November 11, 2014

Factory Physics for

Managers
How Leaders Improve Performance in a Post-
Lean Six Sigma World
Edward S. Pound, Jeffrey H. Bell,
and Mark L. Spearman, PhD
©2014 by Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman
Adapted by permission of McGraw-Hill Education
ISBN: 978-0-07-182250-3

Key Concepts
According to Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, managing an effective manufacturing
operation requires an understanding of the following concepts:

• Do not innovate by imitation. Managers must choose tactics and controls that best fit their own unique com-
panies based on the science of operations—not on the operations of other companies.
• The ultimate goal of any business should be sustained profit and cash flow attained by moral means. Every strat-
egy managers enact must be designed with this goal in mind.
• Use buffers to synchronize demand and transformation. The three buffers of operations include inventory,
capacity, and time. When variability increases, buffers increase.
• Use the demand stock production (DSP) framework. The DSP framework is a representation of companies’
value streams and the best way for managers to develop successful plans for leading their companies to
achieve their marketing and financial goals.
• Create an operations plan that is comprised of tactics, controls, and measures. Effective operations plans are
carefully designed to have predetermined methods, systems, and metrics in place.
• Effective leaders must ensure their visions and strategies are understood by all. Sustainable leadership is
achieved when managers are empathetic and able to convey their visions for their companies through suc-
cinct and thoroughly designed operations plans.

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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

• Companies’ overall success can be improved by applying the basic principles of Factory Physics science to all
areas of operations. Work in process (WIP), cost of inventory, and overall cycle time can be decreased and
on-time delivery increased by utilizing the science behind Factory Physics.

Introduction
Factory Physics for Managers teaches managers and executives how to consistently achieve high cash flow,
low costs, and excellent customer service by gaining a scientific understanding of their operations. Through
an exploration of the basic principles of Factory Physics, Edward S. Pound, Jeffrey H. Bell, and Mark L. Spear-
man provide readers with a practical guide to managing manufacturing, service, and supply-chain operations.
Through real world examples, tools, and techniques, Factory Physics for Managers demonstrates how manag-
ers can transform their business strategies into effective operation tactics and controls.

Science—Use It or Lose
Factory Physics is a practical approach to management that helps leaders inform their operations strategy devel-
opment and implementation. Managers have also been using buzzwords to encapsulate significant production
innovations since the 1960s. The two buzzwords that represent the most enduring managerial initiatives today
are:

1. Lean: The methodology that includes just in time (JIT) methods like streaming mapping. Today Lean is used
in everything from factories to offices to hospitals.
2. Six Sigma: The methodology that applies to extremely sophisticated statistical methods to manufacturing
methods. Six Sigma techniques have become universal among most companies today.
The Toyota Production System (TPS) has long been the archetype of Lean. An analysis of Toyota’s history reveals
that the car manufacturer’s enormous production success can be attributed to its:

• Ability to facilitate continuous work in process (WIP) flow. There is a widespread

• Emphasis on the importance of quality over production. confusion about
• Empowerment of its employees to redesign workplaces over and over what works and what
again until they find the most efficient configuration for the given task. doesn’t work in man-
While Toyota executives never described TPS in scientific terms, it is undeni- ufacturing and sup-
able that the company had a scientific understanding of production systems ply-chain operations.
at a basic level. Unfortunately, most modern managers lack an adequate
As a result, operations
theory of operations and have no knowledge of the relationships between
WIP, cycle time, throughput, variability, and capacity. It attempts to innovate strategies and plans
by imitation, just as Boeing did when it copied Toyota’s assembly process and often do not achieve
lost millions in the process. what they promise.

The Nature of Business—A Secret Hidden in Plain Sight

To achieve sustained operations leadership success, leaders must first understand that the natural behavior of
business is constant conflict. This is because the road to the ultimate goal, high profitability attained by moral
means, is comprised of a number of conflicting elements, including low costs for high quality products and high
sales with fast responses. While these types of conflicts exist in virtually every business and cannot be elimi-
nated, they can be managed by:

• Focusing on profit, cash flow, quality, and customer service.

• Making trade-offs between inventory, capacity, response time, and variability.
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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

Practical Science for Leaders

Despite the widespread confusion about what works and what does not work in manufacturing and supply-
chain operations, managers must always try to prove that their goals can be achieved before committing to
them. One of the most effective ways to do this is to utilize the demand-stock-production (DSP) framework to
quantitatively determine how ambitious an organization’s goals should be. The DSP framework is a variation of
the established value stream mapping technique and a vital concept as it provides a way for managers to create
effective plans for leading their companies to achieve their marketing and financial goals. Representative of a
business’s value stream, the DSP framework is comprised of the following elements:

• Demand: The consumers’ production needs.

• Stock: Material, resources, or information waiting for a production or service process.
• Production: Materials, resources, or information moving through a sequence of operations performed by
machines, people, or natural processes.
Buffers are excess resources that affect value streams and correct misaligned
We want to improve demand and transformation. Managers must understand the relationship
managers’ intuition between buffers and their effects on business performances because with this
through a better knowledge it becomes possible to create a combination of buffers to synchro-
understanding of the nize demand and transformation, the step where materials or resources are
transformed into the goods and services that meet demand. The three types
science governing
of buffers include:
operations. Better
intuition enables 1. Inventory: Extra material from the transformation process or between the
transformation and demand process.
managers to make
better decisions on 2. Time: Any delay between a demand and satisfaction of it by the transfor-
mation process.
the fly and lead more
effectively. 3. Capacity: Extra transformation potential needed to satisfy irregular or un-
predictable demand rates.
According to the authors, the three essential equations every manager must know in order to practice Factory
Physics science includes:

1. The VUT Equation: Describes the real-world behavior of production flows, stocks, and buffers. The VUT equa-
tion illustrates the relationship between the waiting time or cycle time in queue (CTq), variability (V), utiliza-
tion (U), and processing time (T) for a single production center. In its most general form, the VUT equation is
written: CTq = VUT.
2. Little’s Law: The law established by John D. C. Little describes the fundamental relationship between work
in process (WIP), cycle time, and throughput for production flows. Little’s Law is a great estimator for value-
stream cycle times. It is typically written as: WIP = Cycle Time x Throughput. Little’s Law is an effective way to
determine process cycle time because it makes use of two easily determined quantities:
• Throughput: The average demand for a product over the long term, reported as the rate of units/time.
• WIP: With a physical production process, managers can go to the production flow and count the
amount of WIP.
3. The Variance of Replenishment-Time Demand Equation: This model is used to describe behavior of replen-
ishment-time demand (RTD), which provides managers with information about how to manage stocks and
inventory buffers. Replenishment time is the time between when the inventory system recognizes the need
for additional inventory and when the inventory is available for use. The equation is subjective to the vari-

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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

ability of production time and the demand of units per month and is written as: RTD = The Time it Takes to
Procure a Product x The Number of Units in Demand per Month.

Practical Math for Managers

One of the best ways managers can enhance their decision-making intuition is by acquiring a mathematical
understanding of their operations. This is often a challenge as most managers do not have simple businesses
with just one product and a single sequence of process centers, but instead have to deal with complex demands
and product variations.

Modeling Stocks

For managers to effectively measure their inventory stocks and performances, they must be able to calculate
the following:

• The Inventory Position: The general state of inventory can be calculated For most companies,
with the formula: Inventory Position = On Hand + On Order – Backorders.
this is a secret hid-
• The Reorder Point (ROP): When the inventory position falls below this num-
den in plain sight,
ber, it is time to reorder. It is determined by the formula: ROP = The Aver-
age Replenishment-Time + The Safety Stock.
obscured by political
battles or the chaos
• Average Inventory: A good approximation of average inventory is: The Re-
order Quantity/2 + Safety Stock. of weak or dysfunc-
tional business con-
When computing inventory policies, managers must consider the following
three objectives: trol. When the natu-
ral conflicts are not
1. Minimizing the amount of money invested in inventory.
managed, an orga-
2. Maximizing the service level, as measured by fill rate and backorder time. nization can become
3. Minimizing replenishment frequency. bipolar.
Modeling Flows

Flows are collections of routings that take materials from one stock point and transforms them through a series
of processing steps into another stock point. Formulas crucial to understanding flow include:

• Little’s Law: This is a crucial mathematical component of flow as it offers insight into the three important
measures of a production line: its throughput (TH), or the rate at which it produces; the quantity of WIP; and
its cycle time (CT), or how long it takes to go through the line. It is illustrated by the formula: WIP = TH x CT.
• Capacity Analysis: How much capacity a given flow has is determined by the bottleneck of the line. A bottle-
neck is defined as the process center that has the highest long-term utilization, or the fraction of time the
process center is not idle for parts. To compute capacity, it is necessary to assume a throughput, find the
utilization, and then divide the output by the utilization.
• Overall Equipment Effectiveness (OEE): The purpose of OEE is to identify the sources of lost production so they
can be addressed and remedied. It is calculated by: OEE = Availability x Production Efficiency x Yield.
Cycle Time

The entire production process, or cycle time, can be divided into the following useful categories:

1. Raw Process Time (RPT): The RPT for each routing step is the average time it takes to produce one transfer
batch of parts. It is calculated in the following way: RPT = The Transfer Batch x (Average Time to Produce One
Part + The Average Setup Time Allocated for Each Part).

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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

2. Move Time: The time it takes to move a part from one point to another.
3. Shift-Differential Time: When different resources work different amounts of time.
4. Batch Time: This is comprised of transfer batches, which include how many parts are moved between work-
stations, and process batches, or how many parts are made between setups.
5. Queue Time: Time determined by the level of utilization.

Profit, Cash Flow, and Factory Physics Science

The primary goal for any business is maintaining positive cash flow and long-term profitability, which can be
accomplished by both increasing sales and reducing costs. Instead of experimenting with their operations,
managers can utilize Factory Physics science to drive profit and cash by:

1. Maximizing contribution margins at bottlenecks. The rate of a bottleneck controls the throughput of a pro-
duction flow. To get the most profit out of a production flow, managers must maximize their contribution
margins or number of profitable products at the bottleneck. To calculate the contribution margin they can
use the formula: Contribution Margin = Revenue – Variable Costs.
2. Checking to ensure that Lean initiatives do not unintentionally starve bottlenecks. Managers must not starve
bottlenecks because it will increase the need for capacity and add fixed costs.
3. Optimizing inventory. To optimize their inventories and increase returns on assets, managers must minimize
the amount of inventory needed for their desired fill rates.
4. Managing the portfolio of buffers. Managers must continually check that they have the right amount of the
buffers of time, capacity, and inventory in their portfolios and adjust when necessary.

Measures not only Operations Strategy and Planning

provide insight to An operations plan informed by Factory Physics science is comprised of the
performance but also following components:
motivate behavior • Strategy: The design, implementation, and control of buffers, variability,
needed for consistent and costs. A good operations strategy process provides a scenario analy-
execution and predict- sis for making all business decisions.

able results. Without • Tactics: The policies or actions implemented to accomplish an objective.
In the context of Factory Physics, these types of policies are typically de-
good measures,
sign parameters.
conflicting efforts
between individuals • Controls: Methods or systems used to implement tactics for achieving
desired performance, like a manufacturing requirements planning (MRP)
occur by design. system.
• Measures: Quantities used to report performance characteristics of different steps of the production process.
• Execution: The use of tactics, controls, and measures in support of different strategies.
The authors argue that the best way for managers to achieve their organizations’ financial and marketing goals
is to utilize the Sales and Operations Planning Plus Process (S&OP+), a monthly series of tasks and meetings that
operate continuously. The S&OP+ process entails the following steps:

• Demand and supply planning. Determine the target limits for the mean and variant demand rates of items
and the performance boundaries by point and production flow.
• Generate policies to achieve planned performance. Create policies that use mathematical models to accu-
rately reflect the natural behavior of operations and supply-chain performance.

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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

• Implement appropriate feedback controls and monitor performance within control limits. Install IT systems
and feedback controls that monitor system-status measures like WIP levels, inventory positions, and virtual
queue lengths to ensure they remain between the control limits. These should be checked on a weekly basis.

Implementing Tactics, Controls, and Measures for Optimal Results

Despite the fact that execution is the key buzzword in operations, few companies consistently achieve planned
results. To meet company goals, managers must take time to design and implement tactics, controls, and mea-
sures for each of the following stages of production:

• Demand: Managers have the choice of several tactics to handle lumpy demands, including maintaining
enough inventory to have the capacity for variability year round, removing any spikes in demand from the
demand calculations, or putting in some demand clipping filters so that specific deviations are taken out of
the demand calculations.
• Inventory: When it comes to tactical issues revolving around inventories or stocks, managers must develop
strategies that allow them to determine when to order and how much. There are three strategic options for
this:
1. Move to the efficient-frontier curve. The efficient-frontier curve can be The greatest chal-
reached by: lenge of operations
• Reducing inventory costs while maintaining current fill rates. management, or
• Maintaining inventory costs while improving fill rates. almost any manage-
• Reducing inventory costs while improving fill rates. ment, is behavior
2. Redesign the buffer portfolio to trade inventory for time. Adjust and modification. People
balance the amount of inventory and time until it becomes possible resist change if for no
to drastically reduce inventory and achieve 100 percent customer other reason than it’s
service. different from what
3. Change the environment. Changing the environment means reduc- they are used to.
ing demand variability and replenishment time.
• Capacity: The options for capacity tactics depend on the individual production scenario. For example, if
there are high costs of capacity, the strategy should be running the facility as much as possible to use ex-
pensive fixed assets. When it comes to capacity control parameters, WIP is best for determining the amount
of throughput and cycle time a production flow will produce. Managers have the choice of implement-
ing the WIP control mechanism of pure push, which responds directly to demand signals; Toyota’s pure pull
mechanism, which allows WIP to be released to one process center only when that process center is ready;
or the Factory Physics touted constant work in progress (CONWIP) mechanism, which releases WIP only when
WIP levels have fallen below a predetermined level.
Measures are just as important to the Factory Physics framework as tactics and controls. This is because mea-
sures not only provide insight into operational performances, but can also motivate the behaviors needed for
the consistent execution of predictable results. While managers have many different options to choose from,
they must ensure their measures:

1. Provide feedback on the status of the flow or stock point being controlled.
2. Tie to the natural behavior of operations and buffer control.
3. Connect actions directly to financial results.

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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

Leadership, Measures, and Culture Change

Managers can provide a competitive advantage for themselves and their organizations by becoming enduring
leaders. In Factory Physics, effective leadership hinges on managers creating a common understanding of their
visions by ensuring that they are practical, objective, comprehensive, and predictive. Additionally, good leader-
ship requires:

• Empathy. True leaders understand that people inherently want to do a good job, but improving their behav-
iors requires persistence, patience, and training.
• Focused effort on a few key areas. By starting out simple, fundamental concepts and vocabulary can be
worked out as well as basic company frameworks.
• Regular training. Training is needed on the same topic numerous times. The progression of participant re-
sponse to training should include an introduction, a second session prior to implementation, and a third
session after implementation.
To lead effectively, managers must ensure their strategies are shared and
The Factory Physics understood by all employees. They can accomplish this by creating and dis-
framework enables tributing one-page strategic plans that outline the following:
managers to calcu- • Visions: Statements of what organizations want to eventually be.
late risk and act deci- • Missions: Statements of how organizations are going to achieve their vi-
sively. They make sions.
operational deci- • Key Strategies: Developed by leadership, these should remain relatively con-
sions that are tuned sistent over time.
to and inform their • Initiatives/Tactics: The definition of priorities for the next few months or
company’s business quarters, changing from plan update to plan update.
strategy to ensure • Measures/Controls: Weekly operations meetings are effective ways to go
success in operations over pre-established metrics and measure progress. While these meetings
leadership. can take many shapes, they should always review and reinforce what is
working and address what is not.

Examples from Industry

To illustrate the Factory Physics methodology, the authors offer several real world examples, including:

• Before applying Factory Physics, an unnamed pharmaceutical company utilized the common function-
based organizational structure. As most of its processes were batch and queue, 90 percent of the cycle time
was comprised of either queue time or extra time caused by large batches. The authors were able to cut the
cycle times in half and improve on-time delivery from 75 percent to 100 percent by switching to the CON-
WIP mechanism and materials requirements planning (MRP) system.
• Moog Inc., a company that specializes in motion-control technology, struggled for years to convince its shop
that working to fill a bin is just as important as filling a work order and installing a system to regularly review
inventory. After employees were trained in basic Factory Physics principles, Moog was able to streamline its
production process by putting a pull system in place and reducing cycle times from 23 days to 6.
• Cotton manufacturer, the Dixie Group, was able to reduce cycle time and keep the total WIP and inventory
investment at just over $10 million by using the Factory Physics’ dynamic risk-based system (DRS). The steps
of DRS include:

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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

• Planning capacity utilization.

• Optimizing dynamic scheduling parameters.
• Creating planned work orders (PWOs).
• Releasing PWOs according to CONWIP, monitoring completion times and the virtual queue, and de-
ciding whether recourse capacity is needed or not.

Final Word on Factory Physics Science (for Now)

Managers can start applying the concepts of Factory Physics immediately to their operations. Boiled down, the
five fundamental steps of Factory Physics science include:

1. Understanding environments.
2. Visualizing and choosing strategies.
3. Developing and quantifying tactics.
4. Executing feedback controls and control limits.
5. Monitoring measures and aligning them to strategies.

Features of the Book

Estimated Reading Time: 4–5 hours, 370 pages

Factory Physics for Managers by Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman is a highly technical
book that would be beneficial to operations managers and executives. A guide to improving operations and
manufacturing through math and science, this book gives readers the necessary tools to develop and imple-
ment strategies that are best suited to their organizations’ unique needs. In addition to real world examples, the
authors offer numerous charts and diagrams to illustrate the frameworks and equations that comprise Factory
Physics science. The chapters should be read in order.

Contents
Prologue

The Book in Brief

Why Is This Book Needed?

Chapter 1: Science—Use It or Lose

Chapter 2: The Nature of Business—A Secret Hidden in Plain Sight

Chapter 3: Practical Science for Leaders

Chapter 4: Practical Math for Managers

Chapter 5: Profit, Cash Flow, and Factory Physics Science

Chapter 6: Operations Strategy and Planning

Chapter 7: Implementing Tactics, Controls, and Measures for Optimal Results

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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

Chapter 8: Leadership, Measures, and Culture Change

Chapter 9: Examples from Industry

Chapter 10: Final Word on Factory Physics Science (for Now)

Notes

Acknowledgments

Index

Further Information
Information about the authors and subject:
www.factoryphysics.com
Information about this book and other business titles:
www.mheducation.com

Click Here to Purchase the Book

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About the Authors

Edward S. Pound is chief operations officer at Factory Physics Inc.

Jeffrey H. Bell is a managing partner of Arc Precision, a supplier of precision-engineered components to the
medical device industry. He also serves on the advisory board of Factory Physics Inc.

Mark L. Spearman, Ph.D., is the founder, president, and CEO of Factory Physics Inc. and coauthor of the previ-
ously published textbook Factory Physics.

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Factory Physics for Managers Edward S. Pound, Jeffrey H. Bell, and Mark L. Spearman, PhD

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