MANAGEMENT DYNAMICS Merging Constraints Accounting to Drive Improvement phần 8 ppsx

Thus, in Exhibit 9.2 only the welder (tactical constraint) and polisher (strategic constraint) are shown. All resources, even constraint resources, need to have some amount of protective capacity. Any unused capability of the system is available for the role of protective capacity, regardless of whether specifically identified as such. Nevertheless, when estimating the capacity of the system, it is nec- essary to specifically set aside the desired amount of protective capacity. In the example, 11% of the maximum time available is set aside as protective capacity, with the balance available for production. 5 Since the individual production operations of the Example Com- pany are stated in terms of resource minutes needed, the hours are con- verted to minutes. An additional amount of time is set aside for setups, maintenance, and so forth. We are left with the amount of capacity avail- able to be filled through sales. Section B: Repetitive Sales Funnels Two basic types of sales may be used to fill this target capacity: repetitive sales of the same products to the same customers and new offerings to ei- ther the same or different customers. The repetitive sales funnels are shown in Exhibit 9.3. Repetitive sales may be either specifically identified or statistically estimated as an incremental funnel. 6 The specific identification funnel (B1) consists of those orders that recur because of an ongoing relationship with the customer. Each of these orders is identified along with its estimated resource consumption. The throughput of each recurring order is shown in order to allow the ulti- 220 Tactical Subordination in Sales Exhibit 9.2 Target Capacity Available Example Company Sales Funnel (months) November 30, 20X2 Working hours available: 4.33 weeks @ 45 hours = 195 hours maximum per month Number of resources 21 Resource Polisher Welder Maximum hours available 390 195 hours Protective capacity percent 11% 11% Protective capacity 43 21 hours Estimated hours available for production 347 173 hours Estimated capacity minutes 20,810 10,405 minutes Estimated setup minutes 6,547 468 minutes Target capacity available (for the SCORE) 14,263 9 ,937 minutes 5070_Pages 7/14/04 1:55 PM Page 220 mate calculation of budgeted throughput as shown on a Constraints Ac- counting Earnings Statement (illustrated in Chapter 3). The specific identification funnel comprises the recurring monthly sales to the company’s larger and more stable customers. Even so, this business is not guaranteed to continue. Specific customers or orders may be lost due to competitive pressures, poor quality of products or services, or changing customer needs. Change in these orders is likely to have a sig- nificant effect on the organization. Therefore, the orders shown in the specific identification funnel must be regularly reviewed and considered to prevent loss of this business or to plan new offerings as appropriate. In this scenario, there is no statistically estimated incremental funnel (B2) because the specific identification funnel fills the available capacity. If there were an incremental funnel, it would be included on the report with Sales Funnels 221 Exhibit 9.3 Existing Repetitive Sales Funnels (Monthly) Example Company Sales Funnel (months) November 30, 20X 2 Customer Product Quantity Price Estimated Minutes Throughput B1 Specific Identification Funnel Polisher Welder 1 Cust 01 Atex 35 $ 180.00 1,155 0 $ 3,710 2 Cust 02 Atex 23 $ 189.05 759 0 2,636 3 Cust 03 Atex 31 $ 180.96 1,023 0 3,314 4 Cust 04 Atex 12 $ 194.16 396 0 1,433 5 Cust 05 Atex 73 $ 162.67 2,409 0 6,536 6 Cust 01 Detron 44 $ 322.86 660 1,496 9,316 7 Cust 02 Detron 14 $ 337.65 210 476 3,161 8 Cust 03 Detron 4 $ 256.14 60 136 593 9 Cust 04 Detron 7 $ 209.57 105 238 729 10 Cust 05 Detron 153 $ 258.96 2,295 5,202 23,10 5 11 Cust 01 Fonic 35 $ 180.71 770 490 3,734 12 Cust 02 Fonic 20 $ 211.00 440 280 2,709 13 Cust 03 Fonic 9 $ 208.07 198 126 1,194 14 Cust 04 Fonic 50 $ 186.67 1,100 700 5,617 15 Cust 05 Fonic 60 $ 159.27 1,320 840 5,178 B2 Incremental Funnel (statistically estimated) There is no incremental funnel in this case. If there were, it would be added here in a format similar to the specific identification funnel. 0 0 0 B Total Monthly Repetitive Sales Funnel 12,900 9,984 $ 72,965 Divide by Target Capacity Available (A) 14,26 3 9,937 Capacity utilization by Repetitive Funnel 90.4% 100.5% 5070_Pages 7/14/04 1:55 PM Page 221 the specific identification funnel. The minimum data requirements for the repetitive incremental funnel section would include identification of the source of the repetitive business, the estimated constraint capacity required to support these sales and, if integrated with the budget, estimated throughput. 7 The percentage of the target capacity of the constraint and near- constraint resources consumed by the repetitive sales funnels is shown at the end of Exhibit 9.3. The existing specific identification funnel, which was developed in order to exploit the tactical constraint (the welder), is expected to consume the welder’s entire capacity. The welder has an ex- pected usage of 100.5% (the total repetitive sales funnel, 9,984 minutes, divided by the target capacity available, 9,937 minutes). 8 Since the existing specific identification funnel fills the target capac- ity, we will modify the scenario to break the constraint at the welder before discussing the sales process funnel (E and F). Acquisition of an additional welding resource unit will break the welding constraint. The existing repetitive sales funnels no longer fill the capacity target capacity available. The revised target capacity available is shown in Exhibit 9.4. Exhibit 9.4 shows two differences when compared to Exhibit 9.2. First, the welder column is shown in small italics because it would no longer be shown on the report at all. The welder is no longer a constraint or near-constraint. Second, the cutter has been added to the report be- cause it is the next most heavily scheduled resource after the polisher. The repetitive sales funnels now appear as shown in Exhibit 9.5. This figure is similar to Exhibit 9.3. The welder column is no longer shown because only 50% of the welder capacity is used and the welder is no longer a constraint. The total throughputs of the individual orders re- 222 Tactical Subordination in Sales Exhibit 9.4 Target Capacity Available (after Addition of Second Welder) Example Company Sales Funnel (months) November 30, 20X2 Working hours available: 4.33 weeks @ 45 hours = 195 hours maximum per month Number of resources 22 2 Resource Cutter Polisher Welder Maximum hours available 389.7 390 390 hours Protective capacity percent 11% 11% 11% Protective capacity 43 43 43 hours Estimated hours available for production 347 347 347 hours Estimated capacity minutes 20,810 20,810 20,810 minutes Estimated setup minutes 9,353 6,547 935 minutes Target capacity available (for the SCORE) 11,457 14,263 19,875 minutes 5070_Pages 7/14/04 1:55 PM Page 222 Sales Funnels 223 Exhibit 9.5 Existing Repetitive Sales Funnels (Monthly, after Addition of Second Welder) Example Company Sales Funnel (months) November 30, 20X2 Customer Product Quantity Price Estimated Minutes Throughput B1 Specific Identification Funnel Polisher Cutter 1 Cust 01 Atex 35 $ 180.00 1,155 840 $ 3,710 2 Cust 02 Atex 23 $ 189.05 759 552 2,636 3 Cust 03 Atex 31 $ 180.96 1,023 744 3,314 4 Cust 04 Atex 12 $ 194.16 396 288 1,433 5 Cust 05 Atex 73 $ 162.67 2,409 1,752 6,536 6 Cust 01 Detron 44 $ 322.86 660 396 9,316 7 Cust 02 Detron 14 $ 337.65 210 126 3,161 8 Cust 03 Detron 4 $ 256.14 60 36 593 9 Cust 04 Detron 7 $ 209.57 105 63 729 10 Cust 05 Detron 153 $ 258.96 2,295 1,377 23,105 11 Cust 01 Fonic 35 $ 180.71 770 525 3,734 12 Cust 02 Fonic 20 $ 211.00 440 300 2,709 13 Cust 03 Fonic 9 $ 208.07 198 135 1,194 14 Cust 04 Fonic 50 $ 186.67 1,100 750 5,617 15 Cust 05 Fonic 60 $ 159.27 1,320 900 5,178 B2 Incremental Funnel (statistically estimated) There is no incremental funnel in this case. If there were, it would be added here in a format similar to the specific identification funnel. 0 0 0 B Total Monthly Repetitive Sales Funnel 12,900 8,784 $ 72,965 Divide by Target Capacity Available ( A) 14,26 3 11,457 Capacity utilization by Repetitive Funnel 90.4% 76.7% main the same (after all, the existing orders have not changed). Since all of the resources now have unused capacity, the tactical constraint has shifted from the welder to the market. The strategic constraint selected by management is still the polisher, which is at 90.4% of capacity. Recall that in Chapter 5 we carefully determined the relative prof- itability (throughput per constraint unit) of each product with respect to the active internal constraint—the welder. This led to a sales preference ranking for the products in the order of (1) Atex, (2) Fonic, and (3) De- tron. Whenever a constraint shifts, it is appropriate to reconsider previous exploitation and subordination decisions. 9 Exhibit 9.6 repeats the data and information regarding relative profitability by product from Chapter 5 and also includes the recalculation of the sales preferences if the pol- isher becomes the tactical constraint. 5070_Pages 7/14/04 1:55 PM Page 223 Comparison of the throughputs per minute for each product in the ex- isting sales funnel reveals the importance of subordinating to strategic exploita- tion decisions as well as exploitation decisions for the current tactical con- straint. 10 When stated in terms of the polisher minutes, the preference ranking—(1) Detron, (2) Fonic, and (3) Atex—is exactly the opposite from the ranking when the welder is the constraint. If the company is able to switch back and forth between products for emphasis, that is well and good. How- ever, in subordinating to tactical exploitation decisions emphasizing Atex and Fonic, strategically desirable sales of Detron might be permanently lost. At any rate, the tactical constraint is now in the market. To say that the tactical constraint is in the market is to say that it is desirable to obtain additional sales. Sections C and D: Expansion to Sales Process Funnel New sales are desirable to replace existing repetitive sales that have been lost and for growth. The process of obtaining additional sales is captured in the sales process funnel, which consists of identified potential sales op- portunities that are being pursued by the company’s sales force. Since not all sales prospects are converted into firm sales, the sales process funnel must be larger than the target capacity to be filled. The first question is, “How large should the sales process funnel be?” The answer to this ques- tion is provided by the information in Exhibit 9.7. 224 Tactical Subordination in Sales Exhibit 9.6 Relative Profitability by Product Atex Detron Fonic Unit selling price $ 175.00 $ 275.00 $ 180.00 Variable expense: Materials $ 65.00 $ 95.00 $ 65.00 Sales commissions at 5.00% 8.75 13.75 9.00 Total variable expense $ 73.75 $ 108.75 $ 74.00 Throughput contribution (t) per unit $ 101.2 5 $ 166.25 $ 106.00 If Welder is tactical constraint: Welder minutes per unit 0 34 14 Throughput value of product in terms of welder minute (t/cu) infinite $ 4.8897 $7.5714 Rank in terms of profitability 132 If Polisher is tactical constraint: Polisher minutes per unit 33 14 22 Throughput value of product in terms of polisher minute (t/cu) $ 3.0682 $ 11.875 $ 4.8181 Rank in terms of profitability 312 5070_Pages 7/14/04 1:55 PM Page 224 We want to pursue enough identified potential sales opportunities to create and sustain an internal constraint, but not so many that we cannot deliver on our promises to our customers. That is, we would like to exactly fill the monthly target capacity (A). We already have some business, the repetitive sales funnels. Deducting the capacity used by the repetitive sales funnels (B) from the target capacity available (A), we arrive at the monthly capacity available for the new business (C). The amount of sales being pursued typically needs to be larger than the target monthly amount because of two factors: the length of the sales cy- cle and the win ratio. These factors are considered in part (D) of Exhibit 9.7. The length of the sales cycle is the average amount of time elapsed between starting an identified potential sales opportunity into the sales process funnel and placing the order on a drum production resource. If the length of the sales cycle is six months, then the funnel must have six times the amount of one month’s sales to produce the single month’s sales at the appropriate time. Therefore, the monthly capacity available (C) is multiplied by the length of the sales cycle (in months). The win ratio is the percentage of iden- tified potential sales opportunities that are converted to actual sales. It is cal- culated as the sales opportunities closed divided by the sales orders placed into the sales funnel. Since not all sales opportunities pursued actually be- come firm sales, the target capacity is also divided by the win ratio in order to estimate the amount of sales opportunities that must be pursued in order to have the right number of actual sales. When the monthly target capacity has been expanded by these two factors, the result is the total size of the sales process funnel needed to fill the target capacity. This total amount of sales must be pursued at any given time to fill monthly capacity. Sales Funnels 225 Exhibit 9.7 C and D Expansion of Monthly Capacity to Sales Process Funnel Example Company Sales Funnel (months) November 30, 20X2 Estimated Minutes C Monthly Capacity Available for Sales Process Funnel Polisher Cutter Target capacity available (A) 14,263 11,457 minutes Monthly Repetitive Sales Funnel (B) 12,900 8,784 Monthly capacity available for Sales Process Funnel 1,363 2,673 minutes D Total Sales Process Funnel needed (to fill target capacity) Funnel Expansion Multiply C by sales cycle length: 6 months 8,178 16,038 minutes Divide by win ratio: 30.0% 27,260 53,464 minutes Total Sales Process Funnel needed (to fill target capacity) 27,260 53,464 minutes 5070_Pages 7/14/04 1:55 PM Page 225 Section E: Existing Growth and Replacement Funnel Some of the needed sales process funnel is already in process. For exam- ple, Chapter 6 considered the introduction of a new product, Haton. In Chapter 6 a target price of $192.65, which includes a target throughput of $112.93 per unit, was calculated for Haton as a free product. 11 The exist- ing growth and replacement funnel is shown in Exhibit 9.8. The existing growth and replacement funnel (E) in Exhibit 9.8 in- cludes many specifically identified potential sales opportunities as well as the product offering of Haton to customer 03. If the sale to customer 03 is closed, then that offering will become part of the repetitive sales funnel in the future. Section F: Needed Addition to Growth and Replacement Funnel In order to bring the constraint to the desired strategic location (the pol- isher), it will be necessary to fill unused available capacity. How many ad- ditional sales opportunities must be added to the sales process funnel? De- ducting (E) the existing growth and replacement funnel from (D) the expanded funnel needed to fill the target capacity, we arrive at (F) the needed addition to the growth and replacement funnel. These calcula- tions are shown in Exhibit 9.9. The organization needs to search in the cacophony of potential busi- ness to identify sales opportunities to fill this amount of capacity. 12 If (F) is negative, then it represents a larger sales funnel than the organization’s pro- duction capabilities will be able accommodate. In this case, the company must either take action to control the rate of sales within the target capacity or it must elevate the capacity to accommodate the total sales funnel. 226 Tactical Subordination in Sales Exhibit 9.8 Existing Growth and Replacement Funnel Example Company Sales Funnel (months) November 30, 20X2 Estimated Minutes E Existing Growth and Replacement Funnel Polisher Cutter Customer Starter Product Quantity Throughput 1 Cust 03 10/22/X2 Haton 46 736 552 $ 5,195 2 3 (Many other specifically identified n potential sales opportunities) 21,264 17,448 84,000 Existing growth and replacement funnel 22,000 18,000 $89,195 5070_Pages 7/14/04 1:55 PM Page 226 Section G: Score of Monthly Budgeted Throughput At the bottom of Exhibit 9.1, the sales funnels coordinate in a harmonious score, representing the expected amount of throughput to be generated for the month. These are the sales orders that make it through the sales funnels and establish the production or shipping drum beat. As shown in Exhibit 9.10, these are also the sales orders that will provide the estimated (or budgeted) throughput for the month. Sales Funnel Summary The constraint management view of the sales funnels presented differs from the conventional view in several ways. Consider the various sales fun- nel elements, which are summarized in Exhibit 9.11. The first difference is the focus on explicit consideration of tactical and strategic constraints. Second, the sizes of the funnels are measured by the capacity utilized or available rather than by sales dollars. Third, total sales dollars is not even calculated. The financial metric of interest is Sales Funnels 227 Exhibit 9.9 Needed Addition to Growth and Replacement Funnel Example Company Sales Funnel (months) November 30, 20X2 Estimated Minutes Polisher Cutter D Total Sales Process Funnel needed (to fill target capacity) 27,260 53,464 E Existing Growth and Replacement Funnel _22,000 18,000 F Needed addition to Growth and Replacement Funnel 5,260 35,464 Exhibit 9.10 Score of Monthly Budgeted Throughput Example Company Sales Funnel (months) November 30, 20X 2 Repetitive Sales Funnels (B) $72,965 Existing Growth and Replacement Funnel (E) $89,195 Multiply by win ratio and divide by sales cycle length * 0.3 / 6 4,460 Budgeted throughput for next month $74,518 5070_Pages 7/14/04 1:55 PM Page 227 throughput (T), and T is a derivative of capacity usage. Fourth, rather than the pursuit of larger sales volume per se, the analytical purpose of the sales funnels is to coordinate, in a harmonious manner, the marketing and sales efforts with the strategic orientation of the organization. SALES COMMISSIONS In our data for the Example Company presented in Chapter 5, and especially in the pricing and throughput analyses contained in Chapter 6 and earlier in this chapter in the sales funnels discussion, we have assumed a sales commis- sion that is calculated as a percentage of sales dollars. This is consistent with typical business-to-business sales management practice. 13 But does a revenue- based sales motivation model, which is designed to encourage greater sales volume in itself, make sense in a constraint management environment? At first brush, it seems that the purpose of the sales function is to ob- tain more sales. But consider the following. As part of the constraint man- agement focusing process, a strategic constraint has been identified. The exploitation decisions and supporting subordination actions should do two things: 1. Elevate—and break—tactical constraints that are not consistent with the strategic plan. 2. Result in the tactical constraint shifting to the strategic constraint lo- cation. Within this framework, three possibilities exist. The tactical con- straint is either internal (or external on the supply side) or (1) external in 228 Tactical Subordination in Sales Exhibit 9.11 Sales Funnels Summary Example Company November 30, 20X2 Estimated Minutes Throughput Element Polisher Cutter Sales Process Funnel Monthly Sales Funnels A Target capacity available (monthly) 14,263 11,457 B Monthly Repetive Sales Funnel 12,900 8,784 $ 72,965 C Monthly capacity available for Sales Process Funnel 1,363 2,673 D Expand (* cycle length; / win ratio) to Total Sales Process Funnel needed 27,260 53,464 E Existing Growth and Replacement Funnel 22,000 18,000 $ 89,195 4,460 F Needed Replacement to Growth and Replacement Funnel 5,260 35,464 G Monthly budgeted throughput (Score) $ 77,425 5070_Pages 7/14/04 1:55 PM Page 228 the market. If internal, the tactical constraint is either (2) the same as, or (3) different from, the strategic constraint. When a tactical constraint appears as an internal physical con- straint—but is not the same as the strategic constraint—additional current sales requiring the use of the tactical constraint cannot be accommodated. In this situation, greater current sales volume per se cannot be the desired result of the sales process. When the tactical and strategic constraints are the same, the organiza- tion will have established a stable operating environment. Since the strate- gic constraint is also an active internal physical constraint, the organiza- tion does not have the capacity to handle additional sales volume at the present time. Once again, greater current sales volume per se cannot be the desired result of the sales process in this case. The constraint is in the market for products that do not require use of constraint resources—the free products. 14 Even in this case greater current sales volume per se is not the desired result of the sales process. Rather, in each case the desired result of the sales process is to fill, but not exceed, the desired target capacity. Let us consider the Example Company again. For our discussion of sales commissions we will return to the case in which there is a production constraint at the welder. The constraints accounting analysis of the relative profitability of the three products, Atex, Detron, and Fonic, was presented in Chapter 5, Exhibits 5.24 through 5.26. The price and profitability measures that we calculated in Chapter 5 are re- peated in Exhibit 9.12. When the welder is an active internal constraint, the company’s pref- erence for sales, and therefore the desired emphasis by the sales force, is established by the t/cu metric highlighted in Exhibit 9.12 and is as fol- lows. First priority is Atex, which does not require use of the internal con- Sales Commissions 229 Exhibit 9.12 Price and Profitability Data Atex Detron Fonic Unit selling price $ 175.00 $ 275.00 $ 180.00 Gross margin $ 54.75 $ 123.50 $ 111.87 Gross margin as % of sales 31.3% 44.9% 37.8% Throughput contribution (t) per unit $ 101.25 $ 166.25 $ 106.00 t as % of sales 57.9% 60.5% 58.9% Constraint (welder) minutes per unit (cu) 34014 Throughput value of product in terms of constraint minute (t/cu) infinite $ 4.8897 $7.5714 5070_Pages 7/14/04 1:55 PM Page 229 [...]... constraint is in the market, then it may be necessary to influence the customer’s customer As constraints are elevated at the customer and the customer’s customer, a supply chain solution begins to emerge The requirements for successful constraint management within a supply chain are the same three as for an individual entity: (1) knowledge about constraint management, (2) communication of tactical and strategic... DECISIONS In Chapter 4 we saw that in most organizations seeking to implement constraint management as a management philosophy to drive a process of ongoing improvement, there is a need to change deeply seated paradigms about what individuals perceive their relationship with the organization to be.11 The purpose of the POOGI Bonus is to confirm to employees that they are an integral and valued part of the... Discount Rates on Stated Employment Investment Estimated Monthly Cash Flows Employment OE ( $8, 000) NonEmployment T and O E $131,000 Net Cash Flow $123,000 Discounted Value of Employment Operational Expense (Investment) 20% 15% 10% Years 30 $477,974 $630,336 $904, 982 20 $467,974 $600 ,89 3 $81 7,306 10 $402, 480 $ 481 ,80 5 $ 589 ,88 2 Limit of Internal Rate of Return (based on Investment above) 20% 15% Years 30 329%... expected to take about seven months to reach the payback period.25 Constraints Accounting Analysis Whereas the decision criterion used in the conventional analysis essentially asks the question, “Is the increase in T greater than the increase in OE?”, the constraints accounting criterion is to ask, “How long is it expected to take for the increased T to recover the increased financial commitment to the... the customer’s business results may be expressed in terms of conventional performance metrics related to the customer’s efficiency in a local area of operations not currently holding an Archimedean constraint Since the results do not relate to a constraint, the potential to increase the customer’s bottom line is negligible at best A customer who is not aware of—or not interested in—constraint management. .. per month Part I, Analysis of Improvement Part I in Exhibit 10.6 is a new section that analyzes the proposal in terms of improvement Real bottom-line improvement can be detected only after the enExhibit 10.6 Revision Constraints Accounting Analysis Request for Budget G Budget Revision: OE: Sources of future improvement $3,000 per month ID (if I requested): I: $82 0,000 Restore class D labor H Estimated... monthly net cash flow I Analysis of Improvement: Approximate present value of financial commitment to employees: (See Exhibit 10.5 and related discussion) Months to payback ( $82 0,000 / $123,000) Approximate expected rate of return J Recommendation, Approval, Actions: Non-employment $ 131,000 ( 0) ( $ 8, 000) ( $ 8, 000) $123,000 $82 0,000 6.67 months 180 % (range: 160% to 360%) $ 131,000 252 People: A Valuable... difficulty of resolving constraints to throughputoriented offerings The opportunity engine identifies those opportunities that have more favorable prognoses for both the organization’s ability to build a throughput-based sales offering and to win the sale These favorable opportunities are said to be in the T-Zone and are brought into the Growth and Replacement Funnel as needed to create the desired score... that the purpose of the 2 48 People: A Valuable Asset analysis is to determine improvement The question is, “How long will it take to recover the cost of the commitment to employees?” A problem arises in computing the payback data for employment decisions because the employment investment cost stream of $8, 000 per month cash outflow is not completely specified Two factors come into play when establishing... responding to the unused capacity that is exposed in robust applications of constraint management Finally, constraints accounting analytical procedures relating to personnel employment decisions—appropriate for the long-term commitment that is needed to allow the empowered employee to risk independent action—are considered Environmental Platform Consider an organization implementing constraint management . then it may be necessary to influence the customer’s customer. As constraints are elevated at the customer and the customer’s customer, a supply chain solution begins to emerge. The requirements. minute (t/cu) $ 3.0 682 $ 11 .87 5 $ 4 .81 81 Rank in terms of profitability 312 5070_Pages 7/14/04 1:55 PM Page 224 We want to pursue enough identified potential sales opportunities to create and sustain. results do not relate to a constraint, the potential to increase the customer’s bottom line is negligible at best. A customer who is not aware of—or not interested in—constraint management focusing