Synchronous Manufacturing 1k6c51

Chapter 8: An Introduction to Synchronous Manufacturing Umali, Lezette M. Trio, Nikko R. Velasco, Franz Christian S. Villamil, Daniel James E. Villanueva, Marc Edelbert S. Abstract

objectives of a firm (providing jobs, consuming raw materials, increasing sales, increasing share of the market, developing technology, or producing high-quality products) will only follow once it has enough money or profit (1).

In this chapter, synchronous manufacturing, the techniques used in implementing it, and its significance to the industry and to everyone’s lives were tackled. Synchronous manufacturing was deliberately compared to MRP and JIT in order for the readers to understand its advantages and disadvantages relative to the other two. Some concepts in synchronous manufacturing were also discussed such as the theory of constraints, drum buffer rope, and monetary unit days.

Significance to the Industry and to Your Everyday Life Synchronous manufacturing elevates the harmonious relationship between the processes and other elements (such as labor and materials) in a firm. It then improves total system performance. Same thing can also be applied in everyday life. Working harmoniously can help an individual prioritize what needs to and perform well by considering the relationships between the factors that might affect his/her decisions.

Introduction Around 1980, Dr. ElihayuGoldratt, founder of Avraham Y. Goldratt Institute, argued that manufacturers were not being efficient in scheduling and controlling their resources and inventories. In an attempt to solve this problem, Dr. Goldratt and his associates at Creative Output developed software called Optimized Production Technology (OPT) which addresses the problem of inefficient scheduling and controlling of resources. The OPT schedules jobs through manufacturing processes subject limited resources (e.g. limited facilities, machines, personnel, tools, and materials). This software was patronized by a number of large companies. When approximately 100 large companies have installed the software, Dr. Goldratt proceeded to promote the logic and principles behind the software, rather than the software itself (1). This chapter discusses the principles and ideas of Dr. Goldratt in synchronous manufacturing.

Objectives of the Chapter This chapter’s objective is to briefly discuss the concept of Synchronous Manufacturing. Specifically, the audience should be able to:      

Define what is synchronous manufacturing; Describe a bottleneck and differentiate it from non-bottleneck; Measure performance of a firm; Enumerate and apply methods for control; Differentiate synchronous manufacturing from MRP and JIT; and Evaluate firm’s performance in ing.

Significance of the Chapter Main Discussion

“The goal of a firm is to make money.” In order to achieve this goal, the entire production process must work in harmony (Synchronous Manufacturing). When manufacturing is truly synchronized, its emphasis is on total system, not on localized measures such as labor or machine utilizations. Achieving all other

Synchronous Manufacturing Synchronous manufacturing refers to the whole production process working together in harmony to achieve the firm’s main goal – to gain profit. 1

This is the focus of Dr. Goldratt’s approach in manufacturing, which emphasizes the importance of the total performance of the whole production system, instead of concentrating on the localized measures of performance such as labor or machine utilization (1).

the idea that only improvements made on constraints will yield significant benefits (2). With this, TOC provides the Five Focusing Steps (shown in Figure 8.1) which aims to identify and eliminate constraints (2). The steps are as follows (2):

In an attempt to achieve a truly synchronized manufacturing system, Dr. Goldratt developed his nine rules of production scheduling (1).

1. Identify the constraint. Identify the most significant constraint in the system (the single part of the process that restricts the system from achieving the goal).

Goldratt’s Rules of Production Scheduling These are the nine rules which explain the principles behind OPT (1):

2. Exploit the constraint.

1. Do not balance capacity – balance the flow. 2. The level of utilization of a nonbottleneck resource is determined not by its own potential but by some other constraint in the system. 3. Utilization and activation of a resource are not the same. 4. An hour lost at a bottleneck is an hour lost for the entire system. 5. An hour saved at a nonbottleneck is a mirage. 6. Bottlenecks govern both throughput and inventory in the system. 7. The transfer batch may not and many times should not be equal to the process batch. 8. A process batch should be variable both along its route and in time. 9. Priorities can be set only by examining the system’s constraints. Lead time is a derivative of the schedule.

Make quick improvements to the throughput of the constraint by making the most of what you have. 3. Subordinate constraint.

and

synchronize

to

the

Review all the other processes if they the improvement of the constraint. 4. Elevate the performance of the constraint. If the constraint still exists, consider what further actions can be done to eliminate it. In some cases, capital investment may be required. 5. Repeat the process. The Five Focusing Steps are a continuous improvement cycle. After a constraint has been improved, the next step is to find the new limiting factor of the system.

Each of these rules will be elaborated as the discussion progresses. After the nine production scheduling rules, Dr. Goldratt proposed the Theory of Constraints which became a well-known problem-solving tool which can be applied, not just to manufacturing, but to many business areas as well (1). Theory of Constraints Theory of Constraints (TOC) is a methodology conceived by Dr. Goldratt to identify the most significant limiting factor (constraint) in a system and improve this constraint until it no longer restricts the system from achieving its goal. In manufacturing, this constraint is termed “bottleneck” (2).

Figure 8.1.The Five Focusing Steps of TOC (2).

Every process has a single constraint which determines the maximum output of the process. This is the core concept of TOC which results to

Once the TOC is applied accordingly, following benefits will manifest (2): 2

the

    

operational expense is simply all the money spent to transform inventory into throughput (1). It is important to note also that not allproducts that flow through the process are throughput. Throughput is defined as all the products sold. Those not sold are inventory (1).

Increased profit (main goal of the firm) Fast improvement Improved capacity Reduced lead times Reduced inventory

Given these operational measures, the goal of the firm is to increase throughput, and reduce inventory and operational expense (1). This is shown in Figure 8.2

Some of these benefits, however, do not adequately measure the performance of the firm. Performance Measurements To accurately measure the performance of the firm, two types of measurements are used: financial measures and operational measures (1). The financial measures of the firm are as follows (1):   

Net profit – absolute measurement in monetary units Return on investment – a relative measure based on investment Cash flow – measure of survival

Figure 8.2.The operational goal of the firm (1).

Another important measure performance is productivity.



firm’s

Productivity is traditionally measured in of output per labor hour. However, with this definition, productivity does not ensure an increase in profit. For instance, additional output that will not be solved will only be an additional cost. To know whether productivity truly increased, throughput, inventory and operational expense should be considered. Has the throughput increased? Has the inventory and operational decreased? Therefore, productivity should be defined as “all the actions that bring a company closer to its goals” (1).

The next set of measures significant to the performance is the operational measures. They are as follows (1):



a

Productivity

These three must be used together always. For example, a net profit of Php 10 million is a good indicator of performance, but it has no real meaning until the amount of investment made to gain that much profit is made. If the investment made was Php 100,000, there is a 10% return on investment. Moreover, these two measures will not guarantee the survival of the firm in the day-to-day operations. The cash flow is the important measure to ensure survival (1).



of

Aside from the definition of productivity, another misconception in many firms is the idea that capacity must be balanced.

Throughput – the quantity or amount of raw material processed within a given time Inventory – a complete listing of merchandise or stock on hand, work in progress, raw materials, finished goods on hand, etc., made each year by a business concern Operational Expense – a category of expenditure that a business incurs as a result of performing its normal business operations

Unbalanced Capacity Many firms still hold on to the belief that capacity must be balanced across a sequence of processes in order to match the demand with the capacity. However, in synchronous manufacturing, it is emphasized that unbalanced capacity is better. Take for example processes A and B. The time it takes to process a job in process A is normally distributed with mean 10 hours and standard deviation of 2 hours. Process B has a constant processing time of 10 hours. Suppose that 5 items need to go through process A then process B. Figure 8.3

In of money, throughput is the rate at which the firm generates money through sales; inventory is all the money invested by the firm in purchasing the things it intends to sell; 3

Figure 8.3. Processing and completion times of the items going through processes A and B (1).

shows the processing and completion times of the items going through processes A and B. Due to the variations in A’s processing time, the total processing time for the 5 items is 66 hours, instead of an expected completion time of 60 hours. This delay still happens even though the capacities of the two processes are balanced (i.e. both have an average processing time of 10 hours per unit) because time lost when the second process is idle cannot be made up. This simple illustration shows that exerting effort to balance capacity is not a good idea. To balance capacity, adjustments must be made on machines or equipment, tools, workloads, labor, etc. These efforts will be made in vain since the total completion time will still exceed the expected completion time. Thus, instead of balancing capacity, the focus should be on balancing the flow of materials (1).

utilized) and can scheduled properly.

be

a

bottleneck

if

not

Methods for Control Using resource utilization may yield excess inventories since it encourages the overview of non-bottlenecks. Figure 8.4 shows how bottleneck and nonbottleneck resources should be managed.

In balancing the flow of production, the constraints which restrict the flow of materials must be properly dealt with. As mentioned above, these constraints are called bottlenecks. Bottlenecks and Capacity-Constrained Resources Figure

A bottleneck is a resource whose capacity is less than the demand. It is the point in the production process where the flow of materials narrows. On the other hand, a nonbottleneck is a resource whose capacity is larger than the demand. Lastly, a capacity-constrained resource (CCR) is a resource whose utilization is near or equal to 100% (i.e. capacity is almost or fully

8.4.

Possible arrangement of bottlenecks nonbottleneck resource (1).

and

For instance, resource X and resource Y are work centers that can produce a variety of products. Each of these work centers has 200 hours available per month. One unit uses 1 hour of production time for X and 45 minutes

4

for Y. The market demands for both X and Y is 200 units per month (1).

For a part waiting to go through a bottleneck, queue time is the largest. For a non-bottleneck, wait time is the greatest (1).

If the resources are arranged as in Figure 8.4.A, a bottleneck feeds a non-bottleneck. X is the bottleneck since its capacity is less than that of Y (200 units < 267 units) relative to the demand of 200 units. No extra product accumulates in the system because Y has to wait for X. All units produced flow to the market. On the other hand, if a non-bottleneck feeds a bottleneck, as in Figure 8.4.B, 75 percent of Y’s capacity (200 units) should be utilized or else work-in-process will build up in front of X since its capacity is only equal to 200 units (1). This situation illustrates one of Goldratt’s rules: The utilization of a non-bottleneck resource is not determined by its own potential but some other constraint in the system.

Finding the bottleneck Two ways can be used in finding the bottleneck(s) in a system: (i) run a capacity resource profile; and (ii) use the knowledge of the particular plant, look at the system in operation, and talk with supervisors and workers (1). A capacity resource profile is obtained by looking at the loads placed on each resource by the products that are scheduled through them (1). The concept of utilization can also be used in finding the bottleneck. Utilization is a measure of how fully occupied a process step is or how busy it is. It can be computed using the following formula:

Figure 8.4.C shows that the products produced by X and Y are assembled and then sold to the market. Because one unit from X and one unit from Y form an assembly, X is the bottleneck with 200 units of capacity and, therefore, Y should not work more than 75 percent or else extra parts will accumulate (1).

(Eqn 8.1) (3) where

In Figure 8.4.D, equal quantities of product X and Y are demanded by the market. In this case we can call these products “finished goods” because they face independent demands. Here Y has access to material independent of X and, with a higher capacity than needed to satisfy the market, it can produce more product than the market will take. However, this would create an inventory of unneeded finished goods (1).

(Eqn 8.2.) (3) Example 1 (3): Umali’s Lomi’s cooking line has a daily demand of 25 bowls. Time spent in cooking per day is 6 hours. If the cooking line has an effective capacity of 5 bowls per hour, what is the utilization?

Time Components

Using Eqn. 8.1

The production cycle time is composed of the following:

Takt Rate=(25 bowls )/(6 hours)=4.17 bowls per hour

1. Setup time – the time that a part spends waiting for a resource to be set up to work on this same part (1). 2. Processing time – the time that the part is being processed (1). 3. Queue time – the time that a part waits for a resource while the resource is busy with something else (1). 4. Wait time – the time that a part waits not for a resource but for another part so that they can be assembled together (1). 5. Idle time – the unused time; that is, the cycle time less the sum of the setup time, processing time, queue time, and wait time (1).

Solve for the utilization using Eqn. 8.2, Utilization=(4.17 bowls per hour )/(5 bowls per hour) =.834 The utilization of the cooking line is 83.4 %. A relatively low utilization means higher probability that a bottleneck exists within the system. Saving Time An hour saved at the bottleneck adds an extra hour to the entire production system.

5

Time can be saved in a bottleneck through better tooling, higher-quality labor, larger batch sizes, reduction in setup times, and so forth (1).

A system following the drum buffer rope idea continues to have a work in progress inventory but in a minimal sense as shown in Figure 8.6. This would require a small amount of space depending on the buffer size. In this system, the risk of damaging the products while not being processed is decreased and by adapting this idea to a system would cause a greater quality of products produced.

On the other hand, time cannot be saved in a non-bottleneck. An hour saved at the nonbottleneck is a mirage and only adds an hour to its idle time. Trying to “save” time in a non-bottleneck can only turn it to a bottleneck. Avoid Changing Bottleneck

a

Non-bottleneck

into

a

When non-bottleneck resources are scheduled with larger batch sizes, this action could create a bottleneck (1). Increasing setup time serves no production

batch size creates an illusion that is reduced. However, this saved time purpose other than interfere with (3).

Figure 8.6.System with DBR with R2 as bottleneck (4).

To apply the idea of drum buffer rope, let us recall that a bottle neck is a resource that does not have the capacity to meet the demand while capacity-constrained resource (CCR) is a resource operating near capacity but has adequate capability as long as it is scheduled accordingly. A CCR starves downstream operations of products when too many setups are required thus causing the CCR to run short of capacity, or producing too large lot sizes which delays transfer of WIP (1).

Drum, Buffer, Rope Every production line needs some control point or points to manage the flow of products in the system (1). Drum, buffer, rope is a principle that addresses problems brought by bottlenecks and capacity-constrained resource and in production. A system that does not inhibit the drum buffer rope theory would most likely cause a large work in progress inventory just before the bottleneck of the current system. As shown in Figure 8.5, products are queuing before the bottle neck, the R2 in the figure, and is in a non-value adding state in the system. Having this inventory adds cost to the company by taking space. Products in the work in process inventory state accumulates risk of having defects from being stacked on top of each other or mishandling which, if happened, would require a production of the certain item again to replace the broken one.

The drum, buffer, rope principle sets the bottleneck as the control point in a system. This control point is called the drum because it sets the rate in which other parts of the system will function. Bottlenecks are chosen as drum immediately to such that it is used in its maximum capacity and works all the time by making sure upstream operations do not produce too much and build up WIP that the bottleneck cannot handle. In the absence of a bottleneck, the CCR is appointed as the drum and in the case where both bottlenecks and CCR are absent in the system, the drum is any part of the system that produces outputs which will be used by several different downstream operations. After defining the drum, buffer is placed just before the drum. This buffer makes sure that our drum always has the resources to continue producing all the time. Then rope is placed which tells the upstream operations to produce because the buffer is or is almost depleted (1).

Figure 8.5.System without DBR with R2 as bottleneck (4).

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The drum-buffer-rope method strives to achieve the following (3):

1. Create two buffer inventories: one in front of the CCR and one at the end of production which is just before going to market. The buffer at the start of CCR protects the throughput while the buffer at the end, which is the finished-goods, protects the market. Unlike when the drum is a bottleneck where the market gets all the finished products immediately, finished goods are not taken all at once by the market thus a buffer is needed such that when the market decides to purchase, goods are available for transaction (1).

1. Very reliable due date performance 2. Effective exploitation of the constraint 3. As short response time as possible, within the limitations imposed by the constraint(s). Linear flow of a product with a bottleneck Dealing with a bottleneck is most critical, and this discussion ensures that the bottleneck always has work to do. Figure 8.7 shows a simple linear product flow from work center A to G where product D is a bottleneck and therefore is the drum. As a bottleneck, capacities downstream and upstream from it are both greater than the bottlenecks capacity. If this is not controlled, a large amount of inventory in front of work center D to build up and very little anywhere else in the line. There would be little finished goods inventory because all the products produced would be immediately taken by the market (1).

2. Create two ropes: one communicates the finished goods inventory back to the drum, and the other communicates the drum back to the material release point. The rope communicating finished inventory back to the drum is responsible for the increase or decrease of output while the rope communicating the drum to the material release point specifies how much material is needed (1).

Figure 8.7. Linear flow from work center A to F with bottleneck at D (1).

Figure 8.8. Linear flow of product from A to H with CCR on E (1).

The two things that must be done to properly deal with the bottleneck after defining it as a drum are (1):

These steps may not hold true for all cases of bottlenecks being a capacity constrained resource. For instance, the second drum which is placed at the end would not be necessary in the system if the capacity of the CCR is equal to the demand of the market. And as follows, the rope connected to this drum would also be nonexistent. Because the market has an equal demand to the capacity of the CCR, there would be no inventory that would pile up at the end of production since the market takes the finished goods just in time as it is being produced. It could be analyzed that when a CCR has an equal capacity to the demand, the CCR is the “bottleneck” since it comes first before the market while when the CCR has a capacity more than the demand of the market, the market is the “bottleneck” of that system. This is the reason why we put buffers before the market.

1. Keep a buffer inventory in front of it to make sure that it always has something to work on. Because it is a bottleneck, its output determines the throughput of the system. 2. Communicate back upstream to A what D has produced so that A provides only that amount. This keeps inventory from building up. This communication is called the rope. It can be formal as setting a schedule or informal as a daily discussion. Linear flow of products constrained resource

with

a

capacity-

In the case a CCR is present instead of a bottleneck in the production two buffer inventories and two ropes are needed. Figure 8.8 shows an example of a drum being a CCR (1).

Network flow of a product with bottleneck A network flow is a combination of many linear flows which makes the network flow much more

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Importance of Quality

complex thus a more thorough analysis is required.

In MRP, a bigger batch is produced than what s actually needed, serving as an allowance for defective units. In JIT, poor quality cannot be tolerated as it is based on a balanced capacity, meaning it may shut down if there exist a defective unit. In synchronous manufacturing, if there is a defective unit upstream of a bottleneck, only material loss will be incurred. It is due to the fact that there is an excess capacity throughout the system (except for the bottleneck), in which there is still time to do another operation to replace the scrapped ones (1).

Figure 8.9 shows a network flow of a product with a bottleneck at machine center A. Just like in a linear flow with a bottleneck, a time buffer is placed right before the bottleneck. Next a buffer inventory is placed after the nonbottleneck sequence of processes that feed the subassembly. This ensures that the flow of product does not slow down after leaving the bottleneck (1).

It is important to do quality control inspection prior to the bottleneck to make sure that the bottleneck works only on good product. Also, there should be quality assurance downstream the bottleneck to ensure that good materials will not be scrapped (1). In order to decrease the time it takes to get products out to the customers with the quality demanded, synchronous manufacturing helps firms to trim down excess costs and use resources efficiently. Synchronous manufacturing follows the JIT process of keeping low inventories and focusing on customer satisfaction (5). Figure 8.9.Network flow of a product with a bottleneck (1).

Batch sizes

Determining the size of time buffer

Two types of batch sizes are to be discussed in this chapter: process batch size and transfer batch size. In an assembly line, a process batch can be as large as it can be while a transfer batch can be as small as one (1).

Time buffer is the term used for buffer inventory placed before bottlenecks. The size of the time buffer is as large as it needs to be to ensure continuous production in the bottleneck. The size of the time buffer can be calculated by examining past performance data, or sequence could be simulated. The precision of the size of the buffer is not critical thus we have the freedom to estimate the buffer as one-fourth of the total lead time of the system. Let us look back at Figure 8.5 the sequence A to H took a total of 16 days, a 4 day buffer could be placed before the bottleneck. Suppose that the buffer runs out, the buffer size should be increased. This is done by releasing extra material to the first operation A. on the other hand, if buffer never drops below three days, the release of material to A should be reduced and our buffer size should be decreased to three days. It is experience that best determines the final buffer size of the system (1).

Process batch is the quantity of material manufactured as a result of one setup. Larger process batch sizes require fewer setups, which generates more processing time and more output (1). For non-bottleneck, smaller process batch sizes are desirable, whereas for bottleneck resources, larger process batch sizes are desirable. Transfer batch refers to the number of units that move as a group from one workstation to another. A batch that has been processed by a specific workstation can be moved to the next downstream workstation so that it can begin working on that batch (1). Smaller transfer batches give lower WIP inventory and faster product flow, but require more material handling. Larger transfer batches give longer lead times and higher inventories. In other 8

words, the transfer batch size is a tradeoff between production lead times, inventory reduction benefits, and cost of material movement (1).

There are four possible situations when controlling the flow at CCRs and bottlenecks (1): 1. A bottleneck with no setup time required when changing from one product to another 2. A bottleneck with setup time required to change from one production to another 3. A CCR with no setup time required to change from one product to another 4. A CCR with setup time required when changing from one product to another

A transfer batch should always be less than or equal to the process batch. The advantage of using transfer batch that is smaller than the process batch quantity is that the total production time is shorter and the amount of WIP is smaller (1). An example of a process that utilizes transfer batches is shown in Figure 8.10. The process consists of three operators and one driver. The driver performs both of the transfer operations.

How to Treat Inventory In synchronous manufacturing, inventory is treated as a load or a without any ingtype value added from the production (1). In measuring the value of the inventory and the time it stays within an area, the concept of monetary unit days is used. Monetary Unit Days In using the concept of monetary unit days, total value of inventory is multiplied to the number of days that the inventory spends within a department (1). Monetary unit days = value of inventory x time it stays within an area (Eqn. 8.3) Monetary Unit Days Example:

Figure 8.10.An example of a system utilizing transfer batches.

Villanueva Electric Industries has an inventory amounting to PhP 80,000, and stays within the department for 6 days. It means that Villanueva Electric Industries is charged with Php 480,000 in monetary unit days.

In this process map, each operation has its own waiting station for WIP. Each operation uses WIP as an input and outputs WIP to a different location. For example, OP1 processes parts into WIP1, and OP2 pulls parts to work on from WIP2. When WIP1 reaches the transfer batch size, it moves and becomes WIP2 (7).

Monetary day measurements could also be used in other areas (1): 

How to determine process batch and transfer batch sizes 

According to Srikanth, in determining process and transfer batch sizes, it is important to identify first the probable CCRs and bottlenecks, which should then be reviewed by managers in order for them to know which resources are actually controlling their plan (1). It is more practical to control the flow at each bottleneck or CCR to bring the capacities in line, rather than trying to adjust the MPS to change resource loads. The process batch sizes and transfer batch sizes are changed after comparing past performances in meeting due dates (1).





9

Marketing – to discourage holding large amounts of finished-goods inventory. The net result would be to encourage sale of finished products. Purchasing – to discourage placing large purchase orders that on the surface appear to take advantage of quantity discounts. This would encourage JIT purchasing. Manufacturing – to discourage large WIP and producing earlier than needed. This would promote rapid flow of material within the plant. Project management – to quantify a project’s limited resource investments as function of time. This promotes the

proper allocation competing projects.

of

resources

to

varying personalities and cultures. Marketing are oriented into making the most sales for the growth of the company. Production, however, is more focused minimizing cost and maximizing utilization. Table 8.1 summarizes the differences between marketing and production.

Comparing Synchronous Manufacturing to MRP and JIT MRP and JIT are frequently compared to synchronous manufacturing. MRP uses backward scheduling after being given a master production schedule while synchronous manufacturing uses forward scheduling because it focuses on the critical resources (6).Because synchronous manufacturing uses a schedule work to each workstation, there is no need for more WIP other than that being worked on (1).

Table 8.1. Differences between marketing and production Marketing Production Evaluation Growth of the Cost and utilization company in of sales, shared and new products Data used Qualitative Quantitative Experience Sales and Productive (People) association with operations customers Culture Driven by ego Meticulous and and are more more introverted outgoing

JIT like synchronous manufacturing does an excellent job in reducing lead times and work in process but is limited to repetitive manufacturing and requires a stable production level (6).JIT is a trial-and-error procedure applied to a real system. In synchronous manufacturing, the system can be programmed and simulated on a computer because the schedules are realistic and computer run time is short (1).They both try to get material through the manufacturing process as quickly as possible, while at the same time meeting customers’ requirements and expectations.

We now present examples to show different situations for a company and use the correct measurement criteria appropriate for the problem. Example 1 (3): AliBABra sells three products at Php50, Php75, and Php60 per unit, respectively. It is also assumed that the market will take everything that can be supplied. Three work centers (X, Y, and Z) process the three products as shown in Figure 8.11. Processing times for each work centers are also shown. Raw materials, parts, and components are added at each worker to produce each product. The unit cost of these materials is shown as RM. Which product or products should be produced?

Relationship with Other Functional Areas To achieve the best operating system, the production system must work closely with the other functional areas. The firm should operate as a synchronized system with all parts in harmony and ing each other. Companies that do this well can be successful in achieving their fundamental goal of profitability (6). ing’s Influence There are two ing performance measures viewed in cost ing, namely the local measurement and the global measurement. Local measurement shows efficiencies and utilization rates of a certain firm, which in effect forces the supervisors to activate their workers all the time. On the other hand, global measurements show net profit, return on investments and cash flow (1). Marketing and Production Marketing and Production working in coordination ensures a success for the company. However, this is difficult to achieve since most of the time, the two act very independently. One reason for this is personnel from both fields have

Figure 8.11. Product price and work center summary (1).

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Solution: Objective 1: Maximize sales commission Get the limiting resource or process for each product and solve for the production rate per hour. Compute for the revenue using the selling price of each product and the number of outputs per hour. Computations are shown in Table 8.2. Table 8.2. Summary of solutions for Objective 1 Prod Limiting Time Product Sellin uct Resourc Require s g e d produce Price d per Hour A Y 10 min 6 50 B X 6 min 10 75 C Z 5 min 12 60

minimum amount sold. Simply put, the minimum amount of a product cannot be lower than 10 % of the maximum amount of the product. Operating expenses amount to Php 126,000. Figure 8.12 shows the production requirements and selling price of the four products.

Sales Reven ue 300 750 720

Objective 2: Maximize unit gross profit Figure 8.12. Price and Raw Material Costs of the four products

To get the gross profit per unit, subtract the raw material costs from the selling price of that unit. Table 8.3 summarizes the computation for gross profit per unit. Table 8.3. Summary of Solutions for Objective 2 Product Selling Raw Gross Profit Price Material Unit Cost A 50 20 B 75 60 C 60 40

Solution: First, summarize the prices, processing time and raw material costs per product. Table 8.5 shows the summary of the processing time of each worker for each product and the raw material cost per unit.

per 30 15 20

Table 8.5. Summary of Prices and Cost of products Product Selling Processing Time Raw Price Material Cost Worker 1 Worker 2 A 1260 15 min 20 min 750

Objective 3: Maximize total gross profit Get the profit per hour by multiplying product output rate per hour and profit per unit. The summary is presented in Table 8.4. Table 8.4. Summary of Solutions for Objective 3 Product Products Gross pofit Profit per Produced per unit hour per Hour A 6 30 180 B 10 15 150 C 12 20 240

  

B

1340

15 min

20 min

920

C

1260

5 min

30 min

750

D

1340

5 min

30 min

920

Objective 1: Maximize sales commission To maximize sales revenue, the product with the highest selling price will be the most produced. Taking into the 10% constraint stated in the problem, the ratio of the products produced would be 1A:10B:1C:10D.

We choose B to maximize sales revenue (Marketing) We choose A to maximize profit per unit (Manufacturing) We choose C to maximize total profit (Optimal Decision for the firm)

To compute for the labor constraint (available minutes per week): 5 days* 3 shifts* 8 hours* 60 mins. = 7200 minutes available

Example 2 (3):

Using the ratio 1A:10B:1C:10D and the labor constraint, the following equation is generated.

There are 2 workers producing 4 products (A, B, C, and D). The plant works on 3 shifts and it is assumed that the demand is unlimited. The ratio of the product sold is constant in which it cannot exceed 10 to 1 between the maximum and

20x + 10x(20) + 30x +10x(30) = 7200 550x = 7200 where x is the number of units produced 11

The company will gain a profit of Php 18,540 if the company decides to maximize per unit gross profit per week.

Solving for x, we get 13.09 or 13 units So, the company will produce 13 units of A and C and 131 units of B and D

Objective 3: Maximize total gross profit The total revenue is 13(1260)+131(1340)+13(1260)+131(1340) Php383,840 per week

=

The profit per hour can be computed by multiplying the product output rate per hour and gross profit per unit. The results are summarized in Table 8.7.

The total gross profit is 13(1260-750)+131(1340-920)+13(1260750)+131(1340-920)-126,000 = Php -2,700 per week

Table 8.7.Summary of Solutions for Product Product Profit Output Unit rater per hour A 3 B 3 C 2 D 2

There will be a weekly loss of Php 2,700 if the company decides to maximize sales commission. Objective 2: Maximize per unit gross profit per week

Objective 3. per Total profit per hour 510 420 510 420

1530 1260 1020 840

Based from Table 8.6, Product A has the largest total profit per hour, thus it will be maximized.

To compute for the gross profit per unit, subtract the raw material costs from the selling price of that unit. Table 8.6 summarizes the gross profit per unit of each product.

Therefore, the 10A:1B:1C:1D

ratio

of

the

products

is

Table 8.6. Summary of solution for Objective 2 Product Selling Raw Gross Profit per Price Material Unit Cost A 1260 750 510 B 1340 920 420 C 1260 750 510 D 1340 920 420

Giving us the equation 10x(20) + 1x(20) + 1x(30) +1x(30) = 7200, where x is the number of units produced.

As seen on Table 8.6, products A and C have the highest gross profit per unit, thus both products have to be maximized.

The total revenue is 257(1260)+25.7(1340)+25.7(1260)+25.7(1340) = Php425,078 per week

Therefore, the 10A:1B:10C:1D

The total gross profit is 257(1260-750)+25.7(1340-920)+25.7(1260750)+25.7(1340-920)-126,000 = Php 39,765 per week

ratio

of

the

products

Solving for x, we get 25.7 So, the company will produce 257 units of A, and 25.7 units of B, C and D.

is

Giving us the equation 10x(20) + 1x(20) + 10x(30) +1x(30) = 7200, where x is the number of units produced.

The company will gain a profit of Php 39, 765 if the company decides to maximize per unit gross profit per week.

Solving for x, we get 13.09 or 13 units So, the company will produce 131 units of A and C, and 13 units of B and D. The total revenue is 131(1260)+13(1340)+131(1260)+13(1340) Php364,960 per week

In summary, different objectives for the company yields different results, namely:  Maximizing sales commission resulted in a Php 2,700 loss in gross profit per week  Maximizing gross profit resulted in a gorss profit of Php 18,540 per week  Maximizing the total gross profit gave us a profit of Php 39,765 per week

=

The total gross profit is 131(1260-750)+13(1340-920)+131(1260750)+13(1340-920)-126,000 = Php 18,540 per week

Other financial measures include s receivable turnover, inventory turnover, s payable turnover, total assets turnover, and operating expense ratio. These 12

measures may also be used to evaluate which product should the company produce (3). The following are the formulas used for the said measures:

would they sell and how many could they sell? c) Which and how many product or products should you produce to maximize gross profit for one week? d) From question c, how much gross profit would there be for the week? Solution:

(Eqn. 8.4)(3)

a. Maximizing gross margin per unit To get the gross margin per unit, subtract the raw material costs from the selling price (Summarized in Table 8.8).

(Eqn. 8.5) (3)

Table 8.8. Summary of solutions to maximize gross margin per unit Product Selling Raw Gross Margin Price Material Cost A 20 3 17 B 25 7 18 C 30 14 16

(Eqn. 8.6) (3)

(Eqn. 8.7) (3)

Product B will be produced since it has the highest gross margin of $18

(Eqn. 8.8) (3)

b. Maximizing sales commission Example problems for these financial measures are given after Example 5.

Product C, with the highest selling price would be preferred by sales personnel since it gives the highest revenue.

Example 3 (3):

We assumethat the market will take all that we can make, employees work 7 days a week and 8 hours per day. The units of C we can make in a week is: C=

= 672 units

To maximize sales, 672 unitsof product C will be produced. Figure 8.13. Raw Material Cost of each resource and selling price of the three products

c. To maximize profit, profits per hour will be compared, as shown in Table 8.9.

Products A, B, and C sells for $20, $25, and $30, respectively. There are only one Resource X and one Resource Y, which are used to produce A, B, and C for the numbers of minutes stated on Figure 8.13. Raw materials are needed at the process steps, with the costs per unit of raw material. (One unit is used for each product). The market will take all that you can produce.

Table 8.9.Maximizing profit per Produ Constra Producti ct int on Time Resourc on e Resourc e A B C

a) Which product would you produce to maximize the gross margin per unit? b) If sales personnel are paid on commission, which product or products

Y X Y

2 4 5

hour. Numb er of Units Outp ut per hour 30 15 12

Selli ng Price

RM Co st

20 25 30

3 7 14

Gro ss Profi t per Hou r 510 270 192

From Table 8.8, it can be seen that Product A has the highest gross profit per hour. However, Product B has a different constraining resource, 13

so the answer could be a combination of A and B. To test this, we compute for the value of each hour of Y while producing B. (

•

in Figure 8.15. O’Neill can make and sell up to the limit of its demand. Each workstation is staffed by a worker dedicated to work on that workstation alone, and is paid $12 per hour. Variable overhead costs are $8000/week. The plant operates one 8-hour shift per day, or 40 hours/week.

)

This is still lower than the gross profit per hour of A. Therefore, we only produce A. The number of units of A produced during the week is:

d. Gross profit for the week is: Using the gross profit per hour,

Example 4 (3):

Figure 8.15. Flowchart of the manufacturing process of products A, B and C.

Shown in the Figure 8.14 is the income statement of Company XYZ. Calculate the operating expense ratio of the company

Which of the four workstations W, X, Y, or Z has the highest total workload, and thus serves as the bottleneck for O’Neill Enterprises? Solution: The first step is to determine the bottleneck. This is shown in Figure 8.16.

Figure 8.14. Income Statement of Company XYZ

The operating expense ratio is computed by:

(Eqn. 8.8) Figure 8. 16. Solution for finding the bottleneck.

Available capacity= (40hrs/week) x (60mins/hr)= 2400mins/week We determine that work station Z is the bottleneck since its total load is greater than available capacity of 2400 minutes.

Example 5 (3): O’Neill Enterprises manufactures three unique products (A,B,C) that are fabricated and assembled in four different workstations (W,X,Y,Z) using a small batch process. Each of the products visits every one of the four workstations, though not necessarily in the same order. Batch setup times are negligible. A flowchart of the manufacturing process is shown

The senior management at O’Neil Enterprises wants to improve the profitability of the firm by accepting the right set of orders. Currently, decisions are made to accept as much of the highest contribution margin product as possible (up to the limit of its demand), followed by the 14

next highest contribution margin product, and so on until no more capacity is available. Since the firm cannot satisfy all the demand, the product mix must be chosen carefully. Jane Hathaway, the newly hired production supervisor, is knowledgeable about the theory of constraints and bottleneck based scheduling. She believes that the profitability can indeed be approved if bottleneck resources were exploited to determine the product mix. What is the change in profits if instead of the traditional method that O’Neil has used thus far; a bottleneck based approach advocated by Jane is used instead for selecting the product mix?

Step 3: Compute for the profitability. See Table 8.12.

Decision Rule 1: Traditional method

Decision Rule 2: Bottleneck-based approach

In the traditional method, the best product mix is selected based on the overall profit margin of each product.

Select the best product mix according to the dollar contribution per minute of processing time at the bottleneck workstation Z. This rule would take advantage of the principles outlined in the theory of constraints and get the most dollar benefit from the bottleneck.

Table 8.12.Computation of profit for the traditional method. Profits Revenue $15400 Materials $2500 Overhead $8000 Labor $1920 Profit

The profit for product A,B,C is $2980 when they are produced by the sequence A then B then C following the traditional method.

Step 1: Calculate the profit margin unit of each product. See Table 8.10.

Step 1: Calculate the contribution/minute of processing time at bottleneck workstation Z. See Table 8.13.

Table 8.10.Computation of contribution profit margin. A B C Price

$90

$85

$80

Raw Material and Purchased Parts

$13

$14

$15

Labor

$10

$9

$7.40

Contribution Profit Margin

$67

$62

$57.60

Table 8.13. Contribution per minute of processing time at workstation Z. A

B

C

Contribution Margin

$67.00

$62.00

$57.60

Time at Bottleneck

16 min

13 min

10 min

Contr. Margin per min

4.19

4.77

5.76

Looking at the contribution margin for products A, B, and C, we can conclude that A should be processed first then produce B and lastly produce what the system can of product C.

Step 2: Allocate resources W, X, Y, and Z to the products in the order decided in step 1. Satisfy each demand until the bottleneck resource (workstation Z) is encountered. Subtract minutes away from 2400 minutes available for each week at each stage. See Table 8.14.

Step 2: Allocate resources W, X, Y, and Z to the products in the order decided in the previous step. Satisfy each demand until the bottleneck resource, i.e. workstation Z, is encountered. Deduct minutes from 2400 minutes available for each week at each stage. See Table 8.11.

Table 8.14.Computation for the best product mix. Work Starting After 80 After 70 Can Only Center C B Make 43 A W 2400 1440 740 310 X 2400 1600 760 373 Y 2400 2000 1300 655

Table 8.11.Computation for the amounts of A, B, and C. Work Center

Starting

After 65 A

After 70 B

Can only make 45 C

W

2400

1750

1050

510

X

2400

1815

975

525

Y

2400

1425

725

500

Z

2400

1360

450

0

$2980

Z

2400

1600

690

2

The best product mix is 43A, 70B, and 80C. Step 3: Compute profitability for the selected product mix. The new profitability figures are

15

shown below based on the new production quantities of 43A, 70B, 80C. See Table 8.15.

Using the second approach, inventory turnover is calculated as the cost of goods sold divided by average inventory, which in this example is $250,000 divided by $25,000, or 10. The number of inventory days is calculated by dividing 365 by 10, which is 36.5. Using the second approach, inventory turns over 10 times a year and is on hand for approximately 36 days.

Table 8.15. Computation of profit of bottleneck-based approach. Profits Revenue Materials Overhead Labor Profit

$16220 -$2739 -$8000 -$1920 $3561

Example 8: s Payable Turnover (10)

Manufacturing the product mix of 43 A, 70 B, and 80 C will yield a profit of $3561.

Company A made $100 million in purchases from suppliers during the previous year, and at any given point it held an average s payable of $20 million, the s payable turnover ratio for the previous ing period was 5, or $100 million / $20 million. Assume that during the current year, company A had cost of goods sold (COGS) of $120 million, s payable of $30 million for the start of the ing period, and s payable of $50 million for the end of the period.

Additional Examples: Other Financial Measures Example 6: s Receivable Turnover (8) During 2014 Company A had $800,000 in net credit sales. Also suppose that on the first of January it had $64,000 s receivable and that on December 31 it had $72,000 s receivable. Calculate the s receivable turnover.

Solution:

Solution:

To calculate the average s payable for the fiscal year, sum the two s payable amounts, and divide by two. Therefore, the average s payable was $40 million, or ($30 million + $50 million) / 2, for the current year. Consequently, the s payable turnover ratio was 3, or $120 million / $40 million.

Using Eqn. 8.4:

(

)

An s receivable turnover equal to 11.76 means that the company collects its s receivable 11.76 times per year.

Assume that during the current year, company B, which is in the same industry as company A, had COGS of $110 million, s payable of $20 million for the end of the ing period, and payables of $15 million for the start of the ing period. This means that company B had an average s payable of $17.50 million, or ($15 million + $20 million) / Company B had an s payable turnover ratio of 6.29, or $110 million / $17.50 million. Therefore, when compared to company A, company B is paying off its short-term debt at a faster rate.

Example 7: Inventory Turnover (9) Company A has $1 million in sales. The cost of goods sold is only $250,000. The average inventory is $25,000. Compute the inventory turnover. Solution: There are two approaches to this: Approach 1: Sales Divided By Average Inventory Using Eqn. 8.5:

Example 8: Total Assets Turnover (11) Suppose company X has an asset base of $400 million at the beginning of a given year and $500 million at the end of the same year, and suppose that company X generated $900 million in revenues over the course of that year. Compute the asset turnover ratio for Company X.

This means that the company’s inventory is sold and replaced 40 times within a year. Approach 2: Cost of Goods Sold Divided By Average Inventory

16

Solution:



Using Eqn 8.7:  (



)

A total asset turnover ratio of 2.00 means that for every $1 asset, the company generates $2 of sales or revenues.



Conclusion

Operating Expenses – all the money that the system spends to turn inventory into throughput (3) Productivity – All the actions that bring a company closer to its goals (3) Synchronous Manufacturing – entire production process working in harmony to achieve the profit goal of the firm (3) Throughput – the rate at which money is generated by the system through sales (3)

Formula Review

Synchronous manufacturing is a production process managed for operations to work in harmony to achieve the fundamental goal of a firm which is profitability. Its main purpose is to downsize excess costs in order to decrease the time it takes to get products out to the customers with the quality necessitated. The key to competitive advantage is for the firm to operate in a synchronized system with all parts working in concert.

(Eqn. 8.1)(3)

(Eqn. 8.2)(3)

(Eqn. 8.3)(3)

Challenges and Areas for Further Investigation (Eqn. 8.4)(3)

Synchronous manufacturing relies on a calculated aggregate demand and not its true demand. This puts the profit of a company at risk if ever the true demand for a products significantly varies from the computed. This could produce high amounts of inventory and backlogs.

(Eqn. 8.5)(3)

(Eqn. 8.6)(3)

Key to and Formula Review Key  

  

(Eqn. 8.7)(3)

Bottleneck – any resource whose capacity is less than the demand placed upon it. (3) Capacity – Constrained Resource (CCR) – one whose utilization is close to capacity and could be a bottleneck if it is not scheduled carefully (3) Dollar Days – a measurement of the value of inventory and the time it stays within an area (3) Inventory – all the money that the system has invested in purchasing things it intends to sell (3) Nonbottleneck – any resource whose capacity is greater than the demand placed on it (3)

(Eqn. 8.8)(3)

References (1)

(2) (3) (4)

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R. B. Chase, F. R. Jacobs and N. J. Aquilano, Operations Management for Competitive Advantage, 11th ed.., McGraw-Hill/Irwin, The McGraw-Hill Companies, Inc., 2006, pp. 721 – 749 Lean Production, Retrieved October 8, 2016 from http://www.leanproduction.com/theory-ofconstraints.html H. D. Z. Layaoen, IE 151: Production Systems – Lecture Manual, 2nd ed., DBR – Drum Buffer Rope by HohmannChristian. Retrieved October 17, 2016 from https://www.youtube.com/watch?v=F8E86-lCJ5M

(5)

(6)

(7)

Jenkins, J. (2004). Master of ancy Program. Retrieved October 17, 2016, from http://maaw.info/ArticleSummaries/ArtSumRezaeeElm ore97.htm -- 4 Synchronous Manufacturing and Theory of Constraints. (n.d.). Retrieved October 17, 2016, from http://highered.mheducation.com/sites/0072983906/s tudent_view0/chapter18/index.html -- 5 Anderson, M., Anderson, E., & Parker, G. (n.d.). How to Optimize Transfer Batch Size in Operations Management - dummies. Retrieved October 17, 2016, from http://www.dummies.com/business/operationsmanagement/how-to-optimize-transfer-batch-size-in-

operations-management/ Receivables Turnover Ratio, Retrieved from http://www.investopedia.com//r/receivableturno verratio.asp on October 31, 2016 (9) Inventory Turnover, Retrieved from http://www.investopedia.com//i/inventoryturnov er.asp on october 31, 2016 (10) s Payable Turnover Ratio, Retrieved from http://www.investopedia.com//a/spayabl eturnoverratio.asp on October 31, 2016 (11) Asset Turnover Ratio, Retrieved from http://www.investopedia.com//a/assetturnover.a sp on October 31, 2016 (8)

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