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Manufacturing Processes—Production and Business: Measurements for Effective Decision Making, Part 10

Manufacturing Processes—Production and Business: Measurements for Effective Decision Making, Part 10

By Bob Sproull

Review of Measurements for Effective Decision Making, Part 9

In Part 10, the final post in this series, I will present three throughput and performance measurement and reporting system reports that will complete our discussion on this subject: throughput contribution report, buffer management report, and buffer hole percentage trend report. I will present examples from [1] Throughput Accounting—A Guide to Constraint Management, by Steven M. Bragg, as I have throughout this series.

Determine the most profitable product mix with the throughput contribution report

One of the problems with traditional cost accounting is that most accountants know and use the fully burdened cost of their company’s products. Using throughput accounting, fully burdened costs are irrelevant. Instead, we replace this information with a throughput contribution report, shown in the following table:

Product Name Price Variable Cost Throughput Constraint Time Used (minutes) Throughput Time Per Unit

42” Plasma TV

$3,100

$2,020

$1,080

20

$54.00

24” CRT Monitor

800

520

280

6

46.67

13” B &W TV

120

70

50

2

25.00

30” LCD TV

1,200

575

625

40

15.63

19” LCD Monitor

290

230

60

14

4.29

This report focuses on the throughput generated by each product and the time required to process the product on the constrained resource. By dividing the constraint time used into throughput, we arrive at throughput time per unit. When this work has been completed, the report reveals the amount of throughput generated for the least amount of constraint usage. This information can then be used to determine the best mix of products to produce and sell to maximize throughput and profitability.

In our example above, the throughput contribution report has been sorted in declining order by throughput per unit. In our example, this means the 42” plasma TV at $54.00 per minute, and the 24”CRT monitor at $46.67 per minute, are the two most profitable products that this company should sell and produce.

Spot upstream problems with the buffer management report

As everyone should know by now, management needs an inventory buffer in front of the constrained resource to avoid work stoppage on the constraint. The buffer management report is designed to provide details of any problems that will reduce the size of the protective buffer in front of the constraint. Management can use this report to identify and correct buffer-related problems so that preventive improvements can be put in place. Since this buffer management report is designed to spot problems upstream from the constraint buffer, it can also be used to evaluate the performance of those upstream operations.

Date Arrival Time Required Actual Arrival Time Originating Work Station Cause of Delay

Sept. 11

Sept 11, 2PM

Sept 12, 3PM

Paint Shop

Paint nozzle clogged

Sept. 14

Sept. 14, 9AM

Sept. 16, 4PM

Electrolysis

Power outage

Sept. 19

Sept. 19, 10AM

Sept. 19, 4PM

Electrolysis

Electrodes corroded

Sept. 19

Sept. 19, 4PM

Sept. 25, 10AM

Paint Shop

Paint nozzle clogged

Sept. 23

Sept. 23, 1PM

Sept. 24, 9AM

Paint Shop

Ran out of paint

In this example, all of the problems listed originated from two work stations. The paint shop had 60 percent of the problems and electrolysis had 40 percent of the problems.

Determine the size of inventory buffers with the buffer hole percentage trend report

Management needs some kind of tool to determine the correct size of any inventory buffers used in their processes. Even though it can be initially set based upon a rough estimate, ongoing monitoring of buffer penetrations is needed to decide if the buffer level should be changed up or down.

buffer hole trend report image

One of the best tools for size management is the buffer hole percentage trend report as demonstrated in the graph above. It shows the actual buffer hole percentage by date for a two-week period. In this example, we have set a buffer hole lower boundary of two percent and an upper boundary of 11 percent for the percentage of all jobs for which shipments caused the expedite portion of the buffer to be penetrated. The expedite zone is that portion of the buffer where a lack of inventory from an upstream work center triggers expediting to ensure that replenishment inventory arrives as soon as possible. The small boxes represent the daily percentage of jobs causing buffer penetration.

An in-condition situation is when the moving average stays within the upper (11 percent) and lower (2 percent) boundaries. If it regularly stays outside the upper boundary, the buffer should be increased in size to reduce the risk of total buffer penetration. If it stays outside the lower boundary, the buffer is too large and should be reduced. In this example, the trend line has repeatedly exceeded the upper boundary, so it appears that a larger buffer is needed, at least until the causes have been determined and corrected.

A quick recap of the Measurements for Effective Decision Making series

This series has demonstrated an entirely new set of measurements that should be used to monitor the results of a system whose primary goal is to maximize the use of the constrained resource in order to maximize throughput and profitability. In many cases, traditional measurements and reports from traditional cost accounting are not only misleading, but are counterproductive to the achievement of maximized throughput and profitability.

Coming in the next post

I am looking forward to beginning a new series of blog posts aimed at helping manufacturing businesses improve efficiency. As always, if you have any questions or comments about any of my posts, leave me 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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