Hamilton Pozo
The automotive spare parts firm Rodinex Ltda. located in the city of Campo Limpo Paulista (São Paulo)introduced the TOC as a strategic tooling to work and had successfully applied the theory’s principles to its manufacturing process. The firm, using the efficiency of TOC, noticed how its directors decided how and where they should invest its money.Below, we show a simple example from Rodinex from among its many manufacturing processes. To simplify the demonstration and make it easier to understand, the real figures were adjusted and reorganized, under the assumption that the Y(see chart 1).
Chart 1. Financial figures.
Selling price of product X (1,000/week) |
R$ 18.00 per unit |
Selling price of product Y (500/week) |
R$ 22.00 per unit |
Product X is made up from one |
R$ 12.00 per unit |
part purchased on the market and |
|
from two other parts produced |
|
in-house (p1 and p2) |
|
Cost p1 |
R$ 5.00 per unit |
Cost p2 |
R$ 6.40 per unit |
Operating expenses |
R$ 16,500.00 per week |
Source. Research figures.
In addition, it was also assumed that market demand is just 1000 units of X and of 500 units of Y a week.
Chart 2. Factory Sectors
Manufacturing Sectors |
"a", "b", "c", "d" |
Weekly hours |
40 hours per sector |
Part p1, goes through sectors |
"a" and "c" |
Part p2, goes through sectors |
"b" and "c" |
Parts p1, p2, p3 and pc |
Assembled in sector "d" |
Part p3, goes through sectors |
"a" and "b" |
Product X is made up of: |
Parts p2 and p3 |
Source. Research figures.
As with any firm that tries to maximize profits, the question put to the manufacturer as how many units of each type should be produced in order to obtain the highest possible profit, in accordance with the figures shown in charts 1, 2 and 3.
Chart 3. Manufacturing Times.
PRODUCTION CICLE TIME |
MINUTES |
SECTOR |
Part p1 |
15 |
a |
Part p1 |
10 |
c |
Part p2 |
15 |
b |
Part p2 |
5 |
c |
Parts p1 + p2 + p3 |
10 |
d |
Part p3 |
10 |
a |
Part p3 |
15 |
b |
Parts p2 + p3 |
5 |
d |
Source. Research figures.
Under the conventional planning system of Rodinex’s production, this program was configured to make use of the full load of all the machines, with the results obtained being in accordance with what is shown below. The initial action taken was to manage the constraints and, by identifying the system’s constraints, to calculate the process load, the breaks and the set-ups, as shown in chart 4. Here, we assumed there were no set-ups and no interruptions.
Chart 4. Production volume versus capacity.
RESOURCES |
TIME |
PROCESS |
USE |
(Sectors) |
Available/week(minutes) |
Load/week(minutes) |
Percentage |
A |
|
p1 (15x1000)=15,000 |
|
26,400 |
p3 (10x500) = 5,000 |
||
total = 20,000 |
76% |
||
B |
|
p3 (15x1000)= 15,000 |
|
p2 (15x500) = 7,000 |
|||
24,000 |
p3 (15x500) = 7,500 |
||
|
Total = 30,000 |
125% |
|
C |
|
p1 (10x1000)= 10,000 |
|
p2 (5x1000) = 5,000 |
|||
24,000 |
p2 (5x500) = 2,500 |
||
|
Total = 17,500 |
73% |
|
D |
|
P (10x1000) = 10,000 |
|
21,600 |
T (5x500) = 2,500 |
|
|
Total = 12,500 |
59% |
||
Source. Research figures.
According to chart 5, one can see that the system’s constraint is sector "b" and conclude that it will be impossible to manufacture everything that the market buys, so the firm will have to choose the best parts and the best amounts to sell. Therefore, the problem is knowing which parts it will manufacture and in what numbers. Using the conventional approach, one gets the result shown in chart 5.
Chart 5. Figures that make up the contribution margin
FIGURES |
PRODUCT |
PRODUCT |
Selling Price (R$) |
18.00 |
22.00 |
Raw Materials Cost (R$) |
5.00 |
6.40 |
Contribution Margin (R$) * |
13.00 |
15,60 |
Processing Time (minutes) |
55 |
50 |
Cost/minute of piece (R$) ** |
0.236 |
0,312 |
* selling price – raw materials cost
** selling price – raw materials cost
Source. Research figures.
Therefore, according to chart 6, the best product for the firm to produce is Y, which generates a profit of R$ 0,312 for every minute of processing in the factory. Based on the best product and its profit per minute of processing, the firm should produce the maximum number of units of product Y, which corresponds to 500 units a week. The available operating time, in other words, the remaining capacity will be used to manufacture product X, due to the constraint in department "b." Chart 6 shows the calculation of the maximum profit using the conventional approach, which gives us a loss of R$ 900.00 a week.
Chart 6. Maximum profit using the conventional approach.
PRODUCT Y |
|
Market |
500 pieces/week |
Contribution Margin R$ |
15.60 (22 – 6.4) |
Total time utilized in "b" |
15,000 minutes |
Amount of time remaining in "b"(for X) |
9,000 minutes |
Gross profit with X (500 pieces x R$15.60) R$ |
7,800.00 |
PRODUCT X |
|
Market |
1000 pieces/week |
Contribution Margin R$ |
13.00 (18-5) |
Capacity in function of "b" (9,000/15) |
600 pieces/week |
Gross profit with P (600 pieces x R$13.00) R$ |
7,800.00 |
Total Gross Profit (T + P) R$ |
15,600.00 |
Operating expenses R$ |
(16,500.00) |
Net profit/week R$ |
-900.00 |
Source. Research figures.
Under the TOC approach, the objective is to maximize profit; according to chart 4, TOC indicated that the constraint is sector "b". Using this element, we construct chart 7 that shows the best cost per minute under this constraint.
Chart 7. Figures that make up the best contribution margin.
FIGURES |
PRODUCT X |
PRODUCT Y |
Selling Price (R$) |
18.00 |
22.00 |
Raw Materials Cost (R$) |
5.00 |
6.40 |
Contribution Margin (R$) * |
13.00 |
15,60 |
Processing Time (minutes) ** |
15 |
30 |
Cost/minute under the constraint (R$) *** |
0,867 |
0,52 |
Therefore, according to chart 8, the best product for the firm to produce is X rather than Y, which was indicated using the conventional approach. Based on the focus that is most compatible with the analyzed context, the Theory of Constraints, Rodrinex should produce 1000 units of product X, and the remaining time should be used to manufacture product Y, in light of the constraint observed in sector "b". Chart 8 shows the best profit that can initially be obtained.
Chart 8. Calculation of best profit using TOC.
PRODUCT X |
|
Market |
1,000 units/week |
Contribution Margin (R$) |
13.00 (18 - 5) |
Total time utilized in "b" |
15,000 minutes |
Amount of time remaining in "b" (for Y) |
9,000 minutes |
Gross Profit with P (45 units x R$ 100) R$ |
13,000.00 |
PRODUCT Y |
|
Market |
500 units/week |
Contribution Margin (R$) |
15.60 (22 – 6.4) |
Capacity in function of "b" (9,000/30) |
300 units/week |
Gross Profit with T (300 units x R$15.60) R$ |
4,680.00 |
Total Gross Profit (P + T) R$ |
17,660.00 |
Operating Expense R$ |
(16,500.00) |
Net profit / week R$ |
1,160.00 |
According to chart 8, the best profit that can be obtained is the one shown, i.e., R$ 1,160.00 a week. This results from the comparison of the two alternatives assessed in terms of weekly profit maximization, as per charts 7 and 8, which, according to the conventional approach, (chart 7) showed a R$ 900.00 loss and, under TOC approach (chart 8) showed a R$ 1,160.00 profit. In this particular case, a decision was made to calculate which product mix yielded the greatest profitability in the face of one constraint: lack of capacity in "b." The above exposition makes it clear that the constraint determines profitability, and therefore that one should always use the constraints to achieve the highest profit.
As has been shown, TOC acts preventively and effectively, by controlling the effects and eliminating the causes of constraints, without affecting the flow, by using existing capacity to supply demand. This theory is compatible with any type of firm and market, because it manages the bottlenecks and cushions that affect the production flow, subordinating all the other activities to the constraints and ensuring an increase in value added.
TOC is especially useful for helping firms to reduce their lead times and stock levels. Based on surveys among firms that use this theory as well as on the results obtained at Rodrinex, one can conclude that users of this theory report reductions in the lead times of their processes of the order of 30 to 45% and, in relation to their stocks, decreases of between 50 and 75%. This system also results in greater flexibility of the production system through an optimization of the manufacturing mix and increased the profit in the area of study more than 400%.
Although the empirical observation base may be considered too small to make recommendations about the widespread use of TOC, one should bear in mind that the case study used in this article included questions involving factors found in most small firms. Comparing the production chain of the firm studied with others, one finds that there is a lot of similarity with other small manufacturers in Brazil.
TOC helps firms focus their attention on their problems. Because it regards bottleneck resources as being worthy of special attention and since, in general, there are few bottlenecks, firms are encouraged not to waste their efforts, but rather to concentrate on solving problems that may jeopardize the performance of these bottleneck resources, which in turn jeopardizes the operating result of the business as a whole.
TOC principles offer new insights into old problems. This furthers a better understanding of these problems and encourages a search for new solutions. The Socratic Method used causes the idea to’ belong;’ to whoever is going to put it into practice rather than to whoever idealized the change. The important thing is to overcome the general resistance to change and ensure that everyone feels that they too helped spawn the invention.
One can also infer that firms, even under similar conditions, resort to different means to compete, and that their current strategic alignment can be focused on the elimination of constraints as a strategic differential.
There are several possibilities for developing this line of research further, such as: a) a comparison between small industrial firms, to generate further empirical elements for comparing between organizations; b) a study involving firms from different economic sectors; c) comparative studies aimed at identifying differences in production strategies due to different areas of activity.
In addition, other possible surveys could aim to analyze the elements portrayed here in greater depth, exploring these issues in detail, to analyze how operating elements combine in the context of the management of small firms, as well as the way in which these elements support their competitive strategies based on the use of TOC.
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Vol. 32 (2) 2011
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