MANAGEMENT DYNAMICS Merging Constraints Accounting to Drive Improvement phần 5.pdf (kỹ thuật PR)

Exploitation Decisions 115 EXPLOITATION DECISIONS In this section we explore the ways in which the global T, I, and OE measurements affect exploitation decisions as we use the measurements to guide decision making within a constraints accounting framework. Exploitation decisions that are supported by cost analysis, such as production batch sizing, throughput (or sales) mix, and pricing, are inﬂuenced by constraints accounting measurement in similar ways. The setup cost component of the production batch-sizing model and throughput mix are considered in this chapter, and the pricing question is considered in the next. Exploitation has to do with getting the most throughput out of the existing environment. The signiﬁcant constraints accounting attribute in the ﬁnancial analyses for exploitation is the explicit recognition of the throughput effect of opportunity costs. The major ﬁnancial impact will always be in terms of potentially expanded or lost throughput. If the analysis does not reveal a signiﬁcant throughput effect, then it points to a choopchick.41 Setup Cost Consider the case of setup cost, which is a component of the traditional batch-sizing model. The traditional model is illustrated in Exhibit 5.13. The cost of setting up equipment consists of the labor and materials costs, with the labor cost portion likely comprising the major portion. As the quantity of units produced with each setup (which is the production batch size) increases, the total annual setup cost and average setup cost per unit decrease. Larger batch sizes imply fewer batches and less cost. Total Costs Exhibit 5.13 Traditional Batch Size Model $70 $60 $50 $40 $30 $20 $10 $- Setup Cost Carrying Cost Total Cost 1 3 5 7 9 11 13 15 17 19 Batch Size 116 Constraints Accounting Terminology and Technique The traditional perspective of setup cost is shown in Exhibit 5.13 and subsequent exhibits by the “square” line. Consider an example with the following characteristics: • • • • • • • Annual carrying cost: Annual sales: Annual raw materials usage: Setup time for a resource: Materials consumed in setup: Labor and labor-related costs: Annual resource time available: $ 3 per unit $ 10,000,000 $ 6,000,000 2 hours $0 $ 30 per hour 2,000 hours The traditional calculation of the setup cost for this resource would be calculated as shown in Exhibit 5.14. The $60 per setup is the amount represented by the “square” line for the traditional analysis in Exhibit 5.13. Reexamine the model of Exhibit 5.13 with reference to constraints accounting. If the resource being set up is not a capacity-constrained resource and labor is essentially ﬁxed, then reducing the number of setups or time required for an individual setup on the resource will have no effect on labor costs. Only when the setup involves destruction of expensive materials would the costs behave as the traditional model assumes. The constraints accounting analysis of the setup cost for a nonconstraint resource is shown in Exhibit 5.15. The nonconstraint resource setup cost would actually plot as the horizontal line traced by the “diamonds” in Exhibit 5.16. Thus, setup time reductions on nonconstraint resources will be, at best, choopchicks. If the resource is an internal physical constraint, however, then setup time is actually production time lost to the entire chain of events. Here the opportunity cost of the lost throughput to the entire chain provides the appropriate relationship to proﬁtability. The opportunity cost may include current sales that are turned away because of lack of capacity or future sales that are not made when current customers who do not receive timely deliveries seek out alternate suppliers. In the case of a constraint resource, the traditional model considerably understates the impact of re- Exhibit 5.14 Cost of Setup: Traditional Analysis (setup time x labor rate) + materials used = Setup cost (2 hr / setup x $30 / hr) + $0 = $60 / setup Exploitation Decisions 117 Exhibit 5.15 Cost of Setup: Constraints Accounting Analysis— Nonconstraint Resource Change in total labor and materials cost due to setup $0 = Setup cost = $ 0 / setup ducing the setup time or number of setups. A constraints accounting analysis of setup cost for the constrained resource based on current sales turned away is shown in Exhibit 5.17. The constrained resource curve is shown in Exhibit 5.18. The constrained resource curve is dramatically steeper and starts at a radically higher point than the traditional analysis. The traditional analysis curve shown in Exhibits 5.13 and 5.16 is repeated in Exhibit 5.18 for purposes of comparison. It will be found at the bottom of the graph, very close to the horizontal axis. Recognition that the throughput effect, as reﬂected in opportunity cost, deﬁnes the nature of relevant costs for a constrained resource leads to a different perception of the situation. When viewed through the lens of constraints accounting, the traditional analysis of setup costs is faulty in every case. For unconstrained areas, the cost is slightly overstated, and the effect is similar to that previously observed in scenarios 1 and 4 of the thinking bridges example (Chapter 1) and summarized in Exhibit 1.22, which is repeated here as Exhibit 5.19. For activities holding an internal physical constraint, the ﬁnancial impact of the traditional analysis, which relies on historical cost, is signiﬁcantly understated in a manner similar to scenarios 2 and 3 of Exhibit Exhibit 5.16 Setup Costs: Traditional and Nonconstraint Analyses Total Costs $70 $60 Traditional Nonconstraint $50 $40 $1 5 9 13 Batch size 17 118 Constraints Accounting Terminology and Technique Cost of Setup: Constraints Accounting Analysis, Constrained Exhibit 5.17 Resource Annual sales $10,000,000 Annual raw materials usage 6,000,000 Annual throughput (T) $ 4,000,000 T/Constraint time available ($4,000,000/yr) / (2,000 hours/yr) (setup time) 2 hours / setup = O pportunity cost of constraint hour = $2,000 / hour = x (opportunity cost) x $2,000 / hour = Setup cost $4,000 / setup 5.19. Similar limitations apply to the ﬁnancial analyses supporting other operating decisions. Throughput Mix An organization may sell a variety of products and services comprising several product lines in an assortment of geographical market areas. The organization may have multiple methods of distribution and various classes of customer. The relative contributions of these individual elements to the total throughput of the organization is referred to collectively as the throughput mix. Setup Costs: Traditional and Constrained Resource Analysis Exhibit 5.18 $4,000 Traditional $3,000 Constrained Resource $2,000 $1,000 Batch Size 19 17 15 13 11 9 7 5 3 $- 1 Total Costs $5,000 Exploitation Decisions Exhibit 5.19 by Analyses 119 Example Summary: First Year Dollar Gain or (Loss) Shown Least Product Cost (LPC) T, I, & OE (TIOE) Scenario 1 $17,085 ($ 5,000) Scenario 2 $ 26,500 ($ 123,400) Scenario 3 ($36,500) $133,880 Scenario 4 $ 26,500 ($ 5,000) Range of Estimates of Bottom-line Profit Effect $63,000 $257,280 Which analytical technique do you believe more correctly reflects reality? Throughput Mix with Production Constraint When there is an internal physical constraint in the production area, the company does not have sufﬁcient internal capacity to satisfy all of the demand for its products or services. In this case, decisions must be made about what products to sell in which markets and to which customers. Let us use an example to study the decision process for this case. Some production data for the Example Company are presented in Exhibit 5.20.42 The Example Company currently has the capability to produce three products—Atex, Detron, and Fonic. As shown in Exhibit 5.20, the market potential (i.e., the maximum amount that could be sold with the current pricing and market conditions) is 2,080 units of Atex, 4,160 units of Detron, and 2,080 units of Fonic per year. Atex requires raw materials costing $65 for each unit produced and comprised of material ARM, which has a standard cost of $30, and raw material CRM, which costs $35. In similar fashion, Detron’s raw materials cost $95 and Fonic’s are $65. The raw materials are processed through a number of operations involving welding, cutting, polishing, grinding, and assembly. Atex does not require the welding operation, and Fonic does not go through assembly. The process and setup times required for each product are shown in Exhibit 5.20. From this data it is apparent that the welder is an internal phys- 120 Constraints Accounting Terminology and Technique Exhibit 5.20 Example Company: Production Data Atex Market potential (units) Detron 2,080 4,160 $ 30.00 35.00 $ 30.00 35.00 30.00 $ 65.00 $ 95.00 Fonic 2,080 Raw materials used and cost: ARM CRM ERM FRM Materials cost per unit $ 65.00 $ 65.00 Direct labor and process time (minutes): * Annual resource minutes Tota l Needed to available meet potential Welder Cutter Polisher Grinder 0 24.000 33.000 20.000 34.000 9.000 14.000 18.000 14.000 15.000 22.000 27.000 124,800 249,600 249,600 249,600 *170,560 118,560 172,640 172,640 Assembler Direct labor minutes per unit * Internal constraint 8.000 85.000 17.000 92.000 0 78.000 124,800 87,360 0 360.000 120.000 30.000 30.000 240.000 120.000 30.000 15.000 120.000 120.000 60.000 0 510.000 0 420.000 0 315.000 25.500 21.000 15.750 Setup time required per production batch (minutes): Welder Cutter Polisher Grinder Assembler Setup time per batch Setup minutes per unit (batch size = 20 units) Direct labor: 8 employees earning $10.00 per hour and working 2,080 hours per year. ical constraint. A total of 170,560 minutes of process time in the welding operation would be required to satisfy the entire market potential for the three products. However, only 124,800 minutes of welding time are available for the year.43 Not all of the potential quantities demanded can be satisﬁed, and it will be necessary to decide what products to sell. Sales and operational expense data for the Example Company are provided in Exhibit 5.21. The average unit sales prices for Atex and Detron are $175 and $275, respectively. The budgeted operational expense, inclusive of manufacturing overhead, direct labor, sales and marketing, and general admin- Exploitation Decisions Exhibit 5.21 Data 121 Example Company: Sales and Operational Expense (OE) Current sales mix (units) Unit sales price (current) Sales commissions $ Atex Detron 2,080 3,515 175.00 5% of sales Budgeted annual operational expense (OE): Manufacturing overhead Direct labor Sales and marketing General and administrative Total budgeted operational expense (OE) $ 275.00 Fonic 0 $ 5% of sales 180.00 5% of sales $ 332,800 166,400 72,000 100,000 $ 671,200 Production overhead rate: $332,800 / $166,400 = 200% of direct labor cost istrative expense, is $671,200 per year. The company uses a production overhead rate of 200% of direct labor cost, calculated by dividing the budgeted manufacturing overhead of $332,800 by $166,400 of budgeted direct labor cost. Budgeted sales are 2,080 units of Atex, 3,515 units of Detron, and no Fonic. Both Detron and Fonic require use of the constrained welding resource. In making the decision to emphasize Detron over Fonic, the company ﬁrst calculated the product cost using absorption costing as shown in Exhibit 5.22. Exhibit 5.22 Product Unit Cost Summary (Absorption Costing) Traditional Unit Cost Summary Detron Atex Materials cost $ 65.000 $ 95.000 Setup labor @ $10.00 per hour 4.250 3.500 Factory overhead @ 200% of setup labor 8.500 7.000 Direct labor @ $10.00 per hour 14.167 15.333 Factory overhead @ 200% of 30.667 direct labor 28.333 Total unit cost $120.250 $151.500 Fonic $ 65.000 2.625 5.250 13.000 26.000 $111.875 122 Constraints Accounting Terminology and Technique Exhibit 5.23 Gross Margin Analysis Unit selling price Unit cost Gross margin per unit Gross margin as % of sales Rank in terms of profitability Atex $ 175.00 120.25 $ 54.75 31% Detron $ 275.00 151.50 $ 123.50 45% 3 Fonic $ 180.00 111.87 $ 68.13 38% 1 2 The unit costs were then used to rank the products in terms of their gross margin. This ranking is reﬂected in Exhibit 5.23. Detron was ranked ﬁrst, with the largest gross margin at 45%, followed by Fonic at 38%, and Atex at 31%. Being aware of the limitations of traditional absorption costing for decision making, the company also checked the contribution margins. As shown in Exhibit 5.24, the ranking remained the same. The company used the gross margin ranking, as conﬁrmed by the contribution margin analysis, to guide it in its decision to use the welding capacity to produce as much Detron as possible and turn any remaining welding capacity to the production of Fonic. Since each unit of Detron required 34 minutes of welding process time plus 1.5 minutes of setup time,44 or a total 35.5 minutes, the company can produce 3,515 units of Detron.45 Because the potential market is 4,160 units, the Detron consumes the entire welding capacity and no Fonic is produced. This results Exhibit 5.24 Contribution Margin Analysis Unit selling price Variable expense: Materials Sales commissions at 5% Total variable expense Contribution margin per unit (t) Contribution margin as percent of sales Rank in terms of profitability Atex $ 175.00 Detron $ 275.00 $ $ 65.00 8.75 $ 73.75 $ 101.25 58% 3 Fonic $ 180.00 95.00 $ 65.00 ___13.75 $ 108.75 $ 166.25 9.00 $ 74.00 $ 106.00 61% 1 59% 2 Exploitation Decisions Exhibit 5.25 123 Budgeted Proﬁt Emphasizing Detron over Fonic Budgeted Earnings Statement Original Forecast—Emphasizing Detron over Fonic Throughput (unit contribution margins (t) from Exhibit 5.23) $ 584,369 Detron (3,515 units @ $166.25) Atex (2,080 units @ $101.25) 210,600 Operational expense Direct labor $ 166,400 Manufacturing overhead 332,800 Sales and marketing 72,000 General and administrative 100,000 Net Profit $ 794,969 671,200 $ 123,769 in a budgeted proﬁt of $123,769 as shown in Exhibit 5.25. In general, management is pleased with this outcome. The foregoing analysis is ﬂawed from a constraints accounting point of view. It fails to correctly incorporate into the decision the ﬁrst two attributes of constraints accounting—explicit consideration of the role of constraints and speciﬁcation of throughput contribution effects. Let us look closely at the decision process steps that were followed: • It was determined that the market potential was greater than the company’s ability to supply it; that is, there is an internal constraint in the system. • The potential products were ranked in terms of proﬁtability using the unit gross margin and/or throughput contribution margin (either in dollars or percentages). • The rankings were used to determine how much of each product would be offered to the market while remaining within the physical capabilities of the company. That is, preference decision (ranking the products by proﬁtability) was made without explicit consideration of the constraint and failed to consider the impact of the constraint on throughput. Only the question of how much to produce, given a previous preference decision, addressed the constraint. The constraints accounting analysis illustrated in Exhibit 5.26 incorporates the explicit recognition of the throughput contribution effects of the constraint. 124 Constraints Accounting Terminology and Technique Exhibit 5.26 Constraints Accounting Analysis Unit selling price Variable expense: Materials Sales commissions at 5.00% Total variable expense Throughput contribution (t) per unit Physical constraint minutes per unit Throughput value of product in terms of constraint minute (t/cu) Rank in terms of profitability Atex $ 175.00 Detron $ 275.00 Fonic $ 180.00 $ 65.00 8.75 $ 73.75 $ 101.25 0 $ 95.00 13.75 $ 108.75 $ 166.25 34 $ 65.00 9.00 $ 74.00 $ 106.00 14 infinite 1 4.89 3 $ 7.57 2 The constraints accounting analysis ranks the products in the opposite order. Atex appears to be the most proﬁtable in terms of the welding constraint. Since Atex does not require use of the welder, its return is inﬁnite in terms of welder time. Fonic returns half again as much throughput for each welder minute used as does Detron. The constraints accounting preference decision, then, is to make all 2,080 units of Atex and as much Fonic as is possible and can be sold, turning any remaining welder capacity to the production of Detron. Since each unit of Fonic requires about 14 minutes for processing and an average of 45 seconds for setup, the Example Company can produce all 2,080 units of the market potential for Fonic in 30,680 minutes (14.75 minutes per unit * 2,080 units). That will leave 94,120 minutes on the welder for Detron, during which 2,651 units of Detron may be produced (94,120 minutes divided by 35.5 minutes per unit). The budgeted result of this revised throughput mix is shown in Exhibit 5.27. The updated forecast of Exhibit 5.27 reveals an increase in budgeted net proﬁt of $76,840 from $123,769 to $200,609, or an increase of 62% resulting from the revised throughput mix. Beyond Product Throughput The throughput per constraint unit, when calculated for each product, does not tell the entire story. For example, the sales to individual customers might be as shown in Exhibit 5.28. Inspection of Exhibit 5.28 shows that the Example Company would prefer to sell Detron to customer 02, with a throughput per constraint unit (t/cu) of $6.36, than Fonic to customer 05, which has a t/cu of $5.85. The company would also want to consider that customer 05 accounts for

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