Pin It

It is a very widely held belief in business that each station in a production line should be working as hard as it can in order to maximize its efficiency. This might be a car assembly line or an accountant office processing tax returns using several different stages in the accounting process.  In other words, each stage is working at its Local Optimum.  Generations of Cost Accountants have encouraged this and spend endless amounts of time trying to split, for example, the cost of electricity over each work stage in the production cycle. This is probably seriously flawed thinking.

Having each step in a production line producing as hard as it can will inevitably cause work-in-progress (WIP) to pile up in front of the slowest part of the cycle as, by definition, every other part of the cycle can work faster than it can (see Theory of Constraints (TOC) Tool)

This WIP has a cost; the raw materials used, electricity and other similar inputs, labour and so it consumes cash (usually a scarce resource) well before being turned into a saleable product.

By way of example, consider a car assembly line for a 4 door vehicle.

The door making assembly line can produce 40 doors a day at a cost of materials and labour of $100 each.  The car assembly line can produce 8 x 4 door cars a day consuming 32 doors and so each day sees 8 surplus doors added to the WIP in front of the slower car assembly line.  In a year, this is around 2,000 more doors than required at a cost of  WIP of $100 X 2,000 = $200,000 sitting around doing nothing.  But, the door making unit is working to its maximum efficiency at least!

The door making line is an example of Local Optima that actually damages the profitability of the company. 

Resources

A number of easy to read business novels that illustrate the Theory of Constraints (TOC) Tool expand on this issue

Pin It

Comments (0)

Rated 0 out of 5 based on 0 voters
There are no comments posted here yet

Leave your comments

  1. Posting comment as a guest. Sign up or login to your account.
Rate this post:
0 Characters
Attachments (0 / 3)
Share Your Location
Type the text presented in the image below