Theory of Constraints Handbook - James Cox Iii [250]
While looking only at the relevant resource minutes lost on each product, multiplied by Product Y’s Throughput (contribution margin) per minute of Resource 2 production time, plus the variable costs involved will provide the same answer (fix the quality problem at Product X first, then go to Product Z’s problem). This shortcut method (see the Throughput Examples spreadsheet, AR29: AZ48) risks failing to consider all variables. The total effect on operating income (shown in cells AQ50:BB69 in the Throughput_Example spreadsheet) is by far the safer method and the one recommended by experts.
Adding a New Market Segment
The Throughput solution often has been compared with a linear programming solution of a one-constraint problem (Dopuch and Birnberg, 1969) and has been described as a step-wise linear programming analysis, dealing with one constraint (the worst one) at a time. Unfortunately, the Throughput solution, like a linear programming solution, is extremely sensitive to deviations from an equilibrium solution, one in which a best solution is found using current assumptions concerning resource availabilities, product demand, and so forth.
For example, suppose a salesperson returns from China with an order for 30 units a week for each of the three products, X, Y, or Z, or any combination thereof, with agreed selling prices equal to 80 percent of the U.S. prices. Should the company sell any of its products in China? Facing this decision, the company must be very careful not to make the easiest of mistakes: assuming the constraint will not shift to another resource.27
After computing Throughput per minute of Resource 2 for each of the three potential China products, suppose the company decides to sell 30 units of Product Z in China (called China Z in the spreadsheet) with a Throughput per minute of Resource 2 of $18.80 ($156–$62 = $94 ÷ 5 min on Resource 2), prior to filling orders for Products X and Y, and will not be interested in selling Product X (China X, with a Throughput of $7/min) and Product Y (China Y, with a Throughput of $6.55/min) in China. Following this strategy, however, will cause the company not to make a higher total profit ($14,214), as it expects, but to make $12,448—$1,766 less than expected—and $410 less than its previous best performance with no sales to China. The deterioration in operating income will occur due to Product Z’s (and, therefore, China Z’s) high usage of Resource 1, causing it to be in tighter supply and resulting in an interactive constraint with Resource 2. (See “Throughput_Example” spreadsheet, cells BD2: BS82.)
Controls should be in place to prevent actions that will reduce operating income. The following examples illustrate how traditional accounting can lead to nonoptimal decisions.
Purchasing Decisions
Even though materials are not often an organization’s constraint, rapid expansion in 2007 and 2008 saw raw materials prices skyrocket. Of course, the recession in late 2008 and 2009 brought material costs back in line. When materials prices change, Throughput and Throughput per unit also change. Therefore, product priorities also may change. In a TOC world, any time any Throughput metric input changes, its impact on priorities must be computed.
Less obvious purchasing decisions involve opportunities to acquire materials from a lower-cost supplier or to outsource certain portions of the productive effort. Potential acquisition errors can occur based on both accepting and rejecting outsourcing proposals as well as on initial material purchases. Each of the following decisions should be considered independently. That is, the starting point is the current most profitable combination of 80 units of Product Z, 90 units of Product X, and 10 units of Product Y.
Acquisition Decision Purchasing