Process management quality, time and the theory of constraints - pareto presentation(1)

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Quality, Time, and theQuality, Time, and the
Theory of ConstraintsTheory of Constraints
Chapter 19Chapter 19

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IntroductionIntroduction
To satisfy their customers and to beTo satisfy their customers and to be
competitive, managers need to find cost-competitive, managers need to find cost-
effective ways to continuously improveeffective ways to continuously improve
the quality of their products and to shortenthe quality of their products and to shorten
delivery time.delivery time.
This chapter describes how managersThis chapter describes how managers
streamline processes to improve qualitystreamline processes to improve quality
and reduce delays.and reduce delays.

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Two Aspects of QualityTwo Aspects of Quality
1 Quality of designQuality of design measures how closely themeasures how closely the
characteristics of products or services meetcharacteristics of products or services meet
the needs and wants of customers.the needs and wants of customers.
2 Conformance qualityConformance quality refers to the performancerefers to the performance
of a product or service according to design andof a product or service according to design and
product specifications.product specifications.

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Two Aspects of QualityTwo Aspects of Quality
ActualActual
PerformancePerformance
DesignDesign
SpecificationsSpecifications
CustomerCustomer
SatisfactionSatisfaction
QualityQuality
of Designof Design
FailureFailure
ConformanceConformance
QualityQuality
FailureFailure

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Costs of QualityCosts of Quality
TheThe costs of qualitycosts of quality (COQ) refer to costs(COQ) refer to costs
incurred to prevent, or costs arising as a resultincurred to prevent, or costs arising as a result
of, the production of a low-quality product.of, the production of a low-quality product.
These costs focus on conformance quality andThese costs focus on conformance quality and
are incurred in all business functions of theare incurred in all business functions of the
value chain.value chain.

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1 Prevention costsPrevention costs--costs incurred in precluding--costs incurred in precluding
the production of products that do notthe production of products that do not
conform to specifications.conform to specifications.
2 Appraisal costsAppraisal costs--costs incurred in detecting--costs incurred in detecting
which of the individual units of products dowhich of the individual units of products do
not conform to specifications.not conform to specifications.

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3 Internal failure costsInternal failure costs--costs incurred by a--costs incurred by a
nonconforming product detected before it isnonconforming product detected before it is
shipped to customers.shipped to customers.
4 External failure costsExternal failure costs--costs incurred by a--costs incurred by a
nonconforming product detected after it isnonconforming product detected after it is
shipped to customers.shipped to customers.

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Peoria Photo Corporation made 10,000Peoria Photo Corporation made 10,000
photocopying machines in the year 2000.photocopying machines in the year 2000.
Peoria Photo determines the costs of qualityPeoria Photo determines the costs of quality
of its photocopying machines using a 7-stepof its photocopying machines using a 7-step
activity-based costing approach.activity-based costing approach.

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Costs of Quality (Steps 1 and 2)Costs of Quality (Steps 1 and 2)
Step 1Step 1: Identify the chosen cost object(s).: Identify the chosen cost object(s).
The cost object is the 10,000 photocopyingThe cost object is the 10,000 photocopying
machines that Peoria Photo makes.machines that Peoria Photo makes.
Step 2Step 2: Identify the direct costs of quality of: Identify the direct costs of quality of
the product.the product.
The photocopying machines have no directThe photocopying machines have no direct
costs of quality.costs of quality.

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Costs of Quality (Step 3)Costs of Quality (Step 3)
Step 3Step 3: Select the cost-allocation bases to use: Select the cost-allocation bases to use
for allocating indirect costs of qualityfor allocating indirect costs of quality
to the product.to the product.
Peoria Photo classifies activities that resultPeoria Photo classifies activities that result
in prevention, appraisal, internal failure, andin prevention, appraisal, internal failure, and
external failure costs.external failure costs.
(Information on the total quantities of each of(Information on the total quantities of each of
these cost-allocation bases used in all ofthese cost-allocation bases used in all of
Peoria’s operations is not provided.)Peoria’s operations is not provided.)

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Step 4Step 4: Identify the indirect costs of quality: Identify the indirect costs of quality
associated with each cost-allocationassociated with each cost-allocation
base.base.
These are theThese are the total coststotal costs (fixed and variable)(fixed and variable)
incurred on each of the costs of qualityincurred on each of the costs of quality
activities.activities.
(Information about these total costs is not(Information about these total costs is not
provided.)provided.)

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Step 5Step 5: Compute the rate per unit of each: Compute the rate per unit of each
cost-allocation base used tocost-allocation base used to
allocateallocate indirect costs of quality toindirect costs of quality to
products.products.
For each activity, the total costs calculatedFor each activity, the total costs calculated
in Step 4 is divided by the total quantity ofin Step 4 is divided by the total quantity of
the cost-allocation base calculated in Step 3the cost-allocation base calculated in Step 3
to compute the rate per unit for each cost-to compute the rate per unit for each cost-
allocation base.allocation base.

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Peoria Photo chooses the number of inspectionPeoria Photo chooses the number of inspection
hours as the cost-allocation base for thehours as the cost-allocation base for the
inspection activity in all of Peoria’sinspection activity in all of Peoria’s
operations.operations.

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Cost of Quality andCost of Quality and
Value Chain CategoryValue Chain Category RateRate
(Assumed)(Assumed) Prevention costs:Prevention costs:
Design engineeringDesign engineering
(R&D)(R&D) $ 80 per hour$ 80 per hour
Process engineering (R&D)Process engineering (R&D) $ 60 per hour$ 60 per hour
Appraisal costs:Appraisal costs:
Inspection (Manufacturing)Inspection (Manufacturing) $ 40 per$ 40 per
hourhour Internal failure costs:Internal failure costs:
Rework (Manufacturing)Rework (Manufacturing) $100 per$100 per

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Value Chain CategoryValue Chain Category RateRate
(Assumed)(Assumed) External failure costs:External failure costs:
Customer support (Marketing)Customer support (Marketing) $ 50 per$ 50 per
hour Transportation (Distribution)hour Transportation (Distribution) $240 per$240 per
load Warranty repairload Warranty repair
(Customer Service)(Customer Service) $110 per hour$110 per hour

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Step 6Step 6:: Compute the indirect costs of qualityCompute the indirect costs of quality
allocated to the product.allocated to the product.
Peoria Photo first determines the quantitiesPeoria Photo first determines the quantities
of each of the cost-allocation bases used byof each of the cost-allocation bases used by
the photocopying machines.the photocopying machines.
This amount is multiplied by the cost-This amount is multiplied by the cost-
allocation rate calculated in Step 5.allocation rate calculated in Step 5.

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Value Chain CategoryValue Chain Category QuantityQuantity
Prevention costsPrevention costs::
Design engineering (R&D)Design engineering (R&D) 20,00020,000
hours Processhours Process
engineering (R&D)engineering (R&D) 22,500 hours22,500 hours
Appraisal costs:Appraisal costs:
Inspection (Manufacturing)Inspection (Manufacturing) 120,000 hours120,000 hours
Internal failure costs:Internal failure costs:
Rework (Manufacturing)Rework (Manufacturing) 50,000 hours50,000 hours

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Value Chain CategoryValue Chain Category QuantityQuantity
External failure costs:External failure costs:
Customer support (Marketing)Customer support (Marketing) 6,000 hours6,000 hours
Transportation (Distribution)Transportation (Distribution) 1,500 loads1,500 loads
Warranty repairWarranty repair
(Customer Service)(Customer Service) 60,000 hours60,000 hours

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What is the total cost for design engineering?What is the total cost for design engineering?
20,000 hours × $80 = $1,600,00020,000 hours × $80 = $1,600,000
What is the total cost for inspection?What is the total cost for inspection?
120,000 hours × $40 = $4,800,000120,000 hours × $40 = $4,800,000

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Value Chain CategoryValue Chain Category Total CostsTotal Costs
Prevention costs:Prevention costs:
Design engineering (R&D)Design engineering (R&D) $1,600,000$1,600,000
Process engineering (R&D)Process engineering (R&D)
1,350,0001,350,000 TotalTotal
$2,950,000$2,950,000 Appraisal costs:Appraisal costs:
InspectionInspection
$4,800,000$4,800,000 TotalTotal
$4,800,000$4,800,000

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Internal failure costs:Internal failure costs:
Rework (Manufacturing)Rework (Manufacturing) $5,000,000$5,000,000
TotalTotal $5,000,000$5,000,000

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External failure costs:External failure costs:
Customer support (Marketing)Customer support (Marketing) $ 300,000$ 300,000
Transportation (Distribution)Transportation (Distribution) 360,000360,000
Warranty repairWarranty repair
(Customer Service)(Customer Service) 6,600,0006,600,000
TotalTotal $7,260,000$7,260,000

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Step 7Step 7: Compute the total costs of quality of: Compute the total costs of quality of
the product by adding all direct and indirect costs ofthe product by adding all direct and indirect costs of
quality assigned to it.quality assigned to it.
What are the total costs of quality?What are the total costs of quality?
Prevention costsPrevention costs $ 2,950,000$ 2,950,000
Appraisal costsAppraisal costs 4,800,0004,800,000
Internal failure costsInternal failure costs 5,000,0005,000,000
External failure costsExternal failure costs 7,260,0007,260,000
TotalTotal $20,010,000$20,010,000

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Techniques Used to AnalyzeTechniques Used to Analyze
Quality ProblemsQuality Problems
Three methods that companies use to identifyThree methods that companies use to identify
quality problems and to improve quality are:quality problems and to improve quality are:
1 Control chartsControl charts
2 Pareto diagramsPareto diagrams
3 Cause-and-effect diagramsCause-and-effect diagrams

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Control ChartsControl Charts
Statistical quality control (SQC), or statisticalStatistical quality control (SQC), or statistical
process control (SPC), is a formal means ofprocess control (SPC), is a formal means of
distinguishing between random variation anddistinguishing between random variation and
nonrandom variation in an operating process.nonrandom variation in an operating process.
A control chart is a graph of a series ofA control chart is a graph of a series of
successive observations of a particular step,successive observations of a particular step,
procedure, or operation taken at regularprocedure, or operation taken at regular
intervals of time.intervals of time.

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Each observation is plotted relative toEach observation is plotted relative to
specified ranges that represent the expectedspecified ranges that represent the expected
statistical distribution.statistical distribution.
Only those observations outside the controlOnly those observations outside the control
limits are ordinarily regarded as nonrandomlimits are ordinarily regarded as nonrandom
and worth investigating.and worth investigating.

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On the basis of experience, Peoria decidesOn the basis of experience, Peoria decides
that any observation outside the arithmeticthat any observation outside the arithmetic
meanmean µµ ± 2± 2σσ standard deviations should bestandard deviations should be
investigated.investigated.

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1 2 3 4 5 6 7 8 9 101 2 3 4 5 6 7 8 9 10
DaysDays
µµ
µµ ++ σσ
µµ ++ 22σσ
Production Line
µµ -- σσ
µµ -- 22σσ
DefectRateDefectRate

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For the production line, the last twoFor the production line, the last two
observations signal that an out-of-controlobservations signal that an out-of-control
occurrence is highly likely.occurrence is highly likely.
Given the ± 2Given the ± 2σσ from the mean rule, bothfrom the mean rule, both
observations would lead to an investigation.observations would lead to an investigation.

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Pareto DiagramPareto Diagram
Observations outside control limits serve asObservations outside control limits serve as
inputs to Pareto diagrams.inputs to Pareto diagrams.
A Pareto diagram indicates how frequentlyA Pareto diagram indicates how frequently
each type of failure (defect) occurs.each type of failure (defect) occurs.

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Pareto DiagramPareto Diagram
Copies areCopies are
fuzzy andfuzzy and
unclearunclear
Copies areCopies are
tootoo
light/darklight/dark
Paper getsPaper gets
jammedjammed
NumberofTimesNumberofTimes
DefectObservedDefectObserved
700
500
200

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Cause-and-effect DiagramsCause-and-effect Diagrams
The most frequently recurring and costlyThe most frequently recurring and costly
problems identified by the Pareto diagramproblems identified by the Pareto diagram
are analyzed using cause-and-effect diagrams.are analyzed using cause-and-effect diagrams.
A cause-and-effect diagram identifies potentialA cause-and-effect diagram identifies potential
causes of failures or defects.causes of failures or defects.
As a first step, Peoria analyzes the causes ofAs a first step, Peoria analyzes the causes of
the most frequently occurring failure, fuzzythe most frequently occurring failure, fuzzy
and unclear copies.and unclear copies.

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Peoria identifies four major categories ofPeoria identifies four major categories of
potential causes of failure:potential causes of failure:
1 Human factorsHuman factors
2 Methods and design factorsMethods and design factors
3 Machine-related factorsMachine-related factors
4 Materials and components factorsMaterials and components factors

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Methods andMethods and
design factorsdesign factors
Human factorsHuman factors
Machine-relatedMachine-related
factorsfactors
Materials andMaterials and
components factorscomponents factors
Multiple suppliersMultiple suppliers
New operatorNew operator Flawed part designFlawed part design
Poor maintenancePoor maintenance

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Relevant CostsRelevant Costs
Careful analysis of Peoria’s cause-and-effectCareful analysis of Peoria’s cause-and-effect
diagram reveals that the frame of the copierdiagram reveals that the frame of the copier
is often mishandled as it travels from theis often mishandled as it travels from the
suppliers’ warehouses to Peoria’s plant.suppliers’ warehouses to Peoria’s plant.
Mishandling causes the dimensions of theMishandling causes the dimensions of the
frame to vary from specifications, resulting inframe to vary from specifications, resulting in
fuzzy and unclear copies.fuzzy and unclear copies.

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The team of engineers working to solve thisThe team of engineers working to solve this
problem offers two alternative solutions:problem offers two alternative solutions:
1 Improve the inspection of the framesImprove the inspection of the frames
immediately upon delivery.immediately upon delivery.
2 Redesign and strengthen the frames and theRedesign and strengthen the frames and the
containers used to transport them to bettercontainers used to transport them to better
withstand mishandling during transportation.withstand mishandling during transportation.

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What must management do to evaluate eachWhat must management do to evaluate each
alternative?alternative?
Measure the total relevant costs and totalMeasure the total relevant costs and total
relevant revenues.relevant revenues.
Additional AdditionalAdditional Additional
Inspection CostInspection Cost Redesign CostRedesign Cost DifferenceDifference
$200,000 $230,000 $30,000$200,000 $230,000 $30,000
Peoria determines the fixed and variable costPeoria determines the fixed and variable cost
component of each activity involved.component of each activity involved.

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Variable AllocatedVariable Allocated
CostsCosts Fixed CostsFixed Costs TotalTotal
Rework-hourRework-hour $ 40$ 40 $60$60 $100$100
Customer-support-hrCustomer-support-hr $ 20$ 20 $30$30 $ 50$ 50
Transportation/loadTransportation/load $180$180 $60$60 $240$240
Warranty/repair hourWarranty/repair hour $ 45$ 45 $65$65 $110$110

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Only variable costs are relevant becauseOnly variable costs are relevant because
fixed costs are not affected.fixed costs are not affected.
Before making a decision, managementBefore making a decision, management
must compare the incremental costs ofmust compare the incremental costs of
each alternative against the correspondingeach alternative against the corresponding
incremental benefit.incremental benefit.

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Relevant BenefitsRelevant Benefits
Further RedesigningFurther Redesigning
InspectionInspection FramesFrames
Savings in rework costs:Savings in rework costs:
$40 × 12,000 $480,000$40 × 12,000 $480,000
$40 × 16,000 $640,000$40 × 16,000 $640,000
Savings in customer- support costs:Savings in customer- support costs:
$20 × 1,000 $20,000$20 × 1,000 $20,000
$20 × 1,400 $28,000$20 × 1,400 $28,000

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Savings in transportation costs for repair parts:Savings in transportation costs for repair parts:
$180 × 250 $45,000$180 × 250 $45,000
$180 × 350 $63,000$180 × 350 $63,000
Savings in warranty repair costs:Savings in warranty repair costs:
$45 × 10,000 $450,000$45 × 10,000 $450,000
$45 × 14,000 $630,000$45 × 14,000 $630,000

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Relevant savings:Relevant savings:
Rework costsRework costs $480,000$480,000 $ 640,000$ 640,000
Customer-support costsCustomer-support costs 20,00020,000 28,00028,000
Transportation costsTransportation costs 45,00045,000
63,000 Warranty repair costs63,000 Warranty repair costs 450,000450,000
630,000630,000 TotalTotal $995,000$995,000
$1,361,000$1,361,000

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ComparisonComparison
Relevant savingsRelevant savings $995,000$995,000 $1,361,000$1,361,000
Additional costAdditional cost 200,000200,000 230,000230,000
DifferenceDifference $795,000$795,000 $1,131,000$1,131,000
What should Peoria do?What should Peoria do?
Redesigning the frames provides a $336,000Redesigning the frames provides a $336,000
incremental benefit over further inspection.incremental benefit over further inspection.

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Nonfinancial MeasuresNonfinancial Measures
Nonfinancial measures can be categorized into:Nonfinancial measures can be categorized into:
– Nonfinancial measures of customer-satisfactionNonfinancial measures of customer-satisfaction
– Nonfinancial measures of internal performanceNonfinancial measures of internal performance

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Nonfinancial measures of customerNonfinancial measures of customer
satisfaction include:satisfaction include:
– Number of customer complaintsNumber of customer complaints
– Defective units as a percentage of total unitsDefective units as a percentage of total units
shipped to customersshipped to customers
– Percentage of products that experience earlyPercentage of products that experience early
or excessive failureor excessive failure
– On-time delivery rateOn-time delivery rate

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Nonfinancial measures of internal performanceNonfinancial measures of internal performance
include:include:
– Number of defects for each product lineNumber of defects for each product line
– Process yield (ratio of good output to totalProcess yield (ratio of good output to total
output)output)
– Employee turnover (ratio of the number ofEmployee turnover (ratio of the number of
employees who left the company to the totalemployees who left the company to the total
number of employees)number of employees)

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Evaluating Quality PerformanceEvaluating Quality Performance
Measuring the financial costs of quality andMeasuring the financial costs of quality and
the nonfinancial aspects of quality havethe nonfinancial aspects of quality have
distinctly different advantages.distinctly different advantages.
Financial measures are helpful to evaluateFinancial measures are helpful to evaluate
trade-offs among prevention costs, appraisaltrade-offs among prevention costs, appraisal
costs, and failure costs.costs, and failure costs.
They focus attention on the costs of poorThey focus attention on the costs of poor
quality.quality.

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Advantages of COQ measures:Advantages of COQ measures:
– Consistent with the attention directing roleConsistent with the attention directing role
of management accounting, COQ focusesof management accounting, COQ focuses
attention on how costly poor quality can be.attention on how costly poor quality can be.
– Financial COQ measures assist in problemFinancial COQ measures assist in problem
solving by comparing different quality-solving by comparing different quality-
improvement programs and setting prioritiesimprovement programs and setting priorities
for achieving maximum cost reduction.for achieving maximum cost reduction.

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– COQ provides a single, summary measureCOQ provides a single, summary measure
of quality performance.of quality performance.
Nonfinancial measures help focus attentionNonfinancial measures help focus attention
on the precise problem areas that needon the precise problem areas that need
improvement and also serve as indicatorsimprovement and also serve as indicators
of future long-run performance.of future long-run performance.

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Advantages of nonfinancial measures ofAdvantages of nonfinancial measures of
quality:quality:
– Nonfinancial measures of quality are oftenNonfinancial measures of quality are often
easy to quantify and understand.easy to quantify and understand.
– Nonfinancial measures direct attention toNonfinancial measures direct attention to
physical processes and hence focus attentionphysical processes and hence focus attention
on the precise problem areas that needon the precise problem areas that need
improvement.improvement.

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– Nonfinancial measures provide immediateNonfinancial measures provide immediate
short-run feedback on whether qualityshort-run feedback on whether quality
improvement efforts have, in fact, succeededimprovement efforts have, in fact, succeeded
in improving quality.in improving quality.
– Nonfinancial measures are useful indicatorsNonfinancial measures are useful indicators
of future long-run performance.of future long-run performance.

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Time as a Competitive WeaponTime as a Competitive Weapon
Companies need to measure time in order toCompanies need to measure time in order to
manage it properly.manage it properly.
Two common operational measures of timeTwo common operational measures of time
are:are:
1 Customer-response timeCustomer-response time
2 On-time performanceOn-time performance

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Customer-Response TimeCustomer-Response Time
Customer-response time is the amount of time fromCustomer-response time is the amount of time from
when a customer places an order for a product orwhen a customer places an order for a product or
requests service to when the product or service isrequests service to when the product or service is
delivered to the customer.delivered to the customer.
The following are different components of customer-The following are different components of customer-
response time:response time:
Receipt timeReceipt time is the time it takes a Marketingis the time it takes a Marketing
Department to specify a customer’s exactDepartment to specify a customer’s exact
requirements to manufacturing.requirements to manufacturing.

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Customer-Response TimeCustomer-Response Time
Manufacturing lead timeManufacturing lead time is the amount ofis the amount of
time from when an order is ready to start ontime from when an order is ready to start on
the production line to when it becomes athe production line to when it becomes a
finished good.finished good.
Delivery timeDelivery time is the time it takes to deliver ais the time it takes to deliver a
completed order to the customer.completed order to the customer.

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On-Time PerformanceOn-Time Performance
On-time performance refers to situations inOn-time performance refers to situations in
which the product or service is actuallywhich the product or service is actually
delivered at the time it is scheduled to bedelivered at the time it is scheduled to be
delivered.delivered.
On-time performance is an important elementOn-time performance is an important element
of customer satisfaction because customersof customer satisfaction because customers
want and expect on-time deliveries.want and expect on-time deliveries.

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Time Drivers and Costs of TimeTime Drivers and Costs of Time
AA time drivertime driver is any factor where change inis any factor where change in
the factor causes a change in the speed withthe factor causes a change in the speed with
which an activity is undertaken.which an activity is undertaken.
Managing customer-response time and on-timeManaging customer-response time and on-time
performance requires an understanding of theperformance requires an understanding of the
causes of delays and the resulting costs.causes of delays and the resulting costs.

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Two important drivers of time are:Two important drivers of time are:
1 UncertaintyUncertainty
2 Limited capacity and bottlenecksLimited capacity and bottlenecks
The following are different components ofThe following are different components of
customer-response time:customer-response time:
Receipt timeReceipt time is the time it takes a Marketingis the time it takes a Marketing
Department to specify a customer’s exactDepartment to specify a customer’s exact
requirements to manufacturing.requirements to manufacturing.

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Average waiting timeAverage waiting time is the average amountis the average amount
of time that an order will wait in line beforeof time that an order will wait in line before
it is set up and processed.it is set up and processed.
Average waiting timeAverage waiting time == Average number ofAverage number of
orders × (Manufacturing time)²orders × (Manufacturing time)²
DividedDivided byby 2 × [Annual2 × [Annual
machine capacity – (Average number ofmachine capacity – (Average number of
orders × Manufacturing time)]orders × Manufacturing time)]

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The longer the manufacturing time, theThe longer the manufacturing time, the
greater the chance that the machine will begreater the chance that the machine will be
in use when an order arrives, and the longerin use when an order arrives, and the longer
the delays.the delays.
The denominator in this formula measuresThe denominator in this formula measures
unused capacity, or cushion.unused capacity, or cushion.
The smaller the unused capacity, the greaterThe smaller the unused capacity, the greater
the delays.the delays.

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The three main measurements in the theoryThe three main measurements in the theory
of constraints are:of constraints are:
1 Throughput contributionThroughput contribution equal to revenuesequal to revenues
minus direct material costs.minus direct material costs.
2 InvestmentsInvestments equal the sum of material costsequal the sum of material costs
in direct materials inventory, work-in-processin direct materials inventory, work-in-process
inventory, finished goods inventory, R&Dinventory, finished goods inventory, R&D
costs, and costs of equipment and buildings.costs, and costs of equipment and buildings.

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3 Operating costsOperating costs equal to all operating costsequal to all operating costs
(other than direct materials) incurred to earn(other than direct materials) incurred to earn
throughput contribution.throughput contribution.
The objective of TOC is to increaseThe objective of TOC is to increase
throughput contribution while decreasingthroughput contribution while decreasing
investments and operating costs.investments and operating costs.
TOC considers a short-run time horizon andTOC considers a short-run time horizon and
assumes operating costs to be fixed costs.assumes operating costs to be fixed costs.

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The theory of constraints emphasizes theThe theory of constraints emphasizes the
management of bottlenecks as the key tomanagement of bottlenecks as the key to
improving the performance of the productionimproving the performance of the production
system as a whole.system as a whole.

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Managing BottlenecksManaging Bottlenecks
The four steps in managing bottlenecks are:The four steps in managing bottlenecks are:
1 Recognize that the bottleneck operationRecognize that the bottleneck operation
determines throughput contribution of thedetermines throughput contribution of the
system as a whole.system as a whole.
2 Search and find the bottleneck operation bySearch and find the bottleneck operation by
identifying operations with large quantitiesidentifying operations with large quantities
of inventory waiting to be worked on.of inventory waiting to be worked on.

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Managing BottlenecksManaging Bottlenecks
3 Keep the bottleneck busy and subordinate allKeep the bottleneck busy and subordinate all
nonbottleneck operations to the bottlenecknonbottleneck operations to the bottleneck
operations.operations.
4 Take actions to increase bottleneck efficiencyTake actions to increase bottleneck efficiency
and capacity – the objective is to increaseand capacity – the objective is to increase
throughput contribution minus the incrementalthroughput contribution minus the incremental
costs of taking such actions.costs of taking such actions.

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