Is a Queue an Asset or a Liability?

Saturday, January 8, 2011

Many believe that a queue is a good thing.

To a supplier a queue is tangible evidence that there is demand for their product or service and reassurance that their resources will not sit idle, waiting for work and consuming profit rather than creating it.  To a customer a queue is tangible evidence that the product or service is in demand and therefore must be worth having. They may have to wait but the wait will be worth it.  Both suppliers and customers unconsciously collude in the Great Deception and even give it a name – “The Law of Supply and Demand”. By doing so they unwittingly open the door for charlatans and tricksters who deliberately create and maintain queues to make themselves appear more worthy or efficient than they really are.

Even though we all know this intuitively we seem unable to do anything about it. “That is just the way it is” we say with a shrug of resignation. But it does not have to be so – there is a path out of this dead end.

Let us look at this problem from a different perspective. Is a product actually any better because we have waited to get it? No. A longer wait does not increase the quality of the product or service and may indeed impair it.  So, if  a queue does not increase quality does it reduce the cost?  The answer again is “No”. A queue always increases the cost and often in many ways.  Exactly how much the cost increases by depends on what is on the queue, where the queue is, and how long it is. This may sound counter-intitutive and didactic so I need to explain in a bit more detail the reason this statement is an inevitable consequence of the Laws of Physics.

Suppose the queue comprises perishable goods; goods that require constant maintenance; goods that command a fixed price when they leave the queue; goods that are required to be held in a container of limited capacity with fixed overhead costs (i.e. costs that are fixed irrespective of how full the container is).  Patients in a hospital or passengers on an aeroplane are typical examples because the patient/passenger is deprived of their ability to look after themselves; they are totally dependent on others for supplying all their basic needs; and they are perishable in the sense that a patient cannot wait forever for treatment and an aeroplane cannot fly around forever waiting to land. A queue of patients waiting to leave hospital or an aeroplane full of passsengers circling to land at an airport represents an expensive queue – the queue has a cost – and the bigger the queue is and the longer it persists the greater the cost.

So how does a queue form in the first place? The answer is: when the flow in exceeds the flow out. The instant that happens the queue starts to grow bigger.  When flow in is less than flow out the queue is getting smaller – but we cannot have a negative queue – so when the flow out exceeds the flow in AND the size of the queue reaches zero the system suddenly changes behaviour – the work dries up and the resources become idle.  This creates a different cost – the cost of idle resources consuming money but not producing revenue. So a queue/work costs and no queue/no work costs too.  The least cost situation is when the work arrives at exactly the same rate that it can be done: there is no waiting by anyone – no queue and no idle resources.  Note however that this does not imply that the work has to arrive at a constant rate – only that rate at which the work arrives matches the rate at which it is done – it is the difference between the two that should be zero at all times. And where we have several steps – the flow must be the same through all steps of the stream at all times.  Remember the second condition for minimum cost – the size of the queue must be zero as well – this is the zero inventory goal of the “perfect process”.

So, if any deviation from this perfect balance of flow creates some form of cost, why do we ever tolerate queues? The reason is that the perfect world above implies that it is possible to predict the flow in and the flow out with complete accuracy and reliabilty.  We all know from experience that this is impossible: there is always some degree of  natural variation which is unpredictable and which we often call “noise” or “chaos”. For that single reason the lowest cost (not zero cost) situation is when there is just enough breathing space for a queue to wax and wane – smoothing out the unpredictable variation between inflow and outflow. This healthy queue is called a buffer.

The less “noise” the less breathing space is needed and the closer you can get to zero queue cost.

So, given this logical explanation it might surprise you to learn that most of the flow variation we observe in real processes is neither natural nor unpredictable – we deliberately and persistently inject predictable flow variation into our processes.  This unnatural variation is created by own policies – for example, accumulating DIY jobs until there are enough to justify doing them.   The reason we do this is because we have been bamboozled into believing it is a good thing for the financial health of our system. We have been beguiled by the accountants – the Money Magicians.  Actually that is not precise enough – the accountants themselves  are the innocent messengers – the deception comes from the Accounting Policies.  The major niggle is one convention that has become ossified into Accounting Practice – the convention that a queue of work waiting to be finished or sold represents an asset – sort of frozen-for-now-cash that can be thawed out or “liquidated” when the product is sold.  This convention is not incorrect it is just incomplete because, as we have demonstrated, every queue incurs a cost.  In accountant-speak a cost is called a liability and unfortunately this queue-cost-liability is never included in the accounts and this makes a very, very, big difference to the outcome. To assess the financial health of an organisation at a point in time an accountant will use a balance sheet to subtract the liabilities from the assets and come up with a number that is called equity. If that number is zero or negative then the business is financially dead – the technical name is bankruptcy and no accountant likes to utter the B word.  Denial is not a reliable long term buisness strategy and if our Accounting Policies do not include the cost of the queue as a liability on the balance sheet then our finanical reports will be a distortion of reality and will present the business as healthier than it really is.  This is an Error of Omission and has grave negative consequences.  One of which is that it can create a sense of complacency, a blindness to the early warning signs of financial illness and reactive rather than proactive behaviour. The problem is compounded when a large and complex organisation is split into smaller, simpler mini-businesses that all suffer from the same financial blindspot. It becomes even more difficult to see the problem when everyone is making the same error of omission and when it is easier to blame someone else for the inevitable problems that ensue.

We all know from experience that prevention is better than cure and we also know that the future is not predictable with certainty: so in addition to prevention we need vigilence, prompt action, decisive action and appropriate action at the earliest detectable sign of a significant deterioration. Complacency is not a reliable long term survival strategy.

So what is the way forward? Dispense with the accountants? NO! You need them – they are very good at what they do – it is just that what they are doing is not exactly what we all need them to be doing – and that is because the Accounting Policies that they diligently enforce are incomplete.  A safer strategy would be for us to set our accountants the task of learning how to count the cost of a queue and to include that in our internal finanical reporting. The quality of business decisions based on financial data will improve and that is good for everyone – the business, the customers and the reputation of the Accounting Profession. Win-win-win.

The question was “Is a queue and asset or a liability?” The answer is “Both”.