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Manufacturing Processes—Production and Business: Measurements for Effective Decision Making, Part 4

Manufacturing Processes—Production and Business: Measurements for Effective Decision Making, Part 4

By Bob Sproull

Review of Measurements for Effective Decision Making, Part 3

In the third installment of this series on decision-making measurements, I introduced the concept of constraint measures. In the context of a manufacturing organization, Steven M. Bragg, author of Throughput Accounting—A Guide to Constraint Management [1], taught us that constraints are identified by answering the key question: “Which specific area, aspect, or process limits the business’ performance from a customer, competitive, or profit point of view?”

Throughout this series, I will borrow concepts from this book, which I believe should be required reading for all manufacturing decision makers. In Part 4, I continue the topic by examining a series of constraint measures that, if regularly tracked, will drive your company toward greater profitability. 

Focus on what matters with a constraint-based reporting system

An avoidable consequence of using traditional performance measures and reports is that managers tend to focus their attention in many different areas, rather than on the constrained resource. For that reason, I believe traditional metrics should be avoided. 

The correct use of a constraint-based management system requires an entirely different set of performance measures and a new reporting system. The key underlying concept here is attention to the performance of the total production system, with the measurement of localized performance focused squarely on the system constraint’s performance.

Bragg says 16 measurements and three reports contribute to the proper monitoring of a company using constraint management. He also emphasizes that traditional measurements will negatively impact a constraint-based system, and should be avoided. 

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

The 3 reports in constraint-based management:

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

These measurements and reports enable a company to examine overall performance, as well as performance of specific areas within the company. For example, some of the measurements and reports will provide specific feedback to production, maintenance, sales, quality monitoring, or shipping.

Using the first measurement, ratio of throughput to constraint time consumption, is a great way to calibrate a product’s price so that profitability can be maximized.  For example, if a product has a low throughput (throughput = price – totally variable costs) in proportion to the amount of constraint time used, the company should consider raising the price of the product to increase net profits. Conversely, if a product has a high throughput to constraint time consumption ratio, the company should consider a price decrease. And if the product uses no constraint time at all, then it should be priced just low enough to increase sales.

Here is an example presented in A Guide to Constraint Management:

The Professional Podcast Supply Company (PPS) has six products.

Product Name

Price

Totally Variable Cost

Throughput

Constraint Time (min.)

Throughput to Constraint Time

Compressor

$  219.00

$   81.00

$  138.00

14

$ 9.86/minute

Headphones

$   50.00

$   40.00 

$   10.00

0

N/A

Microphone

$  300.00

$  240.00

$   60.00

0

N/A

Mixer

$   82.00

$   21.00

$   61.00

14

$  4.36/minute

Preamplifier

$  190.00

$   35.00

$  155.00

14

$11.07/minute

Reverb Board

$  140.00

$   28.00

$  112.00

14

$  8.00/minute

Based upon the analysis in this table, PPS should try to increase the price of its mixer, which has a low throughput to constraint time ratio of $4.36 per minute. They should concurrently attempt to increase sales with a lower price for the preamplifier, with a ratio almost three times higher than the mixer. Because the company’s headphones and microphones do not pass through the constraint, a price decrease of these two products is advisable to drive up sales volume. This will also result in a net increase in profit margins.

Coming in the next post

I will continue this discussion on the 16 performance measures by examining numbers 2) total throughput dollars quoted in the period and 3) ratio of throughput dollars quoted to throughput firm orders received. 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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