Theory of Constraints Handbook - James Cox Iii [252]
Traditional accounting would say, “No.” The cost to make is only $29.97 ($20 for the material, $7.47 for the labor—14 min at $0.5333,32 plus $2.50 variable overhead). Buying the proposed component would increase the company’s costs by over $10 per unit and $100033 each week.
Rather than comparing costs, however, a person who is aware of TA would look at the impact on the company’s Throughput. Resource 2, Task 3, requires 10 min. Recall that the constraint in this system is Resource 2. Saving 10 min of Resource 2 time on Product X (90 units) and Product Y (10 units) amounts to 1000 extra minutes. With the extra time, additional units can be produced for the unfilled demand of Product Y. All unfilled demand for 40 units of Product Y can be produced and sold, adding an additional $183 per unit for a total of $7,320 additional Throughput, and adding $4520 to the bottom line ($7320 – $2800—the added cost of outsourcing 140 units34 at $20 incremental cost). Compared to the example company’s previous best performance of $12,858, this change represents about a 35 percent increase.35 Even if the company incurs additional overhead to track the supplier’s quality and dependability, the outsourcing (buy) offer should be enthusiastically accepted. In addition, everyone in the company should be made aware of the fact that marketing is now the organization’s constraint and management should formulate plans to increase the capacity of both Resource 2 and Resource 1 when product demand increases.
FIGURE 13-6 First engineer’s engineering change proposal.
Engineering Change Proposals (ECPs)
Engineers have been studying production operations and two new engineers have submitted engineering change proposals (ECPs).
First Engineer’s ECP A young engineer has read about a new process that can reduce the time on Resource 1, Task 3, from 15 to 5 min (see Fig. 13-6). New tooling costing $5000 would have to be acquired, however. Should the proposal be accepted?
Traditional accounting typically would value this opportunity as favorable since saving 10 min on 80 units would produce a savings of 800 min. At the applied labor rate of $0.5333 (or the actual rate of $0.50), cost savings would total $426.64 or a minimum of $400 a week. Thus, payback would occur in $5000/$400 = 12.5 weeks, at the longest. This is a very quick return on investment (ROI).
Of course, traditional accounting information provides support for an incorrect decision. Resource 1 is not the constraint and the “cost savings” of $400 or more per week would never occur. Resource 1 would just have more idle time and the company would be out $5000 for the tooling. TA correctly and immediately would reject this proposal.36 Because Resource 1 might someday become a constraint (it has the highest loading after Resource 2, the current constraint), this proposal might be kept on file for action later, but not now.
FIGURE 13-7 Second engineer’s engineering change proposal.
Second Engineer’s ECP Another engineer has submitted an ECP affecting Product X and Product Y. Figure 13-7 shows three changes: (1) an increase in materials cost from $20 per unit to $30, and (2) a 2-min decrease on Resource 2, Task 3, and (3) an increase from 4 min to 9 min for final processing of Product Y by Resource 4, Task 2. Oh, and the change will require an additional $8000 investment.
Of course, the accounting department is shocked by the $10 increase in material cost and the 3-min increase in net processing time for Product Y (from 35 to 38 min) that is partially offset by the 2-min decrease in Product X processing time. Considering the additional investment required, accounting might even suggest that this engineer should work for a competitor.
By now, you know that since Resource 2 is the company’s current constraint, this change should be evaluated further using TA concepts. Saving only 2 min on Resource 2, Task 3, for 100 units (90 for Product X and 10 for Product Y) means an additional 200 min of availability but costs an additional $1000 in raw material cost ($10