R.B. Vollum & Associates R.B. Vollum & Associates - Theory of Constraints in Action - Results

R.B. Vollum & Associates - Theory of Constraints in Action - Results

The principles of constraints management are so powerful that even this far into the game, managers are rarely prepared for the degree of improvement possible or the speed with which it can happen.

Robert B. Vollum, 2003

R.B. Vollum & Associates - Theory of Constraints in Action

Product Pricing
Let's say that an opportunity has been presented, and since things are a little slow we would really like to get the order. If we use our standard cost, our sales people do not believe we will win the business at the price we must charge to get our "normal 30% margin." To maximize our chances, we have "sharpened our pencil" and reduced our cost estimate to the lowest possible figure by assuming improvements in production labor times. These assumed improvements project even further cost reduction, of course, because of the resulting lower value of allocated overhead. Let’s say we have made a substantial reduction and our cost of sales now calculates to be:
$500,000.00 Material
75,000.00 Labor
225,000.00 Overhead @ 300% burden rate
$800,000.00 Total cost of sales

Experience and our "customer intelligence" indicates that the business will go for something in excess of $1,000,000.00. To insure our success, we decide to take only a 20% gross margin and enter a bid of $1,000,000.00.

We do not get the business!!! On further examination we find that the winning bid was for $800,000.00, OUR PENCIL SHARPENED COST, and that the successful bidder was prepared to go even lower, if necessary. In fact, it looks like we would have needed a bid of $700,000.00 to be certain to win.

How happy or unhappy should we be that we were unsuccessful?

If we had taken the order for $700,000.00, would we have lost $100,000.00, as the costing procedures would indicate, or would we be $200,000.00 ahead? ($700,000.00 selling price minus $500,000.00 material content) The things we know for sure are 1) we did not get the business (and would probably always walk away from similar situations) using traditional costing techniques, and 2) we will not put $200,000.00 of throughput contribution in the bank to help pay the rent, light, heat, wages, salaries, and all the other bills that go on regardless of whether we won or lost. What is good or bad in a given situation depends on the realities of constraints and material/money flow.

In this instance, we should almost certainly be unhappy with the outcome.


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Costs of Idleness
Which is better -
  • A company where everyone is always busy, wearing multiple hats, and working to a substantial backlog


  • A company with a small backlog and obvious excess capacity of facilities and people? Which company will make more money?

Which company will have the greater product flow velocity? Which company will have the shorter lead time? Which company will have the higher on-time delivery performance? Which company can be more price competitive? Which company will have the lower inventory investment? Which company will have the higher quality? Which company will be able to make the faster competitive response? In which company will the relative expenses be less? In which company will the return on investment be greater? How should we value opportunity and protection?


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Real Costs of Setups
If a properly scheduled resource has available excess capacity, how much does a setup cost?

What additional money is actually spent or lost because of the setup?

On the other hand, if a properly scheduled resource is running to capacity and operating to a backlog, what is the cost of a setup and does it have anything to do with the setup cost itself?

What are the variables of time value? How should they be measured?


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Synch Flow
Vs Batch
An ERP/MRP driven company produces products assembled from multiple parts that it fabricates.

These parts contend for time on common resources, some of which have lengthy setup times when changing from one part to another.

To provide a high service level to its market and to obtain high efficiency and facility utilization, the company has historically produced to finished inventory in quantities representing two months usage. Batch lead times for some parts have ranged up to twenty weeks. Multiple batches are usually in process simultaneously at varying stages of completion. There is a high level of finished components stock, but delivery of finished product to inventory is typically behind schedule due to parts shortages. Stock outages of both component stores and finished products are common. There are several people in the Production Control and Customer Service organizations devoted to expediting product and to keeping customers mollified.

By focusing on the true "Point of Control" and properly synchronizing everything with this focus, performance might improve to a level that would eliminate the need for all FG inventory, WIP could be less than 10% of its previous level, and individual, complete products could be produced -- routinely, on time, from scratch -- in maybe as little as two hours. All this without adding people or equipment.

Changing the paradigm from cost/batch to throughput/flow can produce startling results. Often, all that is necessary is to think things through differently and to run the plant to different rules and measures. Most of the rest just falls in line. Companies are rarely prepared for the degree of improvement possible or the speed with which it can happen.


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