The Principles of Product Development Flow: Second Generation Lean Product Development

By Donald G Reinertsen

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We will create risk-averse development processes that strive to “do it right the first time.” We will blindly embrace concepts like Six Sigma product development.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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By focusing on proxy variables, product developers delude themselves into thinking they understand their economics.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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When DIP is high, cycle times are long. When cycle times are long, innovation occurs so late that it becomes imitation.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Today, only 15 percent of product developers know their cost of delay. Since such few companies can answer both questions, it should be no surprise that queues are managed poorly today.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Although efficiency does have economic impact, it is only another proxy variable.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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We must make decisions based on overall economics.

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variability is only a proxy

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Minimizing the economic impact of variability is a profoundly different goal than minimizing variability.

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To manage product development effectively, we must recognize that valuable new information is constantly arriving throughout the development cycle. Rather

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They fail to recognize both the critical relation between batch size and cycle time, and the critical relation between batch size and feedback speed.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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For example, the majority of product developers use phase-gate processes, which transfer 100 percent of the work product in one large batch to the next phase. We cannot make batch size any higher than 100 percent.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Today’s orthodoxy constrains the scope of work and drives variability into timing. The new paradigm constrains timing and drives variability into the scope of

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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The current orthodoxy focuses on planning and managing timelines, instead of the more powerful approach of managing queues.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Our current orthodoxy accepts inflexibility in return for efficiency. But what happens when this inflexibility encounters variability? We get delays. So what do we do? The current orthodoxy suggests that we focus on the variability. We can reduce this variability directly, or we can build buffers and reserves to mask the variability.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Noneconomic Flow Control

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Noneconomic Flow Control

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Observers quickly conclude that these visible characteristics are the root cause of superior performance.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Critical process choices with great influence on economics, such as inventory levels and feedback loop design, are virtually invisible.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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we must treat them as having a quantifiable cost.

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Cadence involves processing work at regular time intervals.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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This added value occurs because 90 percent of the time, you will not purchase the second digit, because you already know you will not win.

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There is simply no way to compare things that lack a common unit of measure. The economic view solves this problem.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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The key idea is that product and project attributes that have economic value should be quantified using a standardized and useful unit of measure: life-cycle profit impact.

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The Principle of Quantified Cost of Delay: If you only quantify one thing, quantify the cost of delay.

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We need COD to evaluate the cost of queues, the value of excess capacity, the benefit of smaller batch sizes, and value of variability reduction.

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We must trade off the economic waste of underutilization

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life-cycle profit.

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Today, no competent manufacturer believes that high utilization rates will optimize manufacturing.

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COD makes these invisible queues visible. With it, you can discover the enormous economic leverage that lies in queues. In product development, our problem is virtually never motionless engineers. It is almost always motionless work products.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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U-curves have flat bottoms, so missing the exact optimum costs very little. For example, in Figure 2-2, a 10 percent error in optimum batch size results in a 2 to 3 percent increase in total

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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We do not need highly accurate information to improve our economic decisions. This is indeed fortunate, because many

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Even imperfect answers improve decision making.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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This leads to what we might call the Pareto Paradox: There is usually more actual opportunity in the undermanaged 80 percent than the overmanaged 20 percent. For example, consider

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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it is best to process these decisions in small batches, and that this requires a low fixed transaction cost per decision.

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economics of the decision have changed by a factor of 200.

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Decompose the choice into its pieces and keep the good parts.

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Use decision rules to decentralize economic control.

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Ensure decision makers feel both cost and benefit.

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Always compare marginal cost and marginal value.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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When one considers marginal economics, however, the picture changes. We might discover that the small increase in value cannot be justified when compared to the extra expense and cycle time necessary to add that feature.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Most companies would work on the feature that has fallen short. They assume that achieving planned objectives maximizes economic outcomes. The correct economic choice is to work on the feature which has the greatest difference between marginal cost and marginal benefit.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Windows 1.0, was a market failure. However, it generated valuable information that influenced later versions of the product.

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“killer test,” one capable of removing very high amounts of risk.

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Whenever the economic benefit of this risk reduction is less than the cost of insurance, it is not a good investment.

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High probability of failure does not equal bad economics.

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Show Me the Money Principle: To influence financial decisions, speak the language of money.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Kendall notation.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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The first letter “M” refers to the arrival process, in this case a Markov process. In a Markov process, the elapsed time between arrivals is exponentially distributed. This simply means that short inter-arrival times are more probable than long ones. This is also known as a memoryless arrival pattern, because each arrival is statistically independent from the next.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Product development inventory is observable through its effects: increased cycle time, delayed feedback, constantly shifting priorities, and status reporting. Unfortunately, all of these effects hurt economic performance.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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deviations in cycle time. Fourth, queues raise the costs of our process. The more projects we have in process, the more projects we have to track and report status on. Even worse, we will ask for more progress reports per project because queues lead to long transit times.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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If a programmer makes a bad assumption about a protocol and gets feedback one day later, she stops making this bad assumption. If she must wait for 30 days to get this feedback, she will embed the bad assumption into 30 days’ worth of code.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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When the next process will be ready to use our work product within an hour, we feel a sense of urgency. When the next process has a 4-week queue, we feel there is little value in hurrying to finish our work.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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The percent of time arriving work will find the resource busy. The average number of items in queue. The average number of items in the system. The percent of overall cycle time that is queue time. The ratio of cycle time to value-added time.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Operating at high levels of capacity utilization increases variability.

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In contrast, with a shared queue, all customers experience a smaller delay.

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Thus, it is important to go beyond the popular but simplistic idea that the capacity of the bottleneck controls system flow.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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we would have to eliminate all variability in our service process to cut queues in half. In contrast, we can create the same results by adding 10 percent more capacity to a system loaded at 90 percent utilization.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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In product development, the situation is quite different. Our jobs have different delay costs, and they block resources for differing amounts of time.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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First, is there a difference in the cost of delay of different jobs in the queue? Second, is there a difference in the time a job will block a resource? Third, is the average length of the queue large?

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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When we base priorities on economics, they tend to remain more stable than priorities based on opinions. Opinions can be changed by the last phone call received from a customer. In contrast, economic facts change less abruptly. The key to stable priorities is to link them to economic facts.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Little’s Formula: Wait Time = Queue Size/Processing Rate Another valuable tool is one

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Don’t control cycle time, control queue size.

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William Feller’s, An Introduction to Probability Theory and Its Applications.

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The cumulative sum drifts further and further away from its mean.

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We simply cannot rely on randomness to correct the problems that randomness creates.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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interventions when queues get large. This suggests that we might set limits on maximum queue size and intervene as we approach these limits. It also suggests that the more frequently we monitor queues and the more quickly we intervene, the less queues will cost us. We will explore both these ideas in much more depth in later chapters.

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The optimum queue size occurs when we balance the cost of capacity against delay cost.

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4 Exploiting Variability

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Exploiting Variability

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

redefining failure (success is economical, not at the level of a roduct)

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Variability can create economic value. To refute the blanket

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

like in poker, the choice that pays will always embed risk

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payoff-function radically transforms our view of variability.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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We frequently encounter strongly asymmetric payoffs in product development. The value of a success can be much higher than the cost of a failure. I first discussed this asymmetry in the

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Variability is only desirable when it increases economic value.

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Fifty percent failure rate is usually optimum for generating information.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

an mvp should be placed at 50% chance success (business and tech)

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An event with low probability has high information content.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

pick somethingyou dont know at all is the best way to learn something

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There is an optimum failure rate. Higher or lower rates create economic waste.

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First, we can change the amount of variability. Second, we can change the economic consequences of the variability.

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Forecasting becomes exponentially easier at short time-horizons.

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coefficient of variation decreases proportional to the square root of the number of trials.

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A series of smaller steps makes much more economic sense because the likelihood of complete failure is much lower.

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Rapid feedback also reduces the consequences of the defect. If feedback is slow, we will write a lot of dependent code before the problem is identified.

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Move variability to the process stage where its cost is lowest.

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In fact, batch size reduction is one of the cheapest, simplest, and most powerful ways to reduce variability and queues.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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A fifth benefit of small batches is its unexpected reduction of overhead.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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I am responsible for delivering one module of code in the next 5 days, I have no place to hide. If I am responsible for one of the 100 modules that are required for the next integration point 100 days from now, I feel much less urgency.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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batch size reduction is reversible.

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If it takes 24 hours to set up a test, we cannot test every 24 hours. We must invest in reducing transaction cost to enable the use of smaller batches.

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Loose coupling between product subsystems enables small batches.

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Once a product developer realizes that small batches are desirable, they start adopting product architectures that permit work to flow in small, decoupled batches.

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Proximity enables small batch sizes.

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we can use the easy jobs to reduce queues by creating negative covariances in the workstream.

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By sequencing the high-risk batch first, we reduce the amount of accumulated investment that is exposed to the risk of failure.

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However, in practice, it is more common to break the hiking group into two smaller batches.

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A better alternative is to do high-level planning for the entire project, but to limit detailed planning to a short time-horizon.

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Every 90 days, the project takes a day to examine its methods and processes.

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The Principle of Local Constraints: If possible, constrain local WIP pools.

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As soon as one work center has filled all its empty pallets, it can make no more parts,

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the real art of managing queues is not about monitoring them and setting limits, it lies in what we do when we reach the limits.

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This approach of queue shifting is actually used quite cleverly in the TPS.

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big guns are not most valuable as an efficient substitute for small guns, they are most valuable for handling situations that the small guns cannot handle.

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method in more detail. A second strategy for blocking task expansion is to terminate a task when we reach the point of diminishing returns. We can view this as establishing

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As one manager from HP said, “We only want to work on fresh bugs.” They limit the number of bugs that they are actively working on. This improves the flow-through time and ensures that they are always working on important problems.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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When loading becomes too high, we will see a sudden and catastrophic drop in output.

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We cannot control congestion if we do not know it is there.

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Whiteboards and sticky notes are powerful, but queue size is still not the best way to inform users of congestion. It is better to provide the user with a forecast of expected flow time. Expected flow time can be calculated using Little’s Formula, Principle Q12, by dividing the WIP by the current processing rate. Flow-time forecasts allow users to make informed choices.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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If we wish to meet a regular product launch schedule, then we need enough capacity margin to absorb schedule delays at intermediate milestones.

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Since you cannot predict when the next product is coming, your only sensible choice is to fight to get your good idea into the current product.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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The current development program acts as a “feature magnet” attracting every good idea that anybody thinks of during its development.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Cadence inherently makes activities automatic and routine. This lowers transaction overhead and makes it economical to use smaller batches.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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A regular cadence for product introduction prevents a delay in one product from cascading into other products. It also exploits economies of synchronization by allowing coordinated introduction of multiple associated products.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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since opportunities arrive at random, their reviews would also occur at random. Instead, they conduct these reviews on a regular cadence.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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First, companies often create complex prioritization algorithms that produce precise priorities based on very imprecise input data. I prefer the simple approach. To select between two almost equivalent choices creates great difficulty and little payoff.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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One of the basic heuristics for RR scheduling is to ensure that 80 percent of jobs are cleared through the system in a single quantum of time. Only 20 percent of jobs will take multiple trips through the queue.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Preemption gives us the fastest possible cycle time, but it is usually a bad practice because it creates inefficiencies that reduce the effective capacity of a bottleneck resource. Instead, it is usually sufficient to give head-of-the-line privileges. This will eliminate queue time, which is typically the largest component of cycle time.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Ph.D. should work on vibration analyses. If there is a vibration analysis due to arrive in the near future, it is better to briefly hold the Ph.D. idle, than it is to block this scarce resource with a routine stress analysis.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Projects should only visit nodes that add economic value.

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Use flexible resources to absorb variation.

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Naval ships use a preplanned system, and they constantly drill to improve the response time of this system. The fire-fighting teams are assigned in advance and equipment is pre-positioned in strategic locations. Sailors do not fight fire by randomly swarming a fire with everyone who is available, the way 5-year-olds swarm a soccer ball.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Select control variables that predict future system behavior.

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companies often establish control set points based on absolute changes in proxy variables, instead of basing them on the economic impact of these changes.

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A metric is only a piece of a control system.

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We don’t need long planning horizons when we have a short turning radius.

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size in product development. These feedback effects are orders of magnitude more important in product development than they are in manufacturing, where work is highly repetitive.

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To detect a smaller signal, reduce the noise.

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Control the economic logic behind a decision, not the entire decision.

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consider the case of using the feature set as a relief valve for schedule variation. This entails dropping features when we deviate from the planned schedule.

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Colocation improves almost all aspects of communication.

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Fast feedback causes people to perceive the cause and effect relationships in their actions.

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If we want to communicate the importance of an issue, we need to allocate time to it.

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Instead, they focus on decentralized execution supported by centralized coordination.

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In fact, a classic military saying observes that, “No war plan survives the first shot of battle.”

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As we progress, we may discover that a feature is valued by 10 times fewer customers and that it will require 10 times more effort to execute.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Some development organizations use “tiger teams” that are assembled from experienced and highly productive people. These teams are brought to bear when a program gets in unexpected and severe trouble.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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don’t assume the goal of efficiency should be given higher priority than response time. Instead, use your economic framework to make this choice.

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One percent excess over parity on 15 features creates no excitement, but a 15 percent advantage on a key attribute may shift customer preference.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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the mission statement for a project can be a powerful way of maintaining coordination. Again, the most important part of this mission is the “why,” not the “what” or “how.”

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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While the customer may be able to identify 200 features and articulately explain what they want, only four to six of these features are actually capable of shifting preference from one brand to another. It is critical for the entire team to focus on these preference-shifting features on their project. The other 195

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They do not permit the uncertainty of color preference to permeate the entire design.

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Since the Marines expect plans to change, they focus on simple, modular, and flexible plans. Simplicity leads to fast adaptation.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Today, most product development organizations only permit pricing to play a role when using external services. There is no additional price for premium service from internal support groups, so all users request premium service. This creates infinite demand for premium service and forces us to allocate this service.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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One interesting variant of this is to allow users to buy premium service with a limited number of tokens rather than money.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen

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Small batch sizes build trust, and trust enables the decentralized control that enables us to work with small batch sizes.

~ The Principles of Product Development Flow: Second Generation Lean Product Development, Donald G Reinertsen