This is a short post: In class we introduce Little’s law to show how flow time is a physical metric of inventory, adjusted for scale:
Flow Time = Inventory / Throughput
Here is a beauty of a graph from Gary Lucido:
This picture dramatically captures a seasonal effect, representing the fairly predictable pattern of a “slow” real estate market in winter to an “almost double as fast” summer. (The “Great Recession” slow down in 2009 is very visible as is the signal that times are changing again in summer of 2012.)
Flow time is the rigorous concept to measure a “slow” or “fast” market. Little’s law gives two explanatory hypotheses for a change in speed in the market: either inventory is decreasing recently or sales (throughput) are increasing [or both].
Isn’t it amazing how useful our three basic operational metrics (Inventory, Flow Time, and Throughput) are to explain and quantify market changes?