based on economics.7. Accelerate feedback with smaller batches.

Seven Big Ideas of 2GLPD

39Copyright 2015, Reinertsen & Associates

1991 / 1997 1997 2009

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