Limit Breaks #5: WIP And Decay Rate

TOYOTA TAKES OVER AN ALREADY WORLD-CLASS PLANT FOR A MONTH

“The Toyota Supplier Support Center agreed to take one product line in this world-class plan and use the methods of [the Toyota Production System] to transform it. At the end of this nine project, the production line was barely recognizable compared with its original world-class state and had attained a level of leanness the plant could not have thought possible. This production lined leapfrogged the rest of the plant on all key performance measures, including:
 
*46% reduction in lead-time to produce the product (from 12 to 6.5 hours)
*83% reduction in work-in-process inventory (from 9 to 1.5 hours)
*91% reduction in finished-goods inventory (from 30,500 to 2,890 units)
*50% reduction in overtime (from 10 hours to 5 hours/person-week)
*83% improvement in productivity (from 2.4 to 4.5 pieces/labor hour)
 
[…]
 
When I lecture companies on the Toyota Way, I describe this case and ask, “What does this tell you?” The answer is always the same: There is always room for continuous improvement. “But were these small, incremental improvements?” I ask. No. These were radical improvements. If you look at the original state of the production line at the beginning of the project, it is clear from the results that the company was in fact far from being world-class[…] The implications are clear and disturbing: this lean plant was not even close to being lean based on Toyota’s standards, despite being recognized as a lean facility. […] Visitors were coming to the plant convinced they were seeing world-class manufacturing, suggesting they did not have a clue what world-class manufacturing is.”
 
-- Jeffrey Liker,  The Toyota Way

***
 
LIMIT BREAKS #5: WIP AND DECAY RATE
 
This chapter, we’re going to borrow a term from manufacturing: WIP.
 
WIP stands for “Work in Process” or “Work in Progress.” When a car company makes a car, they make a lot of the parts separately – the engine, the transmission, the frame, the body, the tires, the windshield, and so on. Until this is all assembled and ready to be sold to the customer, it’s WIP – work in process.
 
After the product is fully assembled and before it’s sold, it becomes “inventory.”
 
Now here’s something you might not expect – larger amounts of WIP and larger amounts of inventory predict a company being less profitable and more likely to fail.  
 
If you’ve read up on the topic a little bit, maybe that’s not so surprising. It’s 2017, after all, and this became commonly accepted wisdom around 30 years ago.
 
Before that, though, it was very  surprising. For a while, Toyota had a higher market capitalization – the total value of the company’s stock on the stock market – than every other car company in the world  combined .
 
Just to be clear, so you know what that means: for a while, Toyota was worth more as a company that Ford, Chrysler, General Motors, BMW, Mercedes, Rolls Royce, Peugot, Ferrarri, and every other car company combined .
 
Combined.
 
One reason is because Toyota’s engineers and executive understood, counterintuitively, that inventory and WIP were both very dangerous and potentially very bad things, and worked constantly to lower the amount of them without compromising their performance.
 
Most of us will never be involved in manufacturing, but we’ll borrow the mental model of WIP and inventory from manufacturing, and talk about how work always has both carrying costs  and a decay rate  associated with it.
 
***
 
INVENTORY AS AN ASSET, INVENTORY AS A LIABILITY
 
In traditional accounting, inventory is an asset  – it’s a valuable thing. You put it on your balance sheet as an asset.
 
As such, before the lean manufacturing revolution pioneered by Toyota, American automakers would typically run their factories at full production ability. This would convert raw materials into inventory of finished cars.
 
Here’s the thing: while that’s correct in accounting terms, often the American car companies would make more cars than consumers would buy before the end of the year.
 
They put those cars into storage and warehouses.
 
This involved “carrying costs” – you needed to pay rent for the storage space at the warehouse, you needed to pay security to make sure the place didn’t get broken into, and you needed to transport cars to the warehouse once they were built, and from the warehouse when they were bought.
 
Additionally, many of the car companies carried debt to finance their production. If the raw materials and labor costs to build a finished car cost $20,000 and the car sat in the warehouse for a year, they had $20,000 tied up in that car. If they’d borrowed money at a 5% interest rate, they paid an additional $1000 in interest costs to leave the car stored there.
 
Thus, while inventory is technically an asset, it has liabilities associated with it. Storing cars in a warehouse costs you money.
 
But wait, it gets worse.
 
***
 
NOBODY BUYS AND FORD DUMPS CARS AT DISCOUNT
 
Every year, most car companies put a new version of each of their models out. So if it’s 2017 right now, the 2017 Ford Camry is for sale. Maybe Ford is selling it for $25,000 and expecting to make a $5,000 profit.
 
But once it turns 2018, who wants to pay full price for last year’s model?
 
Nobody.
 
So any remaining unsold cars start getting discounted more heavily at the end of 2017. Once the year rolls over, Ford might be selling for only $21,000… and if they still have unsold cars, they might have to sell at a loss – for $19,000 or $18,000, just to get rid of the thing, get it out of the warehouse, and get their cash back to pay off the interest on the debt to finance making the thing.
 
Ford – and indeed, most car companies worldwide before Toyota changed things – routinely built more cars than they could sell, and when they had too many cars at the end of the year, deeply discounted them and took a loss on them.
 
You can see how this gets brutal fast – if it cost Ford $20,000 to make the car, $1000 in interest charges to finance holding the inventory, $500 in storage and transportation and security costs, and then they sell it at a loss for $19,000, they lost  a total of $2,500 on that car.
 
And this used to routinely happen, all the time, to most major car companies. It was seen as a largely unavoidable part of doing business.
 
***
 
TOYOTA AND “JUST IN TIME”
 
“The Toyota Production System borrowed many of its ideas from the U.S. One very important idea was the concept of the pull system, which was inspired by American supermarkets. In any well-run supermarket, individual items are replenished as each item begins to run low on the shelf.
 
“ That is, material replenishment is initiated by consumption.  Applied to a shop floor, it means that Step 1 in a process shouldn’t make (replenish) its parts until the next process after it (Step 2) uses up its original supply of parts from Step 1 (that is down to a small amount of safety stock). In TPS, when Step 2 is down to a small amount of safety stock, this triggers a signal to Step 1 asking it for more parts. 
 
“This is similar to what happens when you fill the gas tank in your car. As in Step 2, your car signals a need for more fuel when the gauge tells you that the fuel is low. Then you go to the gas station, Step 1, to refill. It would be foolish to fill your gas tank when you’re not low on gas, but the equivalent of this overproduction happens all the time in [manufacturing] mass production. At Toyota, every step of every manufacturing process has the equivalent of a gas gauge built in (called kanban), to signal to the previous step when its parts need to be replenished. This creates pull which continues cascading backwards to the beginning of the manufacturing cycle. In contrast, most businesses use processes that are filled with waste, because work in Step 1 is performed in large batches before it is needed by Step 2.  This work in process must be storage and tracked and maintained until needed by Step 2, a waste of many resources.  Without this pull system, just-in-time manufacturing would never have evolved.”
 
-- Jeffrey Liker,  The Toyota Way

This seems like a subtle thing, maybe, and can be hard to get your mind around.
 
Basically, Toyota wouldn’t build components  until they were needed for the final product .
 
That is, they wouldn’t make a bunch of windshields just because the glassmaking station was empty. They’d wait until they had a batch of cars that needed windshields, and then make the windshields for that batch alone.
 
This meant you didn’t have a lot of finished glass sitting around that you had to store and had to make sure nobody knocked over and broke. It lowered the amount of storage and security needed, space needed, and cash needed to finance it. Likewise, the parts that went into windshields – raw glass and rubber and treating chemicals – they wouldn’t buy those, either, until they were out of those and a new batch of windshields needed to be made.
 
This is a subtle point, but with big implications. After a couple decades of doing things this way, Toyota could sell cars at a profit  for cheaper than American car manufacturers could make a car at all . Once that happens, the game is over and you have won.

Indeed, without repeated bailouts and protectionist legislation from foreign governments, Toyota would likely have put almost every foreign car manufacturer out of business many times over.
 
***
 
AND DECAY RATE
 
Decay rate is my own term, that I typically apply to knowledge work. But we can first understand it in a manufacturing setting.
 
Let’s say your factory makes as many windshields as it can, even if there’s no cars to be assembled with those windshields. Then, the end of the year rolls around, and suddenly, the next year’s model uses a different shape and design of windshield.
 
At this point, you have a backlog of windshields that can’t and won’t be used. You might be able to sell them for spare parts to car dealerships and mechanics, but again, that’s a complicated logistical hassle. You might need to scrap the windshields entirely, meaning all the cost that went into making them is wasted.
 
Likewise, if a humid hot spell hits the warehouse, maybe the windshields warp a little bit and become useless scrap.
 
Or heck, maybe they just get lost  in the storage process. That, too, was not an uncommon thing in manufacturing.
 
All unfinished work is always decaying.
 
It’s not always possible to know the exact decay rate, but any unfinished work-in-process hanging around is always in danger of decaying, breaking, or becoming obsolete.
 
***
 
APPLYING CARRYING COSTS AND DECAY RATE TO KNOWLEDGE WORK
 
Obviously, most of us will never be involved in industrial mass production.
 
However, the general mental models from manufacturing can be profitably applied to our own lives and work.
 
All “partially completed work” has some similar attributes to work in process.
 
All “completed but not shipped and harvested work” has some similar attributes to inventory.
 
And again, all knowledge work that you aren’t fully complete and done with  has both carrying costs and decay rates for you, which are expensive and making your life worse.
 
***
 
MENTAL BANDWIDTH AS A LIMITED RESOURCE
 
The first and most obvious cost with unfinished work is that you can’t completely forget about it yet.
 
All of us have limited bandwidth  – the amount of things we can think about, coherently, without getting overwhelmed.
 
For the vast majority of people, any unfinished projects or work will randomly recur in one’s thinking. “Should I start doing my taxes yet? Hmm…” – this is unprofitable.
 
Broadly speaking, every time you think about something without making progress on it, you’re paying a cost. It’s draining a little bit of your cognition and taking your mind away from where else it could be spent profitably.
 
This is okay to do, even correct to do it, if you’re intentionally letting some work sit and “marinate” and thinking about it in the background. That’s not what we’re talking about.

Rather, we’re talking about work where you know what the next step is to getting it complete, that you’re sure you’re going to complete, but where you haven’t completed it. Any thinking about that work without doing it is mentally expensive.
 
Obviously, we’ll have readers with a wide variety of different life circumstances. If you’re under the “overwhelm threshold,” you probably can’t imagine just how expensive it is to have work hanging around uncompleted.
 
For people over the overwhelm threshold, it’s very expensive. Incredibly expensive. Actually, paradoxically, people that are constantly over the overwhelm threshold also probably don’t realize how expensive it is… life runs a lot  better when nothing is on fire, and you can pick the most profitable work to do on any given day, or just take the day off and take leisure if you’re tired, or indulge in the best idea you have.
 
You can only keep so many things in your life without losing track of them. Anything that’s started-but-not-finished, that you’re sure you want to finish, you’re incurring some mental cost from.
 
***
 
DECAY RATE IN KNOWLEDGE WORK
 
Most complex technical work requires “loading the problemspace” in one’s mind, in order to be able to complete it. Depending on the task, this might be as little as a few seconds, or as much as 15-30 minutes. For very big projects, it might be 2-4 hours of going back through and studying all the relevant materials.
 
As a general rule with my writing at TSR, for every working day I spread writing a particular essays across, that adds around an extra hour of time to complete the piece .
 
This shocked me when I saw the numbers on it, and I checked and re-checked them repeatedly. It doesn’t seem  like I take much longer when the writing is spread across multiple days, because it certainly doesn’t take me 60 minutes to re-read my notes and research materials before I start writing.
 
But, as with any kind of complex work, things happen the fastest in “flow state” – when time just disappears, and everything just gets done. I reckon this is where the increased costs come from – whenever I spread a piece across multiple days, I have to re-read what I’ve already written to get a consistent tone across the piece and re-check research materials to make sure I’ve got the right names and dates – this might take 15-30 minutes total – but then, I have to go through the “warming up” period where the writing is a struggle for a while before breaking through.
 
Most aggravatingly (and stupidly), there were times in the past where I’d gotten a piece 90% finished and it would only have taken 20-40 more minutes to finish it, but then stopped for the day. Often, it would then take 2-3 hours  for me to write a solid conclusion. Of course, this is very aggravating when it happens – an obvious example of the mental decay rate in action.
 
Things get worse when multiple people are involved – every extra week a project drags on means more coordination meetings, “getting on the same page” again, and so on.
 
And, of course, my writing is not prone to being changed by outside demands. If you were an attorney who had a brief for a case almost complete, but then the client changes the direction, it might mean going back to square one. If you had a complete brief already done, perhaps those change requests never would have come in at all – negating the chance that past work goes obsolete. (At least most attorneys bill hourly. The rest of us don’t have the luxury of charging for our obsolete work.)
 
***
 
GUIDANCE: A MACRO MENTAL SHIFT
 
My first and foremost piece of guidance is a mental shift  that I recommend you make – seeing all work-in-process and “unsold inventory” in your life as dangerous and potentially harmful.

We’ll run out some tactical implications in a moment, but the mindset shift is the most important.
 
Whenever there’s work you’ve committed to do, and haven’t finished, you’re in a somewhat dangerous position.
 
Now, we don’t need to exaggerate this or get histrionic about it – it’s probably not going to be the end of the world if things drag on longer than they need to, and you end up taking more costs as a result.
 
But with that said, if you can reduce the amount of time you have incomplete WIP in your life, you’ll succeed faster, succeed more, be more calm, and have less work go to waste.
 
It can seem like a small thing at the margin, but it adds up. For a small personal example, we recently started advertising the Ultraworking Pentathlon using Google Adwords. Customers love the Pentathlon and we think it’ll be profitable to advertise.
 
Kai and I designed the landing pages, chose keywords, and set up all the tech and created an Adwords account. That took about three days.
 
Then – and this is fully on me – when it was 90% complete, I let it sit for about five days.
 
This is not the end of the world, of course. The first version of the project got out the door in 8 days instead of 3 days.
 
But… for the next five days, even though I had higher priorities (getting  Machina  out the door and turning around some admin and paperwork I needed to do), getting the Adwords live stayed in the back of my mind. I thought about it at least a couple times each day without making progress on it, taxing bandwidth ever-so-slightly.
 
Meanwhile, we started getting initial data and results five days later than we otherwise would have. Again, this isn’t the end of the world – but there’s many opportunities each year to make this type of error.
 
If I make a five-days-later error 20 times per year, we’re 100 days behind a more ideal schedule on market feedback.  Sure, it’s only five days – but every new customer we get might refer someone or repeat purchase, and that’s delayed five days. Take 20 such delays, and you can see how a company that reliably turns around projects in 3-4 days will outperform a company that takes 8 days.
 
While 5 days seems like a small number, over many decisions it adds up. The person that lets the project sit uncompleted has a higher chance of abandoning it, requires more time to “re-load the problemspace” mentally to do the work, the work takes longer, and the results come later. You pay the carrying costs and decay rate.
 
Again, not the end of the world. But the first step, overwhelmingly, is making the macro mental shift –
 
All work-in-process and “unsold inventory” in your life might be dangerous and potentially harmful.
 
***
 
SEQUENTIALIZING PROJECTS
 
The second piece of guidance I have for you might sound trivial and obvious for people already doing it, and it might seem impossibly hard for people who are very far away from it –
 
Aim for sequential projects instead of parallel projects, whenever possible.
 
Sequential means doing them in a sequence: Project 1 completes, so then you start Project 2. You don’t start Project 2 when Project 1 is 50% complete, or even 90% complete. You get Project 1 done and completely out of your life before starting the next one.
 
As an example, if you were a student that had four final papers for your classes, and they were all due in 20 days, you’d be much better off spending 3-5 days to get one of them completely done and submitted before starting on the second one. If you do the math, under most circumstances that’ll be the cheapest and sanest way.
 
It also means less risk – if you break your ankle or get seriously ill with 3 days left in the semester, only one final project is at risk, instead of all 4 of them if you did them all in parallel.
 
There are already many people operating this way, and the advice might seem trivial to them. Those people tend to be very successful. I first heard this advice from my friend, the terrific CEO Zach Obront, who built his startup BookInABox to over $6 million in annual revenue within three years of starting. He runs hard, fast, and sequential on his projects as much as possible.
 
For other people, it seems impossible – there’s already 15 things going on, and they’re all on fire. Yikes.
 
In that case, you might recognize that perfection here isn’t required – and indeed, almost all of us will have blended parallel projects from time to time – but you’ll still benefit from often saying, “Which of these can I get done and completed forever?” and then prioritizing those, to lower the number of things in process and free up mental bandwidth as a result.
 
Finally, you might do well to install a weekly review where you select and schedule your projects, and almost never agree to projects mid-week. I did this and it changed my life. Whenever I have a new opportunity, unless it’s obviously massively better than whatever else I’d be doing, I tell the person I’ll take a couple days to think about it, and I overview all of my already active projects  at the same time, looking at what’s going to be delayed and how much as a result.
 
Starting new projects before you’ve finished your last ones is a recipe for higher carrying costs and a higher decay rate, which are of course expensive. A project has to be really good  to make it worth blending and parallelizing with other already-good things in process.
 
***
 
“TEFLON” AS TACTICAL AND OPERATIONAL GUIDANCE
 
Finally, I’d like to give you one word that’s been incredibly profitable for me –
 
Teflon.
 
Teflon is what they coat pans with to make them “non-stick” – things don’t stick to Teflon.
 
Most of the tactical improvements you can make to your work habits in this area come from being more “Teflon-like.”
 
For instance, there’s the famous “OHIO” rule – “Only Handle It Once” – meaning, train yourself to not touch a piece of work until you’re ready to complete it. For email, playing Baydin’s “ Email Game ” will only show you a single email at a time. Use it and refuse to skip any email until your answer it or process it, and you’ll only look at a particular email once. Whenever my inbox gets above 20 or so, I use Email Game to process it.

If you do a type of work that always takes multiple sessions to complete, it can be useful to break the work into separate steps that can be completed in a single session, and to aim not to start on the work until you can at least get the next complete step.
 
This was revolutionary for me with writing – I separate out brainstorming, outlining, research, editing, and writing, all of which can be handled as separate steps. I know I can work to get a complete outline in 30-60 minutes, and on a busy day, I can schedule just outlining and know it’ll get complete under an hour.
 
Probably the hardest part of Teflon-ness is undergoing the mental and emotional training to always push through if you’re a little tired but work is nearing complete.
 
I like to call that “Terminator Mode,” after Arnold Schwarzenegger’s cyborg character in the movies of that name. Whenever The Terminator was near a target, it would go into, well, “Terminator Mode” and relentlessly go after the target.
 
If work is far from complete, I don’t stress and work at whatever pace, and comfortably break off for the day if my concentration is scattered and I’m not working well any more. But around 85% complete or so, I try to flip into “Terminator Mode” and really relentlessly stay with it until it’s complete.
 
This can be harder than it sounds, and it takes training and practice to build into your life. But whenever you catch yourself saying, “Well, this is almost done, but I’m getting a little tired/hungry/whatever…” – stop!  Terminator Mode! Teflon!
 
I actually debrief every single day “Was I net-Teflon?” as a Yes/No question. It meant not letting any work hang around that could’ve been completed. For such a small thing, it’s really almost miraculous in its effects.
 
***
 
IN CONCLUSION
 
All work-in-process has some carrying costs associated with it, and some decay rate. As long as something you’re committing to doing is incomplete, you’re paying at least some small cost each day.
 
The first thing you ought to do is recognize that , and make the mindset shift that it’s good to be Teflon .
 
As much as possible, work to sequentialize your projects, not doing the next one until the current one is complete.
 
If you’re over the overwhelm threshold and have multiple projects open that you’re genuinely going to complete, consider prioritizing whichever one can finish to reduce the mental carrying costs and decay rate in your life.
 
Then, work both tactically and operationally to train good work habits  around Teflon-ness into your life. The time from starting a packet of work to that packet completing is one of the chief predictors of success, because it means less stress, less cost, greater efficiency, greater flexibility, and more calm and control in the process.