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Unformatted text preview: Chapter 20 - Constraint Management CHAPTER 20 CONSTRAINT MANAGEMENT Review and Discussion Questions 1. State the global performance measurements and operational performance measurements and briefly define each of them. How do these differ from traditional accounting measurements? Global performance measurement: • Net profit—measurement in dollars • Return on investment—generally a percent of the investment • Cash flow—the amount of cash available for day to day operations. From an accounting standpoint, deductions such as for depreciation are added back in since depreciation is not really money spent Operational measurement: • Throughput—the actual rate of sales generated by the system • Inventory—all the money invested in things that are intended to be sold. This includes raw materials, equipment, etc., but at the cost price, less any depreciation (which is operating expense). • Operating expense—money spent to convert inventory into throughput. This includes direct and indirect labor, materials, depreciation, administrative costs, etc. Traditional accounting methods work with such things as standard costs, allocation of burdens (which may consist of indirect labor, administrative costs, insurance, taxes, depreciation, etc.), and gross profits, net profits, cost centers, profit centers, all of which may be based on standards and allocations. These may not have any basis in reality. Many examples can be cited where traditional accounting forces wrong decisions. One specific example that one of the authors has confronted is of a V. P. of manufacturing who is terminating a very profitable product line, because on paper this product line is losing money. Why? Because overhead is allocated based on the amount of direct labor and this product line is almost all-direct labor, with very little equipment involved. His allocation of everyone else’s burden creates a paper loss. Under these circumstances he would lose his annual bonus and be rated down in his performance. Other areas of accounting differences: inventory in traditional accounting is carried the same as cost of goods sold, i.e., with all the labor and burdens included. In operational measurement’s terminology, inventory is carried as the cost of the raw materials. 40 Chapter 20 - Constraint Management 2. Discuss process batch and transfer batches. How might you determine what the sizes should be? Process batch size is the total number of units that are scheduled to be processed within the same setup. Larger process batches involve fewer setups and, therefore, have more output. The reverse is true for smaller process batches. Transfer batches refers to the movement of part of the process batch, rather than waiting for the entire job to be completed. A process batch of 1000, for example, can be transferred in ten batches of 100 each....
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- Spring '11
- Management, constraint management