THROUGHPUT ACCOUNTING AND THE THEORY OF CONSTRAINTS, PART 1-2

IDENTIFYING BOTTLENECKS

 

Back at the plant, Alex and his team set out to identify which machines at the plant are the bottleneck resources. After talking to staff and walking around the factory, where there are big piles of inventory sitting in front of two main machines, the bottlenecks become obvious. Eighty per cent of parts have to go through these machines, and the team make sure that all such parts are processed on the non-bottleneck machines in priority to the other 20% of parts, by marking them up with a red label. The parts that don’t go through the bottlenecks are marked with a green label. The result? Throughput increases. But the problem? Unfortunately, it doesn’t increase enough to save the factory.

 

ELEVATING BOTTLENECKS

 

The next step is therefore to try and elevate the capacity of the bottlenecks. This is not easy without spending money, but observation shows that, at times, the bottleneck machines are sometimes still idle, despite the labelling system giving priority to the parts that have to be ready to go through the bottleneck machines. This is partly because workers are taking their breaks before getting the machines running again, and partly because they have left the machines unmanned because they have been called away to work on another (non-bottleneck) machine. Both of these absences result in the machines becoming idle. At this point, Alex learns an important lesson: an hour lost on a bottleneck machine is an hour lost for the entire system. This hour can never be recouped. It is pointless to leave a bottleneck machine unmanned in order to go and load up a non-bottleneck machine because there is spare capacity on the non-bottleneck machine anyway. It doesn’t matter if it’s not running for a bit. But it does matter in the case of the bottleneck. From this point onwards, the two bottlenecks are permanently manned and permanently running. Their capacity is elevated this way, along with another few changes that are implemented.

 

THE NEED TO ACCEPT IDLE TIME

 

At this point, Alex and his team think they have saved the factory, and then suddenly they find that new bottlenecks seem to be appearing. Parts with green labels on are not being completed in sufficient quantities, meaning that final assembly of the company’s products is again not taking place, and orders are being delayed again (because final assembly of products requires both bottleneck and non-bottleneck parts). Alex calls Jonah in a panic and asks for help. Jonah soon identifies the problem. Factory workers are still trying to be as efficient as possible, all of the time. This means that they are getting their machines to produce as many parts as possible, irrespective of the number of parts that can actually be processed by the bottleneck.

Jonah begins to explain, labelling a bottleneck machine as X and a non-bottleneck machine as Y. Some products may not need to go through X, he says, but that doesn’t mean that workers should make as many parts as the machines can produce, just to keep the machine’s efficiency rate looking good. Y parts should only be produced to the extent that they can be used in the assembly of finished goods, and the production

 

of these is constrained by their need for bottleneck parts too. Any excess Y parts will simply go to the warehouse and be stored as finished goods, ultimately becoming obsolete and having to be written off at a substantial cost.

 

As for those products that do need to go through X, they may, for example, go from Y to Y to X to Y (as there are numerous steps involved in the production process). But if the capacity of the first Y machine is far higher than the capacity of the next Y machine, and it processes excessive X parts, another bottleneck may look like it has appeared on the second Y machine because so many red labelled parts are being fed through that it never gets to process the green ones, which are also necessary for final assembly. Suddenly Alex realises that all machines must work at the pace set by the bottleneck machines, just like the boys on the hike that had to walk at the pace of the slowest walker.

 

Consequently, Alex realises that it is really important to let Y machines and workers sit idle when they have produced to the capacity of the bottleneck machines. By definition, they have spare capacity. It’s not only wasteful to produce parts that are not needed or cannot be processed; it also clogs up the whole system and makes it seem as if new bottlenecks are appearing. This idea of idle time not only being acceptable but also being essential flies in the face of everything that is believed at the time and, yet, when you understand the theory of constraints, it makes perfect sense. A balanced factory is not efficient at all; it is very inefficient because different machines and processes have different capacities, and if machines that have spare capacity are working 100% of the time, they are producing parts that are not needed. This is wasteful, not efficient. As evidenced in the novel, inventory goes up and throughput goes down. Alex is quick to resolve the problem and get things running smoothly again.

 

THROUGHPUT AND JUST-IN-TIME

 

Given that producing excess inventories both pushes costs up and prevents throughput, it becomes obvious that throughput accounting and just in time operate very well together. This becomes clear towards the end of the novel when UniCo secures even more orders by reducing its delivery time dramatically. It is able to do this by adopting some of the principles of just-in-time.

 

First, Alex reduces batch sizes substantially. For those unfamiliar with throughput accounting and just-in-time, it can be hard to get past the idea that if batch sizes are halved, financial results may still improve. The novice believes that if batch sizes are halved, costs must go up, because more orders are needed, more set ups are needed, more deliveries are needed, and so on... and surely these costs must be high? But the fact is – as proved in the novel – inventory costs are also halved and, even more importantly, lead time is halved, which in this case gives UniCo a competitive advantage. Throughput increases dramatically because of increased sales volumes. These increased sales volumes also led to a significantly lower operating cost per unit, which, along with the reduced inventory costs, more than makes up for increase in the other costs. Given that there is spare capacity for all of the non-bottleneck machines

 

anyway, if the number of set ups for these is increased, no real additional cost arises because there is idle time. As Jonah says: ‘An hour saved on a non-bottleneck resource is a mirage.’

 

CONCLUSION

 

It is not possible, within the space of a few pages, to convey everything that The Goal has to say. To think that I could do so would be an insult to the authors of this 273-page novel. Nor is the theory contained within the novel beyond questioning and criticism; but this article was not meant as a critique.

 

Hopefully, however, I have told you enough to convince you that this book is worth reading should you have a couple of days to spare sometime. I haven’t, after all, told you the ending... Also, you should now have an understanding of the background to my second article, which you will find in the next issue of Student Accountant.

 

Written by a member of the Paper F5 examining team

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