Page 115 - The Handbook for Quality Management a Complete Guide to Operational Excellence

102 I n t e g r a t e d P l a n n i n g S t r a t e g i c P l a n n i n g 103

• Will we need less raw material or purchased parts?
• Will we be able to keep less material on hand?
• Will it reduce work­in­process?
• Will we need less capital facilities or equipment to do the same
work? If the answer is “yes,” the decision will reduce Inventory or
Investment.
• Will overhead go down?
• Will payments to vendors decrease?

If so, the decision will decrease Operating Expense.
Let’s return to the example mentioned earlier about the production
man ager faced with a decision to break a setup in response to a sales man-
ager’s request. Using conventional reasoning, an efficiency-oriented pro-
duction manager would see his productivity figures suffering because of
the time lost to doing the new setup. Inserting this urgent order would
also disrupt a for mal schedule, slipping every subsequent order’s sched-
uled starting and finish ing times.
But a constraint-oriented manager would look at it a little differently. His
or her first question would be, “Am I internally constrained by a shortage of
resources?” The answer should be fairly obvious, because the manager
would already be aware of the size of the backlog, if any. If the answer is
“no,” the production process has excess capacity to be able to accommodate
the urgent order without delaying scheduled work. The cost of the addi-
tional order is only the raw materials used and possibly the loss of materials
from a unit of the job currently on the machine when the setup is broken. The
machine operators’ time doesn’t cost any more. They’re paid by the hour,
whether they’re doing setups or producing products. The direct increase in
net profit to the company by agreeing to the sales manager’s request would
be the Throughput (sales revenue minus variable costs) for the new order.
And it’s possible that providing this expedited service to a customer might
win more repeat business in the future. So as long as the manufacturing pro-
cess is not internally constrained, the production manager cognizant of con-
straint theo ry would probably accept this new job, while a traditional
manager might tell the sales person, “Get in line! We operate on a first-in,
first-out basis.” And this manager’s “numbers” would look good at the end
of the month—but what would that decision have done for the company?
The use of T, I, and OE for making management decisions is not a
replace ment for generally accepted accounting procedures (GAAP). Those
are required, and will probably always be, for external reporting pur-
poses—annu al reports to stockholders, securities and exchange filings,
tax reporting, etc. But Throughput, Inventory, and Operating Expense are
considerably easier for most line managers to understand and use in
gauging the financial effects of their daily decisions.

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