Theory of Constraints Handbook - James Cox Iii [646]
Sometimes it is straightforward to assign a dollar value to the inventory of these conceptual items. In the internal audit example, the department might assign an average value of $100 to audit hours incurred and use this to determine the inventory value of audits in progress. For example, an audit that is budgeted for 120 hours would have a total value of $12,000. Because on average only half the hours have been incurred at any point in time, a useful simplification would be to assign an inventory value of 50 percent of the total value, or $6,000, as soon as the audit is initiated and use this figure to accumulate IDD throughout the duration of the audit. This approach has the benefit of valuing larger audits at a proportionately higher value than small audits, with the result that IDD would be a more accurate reflection of the work that is in progress than the simple “audit-days” measure described previously.
Applying this concept to the Odessa Police Department, a value of one-half of the salary of the position being hired could be used as an inventory value. For example, if the department were starting the hiring process for a new administrative assistant at a salary of $20,000, one-half of that amount or $10,000 would be added to “inventory” and kept there until the person was actually hired. At the end of each reporting period, the total number of IDD would be reported. In this case, if the search for the administrative assistant had been started on the 21st day of the month, $100,000 IDD (10 days × 50 percent of $20,000) would be reported at the end of the month. If the search were not completed the following month, another $300,000 IDD (30 days × $10,000) would accumulate. This measure would be extremely valuable when the department is hiring a class of 10 recruits. If the average pay for a new recruit were $30,000, IDD of 4,500,000 (50 percent of $30,000 × 10 recruits × 30 days) would be incurred for each month the hiring process continues. Assigning dollar values to these types of projects, assignments, papers, or mental tasks is helpful where it is possible, because managers naturally focus on dollar amounts more easily than on simple item counts.
It should be noted that the use of IDD described here is not the same as its use for physical inventory in the supply chain. When used for physical inventory, the primary purpose of IDD is to discourage supply chain partners from doing things they should not be doing, that is, building inventory before it is necessary or building inventory that may never be necessary. Our primary concern here, however, is not with organizational units doing things that should not be done (e.g., hiring the administrative assistant) but with providing visibility to unit management of WIP and encouraging units to strive to complete tasks quickly. The longer the projects, assignments, papers, or mental tasks are held in the system, the larger the value of IDD. There is an incentive to complete assignments and tasks quickly to stop the accumulation of IDD.
To see how IDD might apply to the PCIP group at Boeing, assume that the decision is made to release project 123A, which requires repositioning a support bracket on the 747 to save $1,000 installation labor per plane. If an engineer starts the project today and pushes all of the necessary reviews, approvals, and other interactions with other units, the project will require 10 hours of PCIP engineer time and can be completed in one month. Without diligent follow-up and focus on this project, however, significant multitasking with its attendant switching costs and lead-time effects can occur. As mentioned previously, the PCIP group has not committed to deadlines for