Theory of Constraints Handbook - James Cox Iii [255]
Vn= Vn-1+ ∑ Value
where Vn = the value for a current time period (e.g., day or week)
Vn-1 = the value for the previous time period
Σ Value = the total net value ($ in the U.S.) invested or realized in the current period (e.g., days, weeks, months)
This formula basically says that every amount of currency invested for a day results in a lost opportunity to use that amount for some other purpose, and every day the amount is not recovered repeats the lost opportunity. Therefore, the value is not fully recovered until sufficient amounts have been received to cover the entire deficit. The basic idea is to age investments analogous to the aging of accounts receivable.
Inventory Value Days For example, if $100 is invested in inventory on Day 1 and the inventory is not sold until Day 10, inventory value days would equal $100 × 10 days or $1000. In this way, slow moving inventory is highlighted and the information provided encourages the quick sale of older inventory. It also provides a way to project demand saturation so that additional units are not manufactured or acquired. With thousands of products, the process becomes more complex, but can be accomplished either with enterprise software or with spreadsheets. A one-product example that includes acquisitions and sales over a period of 33 days (“VALUE-FORMULAandEXAMPLES.xlsx,” second spreadsheet, “Inventory Example”) may be found at the following Web site: www.mhprofessional.com/TOCHandbook. Figure 13-9, based on the spreadsheet example, shows the difference between the absolute amounts invested, as traditionally recorded (dark color) and inventory value days (lighter color). The rapid growth in inventory value days beginning on Day 23 signals management that inventory is building too rapidly and gives advance warning to cut acquisition of this item, which happened on Day 29. While the increase also is signaled by the traditional inventory values, upon close inspection, it is not nearly as noticeable and dramatic.
FIGURE 13-9 Traditional inventory value versus inventory value days.
Throughput Value Days The same file (“VALUE-FORMULAandEXAMPLES.xlsx”) has a third spreadsheet, “Throughput Example,” that illustrates how the same formula may be used to track orders that are delayed (missing from the critical area of a buffer for quality or other reasons or returned by the customer due to a quality problem).
Transfer Pricing
Organizations regularly go through restructuring programs where they go from a centralized organizational structure, where divisions are cost centers and major decisions such as product selection, pricing, and investments are made at headquarters, to a decentralized structure, where divisions are profit centers or investment centers. As their names imply, a cost center is responsible only for controlling costs; a profit center has responsibility for generating revenues and controlling costs, and investment centers are encouraged to behave as entrepreneurs and are responsible for making investments, generating revenues, and controlling costs. Organizations also regularly go through the process in a reverse direction: from decentralized profit and investment centers to centrally controlled cost centers.
Top management would like to control all decisions (a centralized structure), but they realize that they are too far from the action to act sufficiently to quickly compete in a meaningful way. However, when organizations are decentralized, incorrigible transfer-pricing issues arise if any products are transferred from one division to another, which they usually are.
Additional complications arise because division managers usually are in competition with each other. The selling division wants a higher price; the purchasing division wants a lower price. Transfers between divisions in different countries bring complex tax issues into the mix.
Addressing transfer pricing in detail is beyond the scope of this chapter. However, if you are interested in a nice treatment