This document summarizes a presentation on Second Generation Lean Product Development. It outlines 7 big ideas: 1) Understand economics, 2) Manage queues, 3) Exploit variability, 4) Enable smaller batches, 5) Control WIP and start rates, 6) Prioritize based on economics, and 7) Accelerate feedback. The presentation argues that product development can be improved by making queues and costs visible, reducing batch sizes to speed feedback, and sequencing work based on economic factors like cost of delay.

1. No part of this presentation may be reproduced
without the written permission of the author.
An Introduction to
Second Generation Lean
Product Development
SimCorp SAFe Meetup
Copehhagen, Denmark
November 13, 2018
Donald G. Reinertsen
Reinertsen & Associates
600 Via Monte D’Oro
Redondo Beach, CA 90277 U.S.A.
(310)-373-5332
Internet: Don@ReinertsenAssociates.com
Twitter: @dreinertsen
www.ReinertsenAssociates.com

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

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If we provide developers with good
decision support information they
can make better economic choices
more quickly.
Big Idea #1

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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 Cycle
Profits
Economic SpaceProxy Variable Space
Transformations
The metric of the target space need not always be economic.

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The Modeling Process
Create Baseline Model
Determine Total Profit Impact of Missing a MOP
Calculate Sensitivity Factors
Model
Expense
Overrun
Model
Schedule
Delay
Model
Value
Shortfall
Model
Cost
Overrun
Model
Risk
Change

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The Model Output
Life-Cycle Profit Impact
-$80,000
-$500,000
-$100,000
-$150,000
-$40,000
1 Percent
Expense
Overrun
1 Percent
Product Cost
Overrun
1 Percent Value
Shortfall 1 Month Delay
1 Percent
Increase in Risk
A Cost of Delay makes invisible queues financially visible.

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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

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Decentralizing Control with Decision Rules
Engineer Supervisor Program
Manager
Boeing 777 Weight Reduction
Decision Authority
$300
$2,500
$600
Dollars
per Pound

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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.
• Good decision support information
enables decentralized decisions.

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Invisible and unmanaged queues are
the root cause of poor economic
performance in product development.
Big Idea # 2

12. Traffic at rush hour
illustrates the classic
characteristics of a
queueing system.
PhotoCopyright2000Comstock,Inc.

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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
QueueSize
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

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Manage 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.
• Correct queue size is an economic tradeoff.

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In product development we should
try to alter the economic impact of
variability rather than trying to
eliminate it.
Big Idea # 3

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Payoff vs. Price
Price
Payoff
Expected Price
Price
Probabilty
Asymmetric Payoffs and Option Pricing
Strike
Price
Expected Payoff
Price
Expected
Payoff
Strike
Price
x
=

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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

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Exploit Variability
• In product development, we can’t add
value without adding variability, but we
can add variability without adding value.
• We must design development processes
that flourish in the presence of variability.
• The key to achieving better outcomes in
the presence of variability is to create
payoff asymmetries.

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The fastest and easiest way to reduce
queues is to reduce the batch size in
our product development process.
Big Idea # 4

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Small BatchesLarge Batch
Unreviewed Drawings
Drawing Review Process
200
20
10 Weeks 1 Week
Average feedback delay drops from 35 days to 3.5 days.

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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

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The easiest way to control the cycle
time of a process is to control the
amount of WIP in the process.
Big Idea # 5

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Why Limit Active Projects?
1
2
3
4
1
2
3
4
COD Savings of Project 1 and 2 Late Start Advantages
for Project 3 and 4
Många barn och lite mat ger tunna smörgåsar.
Mange børn og lidt mad giver tynde smørgåsar.

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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
Ready
Queue Coding
Ready
to Test Testing
Test
Complete
A D
E
C
B
WIP Constraint = 10 units
WIP constraints can be local, regional, or global.

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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.

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At both the project and portfolio level,
the sequencing of work should be
based on economics.
Big Idea # 6

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Cost
of
Delay
Time
2
Cost
of
Delay
Delay Cost
First-In First-Out
Last-In First-Out
Project Duration
Cost of
Delay
1 3 3
2 3 3
3 3 3
Use FIFO for Homogeneous Flow
1
3
2
3
1
A
A
B
B

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Cost
of
Delay
Time
Cost
of
Delay
Delay Cost
High Weight First
Low Weight First
1
2
3
Project Duration
Cost of
Delay
Weight =
COD/
Duration
1 1 10 10
2 3 3 1
3 10 1 0.1
1
23
Weighted Shortest Job First (WSJF)
160 7
96 Percent
Reduction!

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Sequence Work Based on Economics
• 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 approaches like
WSJF have better economics.

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Fast feedback loops enable better
economic performance in the presence
of uncertainty.
Big Idea # 7

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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.

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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

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Accelerate 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.
• Small batches create fast feedback, and
fast feedback creates the payoff
asymmetries required to exploit variability.

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

37. 1991 / 1997 1997 2009
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