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Manufacturing Processes—Production and Business: Measurements for Effective Decision Making, Part 5

Manufacturing Processes—Production and Business: Measurements for Effective Decision Making, Part 5

By Bob Sproull

Review of Measurements for Effective Decision Making, Part 4

In the fourth installment of this series on decision-making measurements, I presented the concept of the constraint-based performance reporting system. This system is comprised of 16 measurements, used to generate three reports. The system is useful in facilitating proper monitoring within a company that uses constraint management as its guiding principle.

The 16 measurements in constraint-based management:

  1. Ratio of throughput to constraint time consumption
  2. Total throughput dollars quoted in the period
  3. Ratio of throughput dollars quoted to throughput firm orders received
  4. Sales productivity
  5. Ratio of throughput booked to shipped
  6. Trend line of sales backlog dollars
  7. Ratio of maintenance downtime to operating time on constrained resource
  8. Throughput of post-constraint scrap
  9. Constraint utilization
  10. Constraint schedule attainment
  11. Manufacturing productivity
  12. Manufacturing effectiveness
  13. Order cycle time
  14. Throughput shipping delay
  15. Inventory turnover
  16. Return on investment

3 reports these measurements can be used to generate:

  1. Throughput contribution report
  2. Buffer management report
  3. Buffer hole percentage trend

I completed the post with an example of the first measurement, the ratio of throughput to constraint time consumption.

As with the previous posts in this series, much of what I present is taken from [1] Throughput Accounting—A Guide to Constraint Management, a book written by Steven M. Bragg. Let’s now move on to the second measurement.

Understanding total throughput dollars quoted in the period

Traditionally, manufacturers have used the total amount of sales dollars quoted in a period as the prime sales metric. This figure leaves management with no idea if the quoted sales contain enough throughput dollars to generate a profit. The solution is to have sales quote throughput for the period. This measurement also provides management a way to determine the sales compensation program and commissions.

Let’s examine an example from Throughput Accounting. The president of Orion Telescope Company examined sales quoting activity for the recent period, which was based on a flat-rate commission structure. This means that all sales earned the same commission rate, as demonstrated in this table:

Product Name

Throughput/Unit

Units Quoted

Total Throughput

Commission Rate

8” Reflector

$ 220.00

800

$ 176,000

6 %

4” Reflector

$ 400.00

140

$ 56,000

6 %

12” Catadioptric

$ 1,600.00

60

$ 96,000

6 %

Totals

1,000

$ 328,000

The sales staff claimed that most customers wanted to purchase the 8” Reflector Telescope, because it has the lowest price. If they are correct, Orion’s throughput should remain low, since most sales quotes are focused on this low-throughput product. The president decided to test his sales staff’s claim by doubling the sales commission on the other two products, with the results of his action summarized in the following table:

Product Name

Throughput/Unit

Units Quoted

Total Throughput

Commission Rate

8” Reflector

$ 220.00

700

$ 154,000

6 %

4” Reflector

$ 400.00

180

$ 72,000

12 %

12” Catadioptric

$ 1 ,600.00

120

$ 92,000

12 %

Totals

1,000

$ 418,000

Even though the total units quoted is the same as it was in the prior month, the sales team was able to convince 10 percent of its customers to shift to higher throughput products. This resulted in a total throughput of $90,000, representing a 27 percent increase in throughput over the prior month. Let’s now look at the third measurement in the constraint-based system.

Examining the ratio of throughput dollars quoted to throughput firm orders received

This measurement compares the actual total quoted throughput dollars to total throughput actually received from orders. As such, it is a very telling measurement of sales performance. It provides a direct assessment of the sales team’s ability to convince customers to accept their quotes. A variation is to calculate just for quotes for which there were competing quotes. This provides management a sense of how their products and price points compare to the competition.

Bragg provides an excellent example in the table below, which demonstrates a situation in which sales performance is maximized when bids are made on sole source aerial photography projects.

Quote Type

Throughput Quoted

Throughput Orders

Success Rate

Sole Source

$ 4,825,000

$ 3,957,000

82 %

Competitive Bid

$ 7,043,000

$ 1,620,000

23 %

Totals

$ 11,868,000

$ 5,577,000

47 %

Coming in the next post

In the next post, we will discuss the next three of the 16 performance measures: sales productivity, ratio of throughput booked to shipped, and trend line of sales backlog dollars. As always, if you have any questions or comments about any of my posts, leave a message and I will respond.

Until next time,

Bob Sproull

References:

[1] Throughput Accounting—A Guide to Constraint Management, by Steven M. Bragg, John Wiley & Sons, Inc., 2007.

Bob Sproull

About the author

Bob Sproull has helped businesses across the manufacturing spectrum improve their operations for more than 40 years.

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