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Manufacturing Processes—Production and Business: Measurements for Effective Decision Making, Part 6

Manufacturing Processes—Production and Business: Measurements for Effective Decision Making, Part 6

By Bob Sproull

Review of Measurements for Effective Decision Making, Part 5

In the previous installment in this series on decision-making measurements, I explained through examples how and why the second and third measurements work. These measurements are total throughput dollars quoted in the period and the ratio of throughput dollars quoted to throughput firm orders received.

I will continue to borrow and excerpt from [1] Throughput Accounting—A Guide to Constraint Management by Steven M. Bragg. Let’s now move on to the next three measurements.

This measurement shows how well the sales team converts prospects to customers

One of the best ways to measure sales efficiency is to compare total throughput dollars booked in each period to the sales department’s expense. This demonstrates how well the sales team can uncover sales prospects and then convert them into firm orders with a minimum amount of operating expense. The actual measurement looks like this:

Throughput dollars booked


Sales department expense

Let’s look at an example of this performance measurement. The controller of the Cafeteria Carts Company is concerned that the sales staff is spending too much time assisting customers with the design of customized food catering carts, rather than selling its mass-produced carts. She creates the following table to reveal the level of productivity for each type of cart sale:

Sale Type

Throughput Dollars Booked

Sales Department Expense

Sales

Productivity

Custom carts

$ 5,750,000

$ 2,300,000

2.5

Standard carts

$ 8,425,000

$ 575,000

14.7

Totals

$14,174,000

$ 2,875,000

4.9

As the table shows, there is a wide disparity in sales productivity between the custom and standard carts. In fact, the sales department brings in only 2.5X its cost for custom carts compared to 14.7X its costs for standard carts.

This measurement uncovers resource constraint problems

An important piece of information for management is how many throughput dollars have been booked in each period. When compared to the dollars of throughput shipped each month, the difference determines whether the company is moving the net amount of its backlogged throughput.

For example, the general manager of the American Playground Company has tracked the status of new throughput bookings, throughput shipped and the net change between the two for a six-month period, as indicated below:

Month

New Throughput Booked

Throughput Shipped

Net Throughput Change

January

$ 3,247,000

$ 3,107,000

$ 140,000

February

$ 3,248,000

$ 3,100,000

$ 148,000

March

$ 3,250,000

$ 3,093,000

$ 157,000

April

$ 3,251,000

$ 3,088,000

$ 163,000

May

$ 3,254,000

$ 3,083,000

$ 171,000

June

$ 3,258,000

$ 3,078,000

$ 180,000

Based upon these results, American Playground has a serious resource constraint problem. Its bookings consistently exceed its ability to ship products, which results in an ever-increasing backlog of unfilled orders. The difference between throughput booked and throughput shipped is expanding over time as its shipments continue to decline.

Become more efficient by following the trend line of sales backlog dollars

When a company identifies its constrained resources (as in the case of American Playground Company) and begins working to improve it, progress must be tracked. A great way to do this is to create a trend line of results. With American Playground, we can use this trend line to see throughput shipped increasing as improvements are implemented, as shown in the figure below:

throughput shipped versus time graph

Improvements began in the June/July time frame and the corresponding trend line demonstrates the results achieved. The difference is approximately $80,000.

Coming in the next post

I will examine and explain the next three performance measurements in the constraint-based performance reporting system. They are as follows: ratio of maintenance downtime to operating time on constrained resource, throughput of post-constraint resource, and constraint utilization.

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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