Manufacturing Breakthrough Blog

Everyone agrees that when it comes to significant, ongoing and positive operational change in an organization, there is no magic bullet. But what if we told you that there is a faster, easier, less resource-intensive, and more effective approach that breaks through the commonly accepted conventions around building a better manufacturing business? In this blog we’ll teach you about this evolved approach to less waste, greater productivity, better decision-making, and ultimately more profitability in your manufacturing business.

Bottleneck and Non-Bottleneck Marginal Value Example

Friday February 17, 2017

Review

In my last post we presented the foundation for an example of how to calculate the marginal values for both bottleneck and non-bottleneck resources. 

In today’s post we will complete the example of how to calculate the marginal values of both bottleneck and non-bottleneck resources.  As with the other posts in this series, much of what we will discuss in this post references the book, Synchronous Management – Profit-Based Manufacturing for the 21st Century, written by L. Srikanth and Michael Umble.  If you haven’t read this book, I highly recommend that you get a copy and do so!

The figure and table below are added for reference:

Resource Capacities for the Simple Product Flow

Resource

Process Time Per Unit (minutes)

Process Time Available Per Week (hours)

Capacity Per Week (Units of Product)

R1

8

40

300

R2

8

40

300

R3

12

40

200

R4

6

40

400

R5

6

40

400

R6

6

40

400



Assume that the financial data for the product are as follows:

  • Selling price per unit          =        $100
  • Material cost per unit         =        $  20
  • Direct labor cost per hour   =        $  10

 

Bottleneck and Non-Bottleneck Marginal Values

Consider the effect of gaining or losing an hour at any of the non-bottleneck resources (R1, R2, R4, R5, and R5).  Gaining an hour of productive time at any of these resources only adds to the extra capacity of these resources and will not result in a gain in throughput since resource R3 can still only produce 200 units per week. Losing an hour at any one of these resources only means that they will have less extra capacity which will have no effect on their ability to produce 200 units per week.  The bottom line is that the marginal value of the non-bottleneck resources is zero, no matter whether the capacity is increased or decreased.  Let’s now consider the impact of losing or gaining an hour of bottleneck time.

If, somehow, an extra hour of bottleneck time can be achieved, then an additional five units can be produced (i.e. 60 minutes ÷ 12 minutes per unit per hour = 5 units) so that the total throughput is now 205 units for the week.  As a result of these additional 5 units, then sales revenue will increase by $500 (5 units x $ = $500). The only additional costs would be the material costs for the 5 units which is $20 per unit or $100.  Therefore, the total additional throughput for the week would be $400 (i.e. $500 - $100 = $400).  On the other hand, if an hour of productive capacity on the bottleneck operation is lost at the bottleneck (resource R3), then production will decrease by 5 units per week and the net profit will decrease by $400.  The conclusion is, the marginal value of one hour at the bottleneck (resource R3) is $400.

Our conclusion from this example is that improvements which result in more output at non-bottlenecks have little value or impact on the bottom line. In fact, when a bottleneck is present, the non-bottleneck resources contribute no value to the bottom line except as it relates to reduce inventory or operating expenses.  On the other hand, if bottlenecks exist, then the gain for the company when these resources are improved can be very significant.  The implication here is that all priority improvement efforts should be focused on the bottleneck resources.

Next Time

In my next post, we will begin a new series of posts on the types of different constraints that can exist within many different companies.  As always, if you have any questions or comments about any of my posts, leave me a message and I will respond.

 

Until next time.

 

Bob Sproull

 

References:

[1] L. Srikanth and Michael Umble, Synchronous Management – Profit-Based Manufacturing for the 21st Century, Volume One – 1997, The Spectrum Publishing Company, Wallingford, CT

 

Bottleneck and Non-Bottleneck Value

Thursday February 9, 2017

Review

In my last post we introduced and defined bottleneck and non-bottleneck resources.  We also stated that there is a distinct difference in both value and significance to the total operation between both types of resources, even though the standard cost system does not recognize these differences. We also defined four different types of time as follows:

  • Processing Time:  The time required to process materials at a specific operation, not including setup time.
  • Setup Time:  The time required for a specific machine, resource, work center or line to complete the conversion from one product to another product including the testing and acceptance of the new product.
  • Idle Time:  Time not used for processing material or setting up a specific machine, resource, work center or line.
  • Wasted Time: Time spent processing materials that cannot be realized as throughput.  This time includes rework or scrap materials, work-in-process materials that are not scheduled or needed or finished goods above and beyond immediate demand.

In today’s post we will discuss the difference in value and significance of both bottleneck and non-bottleneck resources. 

Bottleneck and Non-Bottleneck Value

When we consider the time components of bottleneck and non-bottleneck resources, it becomes very clear that the value of each type of resource is fundamentally different.  When know that bottleneck resources have no spare capacity and that any idle or wasted time will always result in wasted or lost throughput for the entire operation. Let’s now consider the actual value of time for each type resource.

Bottleneck Time Value

In my last post we stated that by definition, the market demand for productive time on a bottleneck resource is equal to or greater than the capacity of that resource.  This tells us that every second of time at a bottleneck resources must be allocated to only processing time or setup time.  It should be apparent that actions that result in more productive time at a bottleneck (i.e. reduced processing or set-up time) automatically result in more throughput, as long as there is not another bottleneck.  It’s important to remember that being more productive means producing more parts to satisfy immediate demand.  This means that the value of an improvement at a bottleneck resource is equivalent to the value of the additional throughput achieved.  Srikanth and Umble [1] provide us with Synchronous Management Principle 2: The marginal value of time at a bottleneck resource is equal to the throughput rate of the products produced by the bottleneck.

Non-Bottleneck Time Value

Non-bottleneck resources are characterized by having more capacity than needed to satisfy the demand placed on them by the market. As such, non-bottleneck resources typically exhibit a certain quantity of idle time, but how this idle time is used is the key to determining both the significance and value of non-bottleneck resources.  Any time lost at a non-bottleneck resource will only impact the throughput if the lost time exceeds the resource’s “catch-up” time.  The conclusion is that, generally speaking, the impact of lost time on a non-bottleneck resource is negligible compared to that of a bottleneck resource.  Srikanth and Michael Umble [1] provide an excellent illustration of the value of both of these resources.

Consider a production line with six resources manufacturing a single product.  The figure below illustrates the simple product flow through this process.  Raw material is fed to resource 1 (R1), is processed for 8 minutes and transferred to resource 2 (R2). Resource 2 (R2) processes material from R1 for 8 minutes and then passes it on to resource 3 (R3) and so forth until the now completed product exits resource 6 (R6) as finished product.

The work week consists of 40 hours for each resource and the market demand for this product varies between 250 and 280 units per week.  The bottleneck in this simple process is clearly resource R3, since it can only process 200 units per week (i.e. 40 hours per week x 60 minutes per hour ÷ 12 minutes per unit = 200 units per week).  Resources R1, R2, R4, R5 and R6 are all non-bottlenecks, since they can produce more than 280 units per week.

The following table displays the resulting weekly capability of each resource per week, assuming that forty hours of processing time are available at each resource per week.

 

Resource Capacities for the Simple Product Flow

Resource

Process Time Per Unit (minutes)

Process Time Available Per Week (hours)

Capacity Per Week (Units of Product)

R1

8

40

300

R2

8

40

300

R3

12

40

200

R4

6

40

400

R5

6

40

400

R6

6

40

400

Assume that the financial data for the product are as follows:

  • Selling price per unit           =          $100
  • Material cost per unit          =          $  20
  • Direct labor cost per hour   =          $  10

The marginal value of time at the various resources can now be calculated.  To keep the analysis simple, two legitimate assumptions will be made.  First, the analyst will only consider the value of one hour of productive time, either added or subtracted.  Second, increases or decreases in expenses incurred as a result of gaining or losing productive capacity are ignored.  These expenses can be easily included in the analysis, but their effect will be negligible and will only detract from the main point of the exercise.

Next Time

In my next post, we will complete our analysis of this simple process to demonstrate the marginal value of both bottlenecks and non-bottlenecks.  As always, if you have any questions or comments about any of my posts, leave me a message and I will respond.

 

Until next time.

 

Bob Sproull

 

References:

[1] L. Srikanth and Michael Umble, Synchronous Management – Profit-Based Manufacturing for the 21st Century, Volume One – 1997, The Spectrum Publishing Company, Wallingford, CT

Bottleneck and Non-Bottleneck Resources

Friday February 3, 2017

In my last post we discussed the balanced plant concept and why it is not the best way to set-up a continuous production line. We also learned about the synchronous management principle that tells us to not focus on balancing capacities, but rather we should focus on synchronizing flow. We also discussed why we should focus on the flow of work and not on the efficiency of individual tasks. In today’s post we will discuss bottleneck and non-bottleneck resources and then how to differentiate the two.

The Misconception of the Balanced Plant

Friday January 27, 2017

In today’s post we will discuss the balanced plant concept and the misconceptions it can have on manufacturing systems. The balanced manufacturing plant, one of the cornerstones of Lean Manufacturing, is one where the capacity of each process step is equal to the demand placed on it by sales commitments.

Dependencies and Variability

Wednesday January 11, 2017

We completed our series on local and global optimums by laying out the impact of changes to Throughput (T), Inventory ( I ), and Operating Expense (OE) on an organization’s performance. In today’s post we will explore a new series on the “Twin Killers in Manufacturing Operations”, dependency and variability. This series of posts will reference the book, Synchronous Management – Profit-Based Manufacturing for the 21st Century, written by L. Srikanth and Michael Umble which I highly recommend!