Factory Plot
ch 9
The CEO will come to the plant for publicity in a month.
Alex matches the three measurements with the questions Jonah asked in their first meeting:
- Throughput - did your sales go up?
- inventory - did your inventory go down?
- operational expenses - did you lay off anybody?
So the way to express the goal is this?
Increase throughput while simultaneously reducing both inventory and operating expense.
Did the robots do that? Inventory and operational expenses went up and he doesn’t know whether throughput went up or not. He knows efficiencies have gone up so cost-per-part has gone down.
But did the cost really come down? How could the cost-per-part go down if operational expense went up?
The answer would be that they’re producing more things (without necessarily selling more). In addition to labor costs that takes it probably also costs to run (oil, electricity) and maintain the machines. If they’re building up more inventory that means each part could be made cheaper but they spent more in total. More inventory means they’re putting more money in the system but not necessarily producing more finished products.
Alex and Lou find out sales have not changed after the robots were installed. Instead overdue shipments have increased.
Alex want to know what happened to inventories. He asks for stats on work-in-process on parts produced by the robots. This seems like measurement they’re not currently keeping track of.
They ask Stacey who manages inventory control. She says inventories have gone up on the robot parts.
She says the robots were only at 30% efficiency when they came in. So she released more material to the robots such that they would be working at as high efficiency as possible. Since then those parts end up as surpluses and inventory has been growing. Those parts aren’t being consumed because they’re parts no one asked for, they’re just producing extra to keep the efficiencies up. And somehow they’re not getting the parts they need in order to finish their products on time.
I think I can answer:
The machines are not ready when needed. They’re not producing things just-in-time. They’re not producing things that are needed when they are needed. Like the example late order in the beginning, the machines are working on other things when an urgent order needs to use that machine. They may in general have lots of inventory but they could be missing buffers for certain things. They’re not focusing on the urgent orders.
Bob says they can get the parts that are needed but too late. They’ll have a lot of some of the components but not enough of other components and which they have lots of and which are in shortage changes.
Alex questions whether cost of parts has gone down because of increasing operational costs of managing larger inventories.
ch 10
Alex tells them what he has learned from Jonah.
Bob asks what sales has to do with them, the manufacturers. He says sales is for marketing. Alex points out that they’re not in business to fill warehouses with finished goods.
“Interesting, isn’t it, that each one of those definitions contains the word money,” he says. “Throughput is the money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make throughput happen. One measurement for the incoming money, one for the money still stuck inside, and one for the money going out.”
“Maybe Jonah feels direct labor shouldn’t be a part of inventory
I think I misread what Jonah said.
“But the value added to the product by direct labor has to be a part of inventory, doesn’t it?”
“It might be, but it doesn’t have to be,” he says.
“Why do you say that?”
“Very simply, I decided to define it this way because I believe it’s better not to take the value added into account,”
Alex said value added has to be a part of inventory. Jonah said it doesn’t have to be. Jonah said that value added by direct labor can be accounted for using different definitions. In his definition value added is not taken into account in inventory. I thought he said it could be dependent on the situation. But now I think Jonah is consistent with direct labor not being a part of inventory. His definition eliminates the confusion of whether value added by direct labor is an expense or an investment. He says it’s an expense.
I think Jonah wants to take what they sell minus total cost that went into the product in order to figure out profits. Total cost is materials and tools they bought and labor paid for to produce or maintain the materials and tools. Every cost is covered by those things.
That would be contrary to my guess that TOC doesn’t track every little cost:
“All this is, if I understand it correctly, is a different way of doing the accounting. All employee time—whether it’s direct or indirect, idle time or operating time, or whatever—is operational expense, according to Jonah. You’re still accounting for it. It’s just that his way is simpler, and you don’t have to play as many games."
I’m guessing the other way of accounting is cost accounting? And they differentiate direct or indirect, idle or operating and more.
(It seems like idle time is measured and generally minimized in cost accounting:
Idle Time: Causes and Accounting Treatment | Employees
The reasons for the idle time are to be analyzed and the management needs to know the reasons for avoidable idle time so that correction can be formulated to reduce and minimize the idle time. An idle time report is prepared as shown in Table 6.1 for giving necessary information on idle time with an analysis of causes.
)
I would guess that TOC thinks those measurements are local optimums. Minimizing idle time is a local optimum. While operational expenses is a global measurement.
Jonah mentioned confusion between investment and expense; are we confused enough now to be doing something we shouldn’t?
I guess the confusion is in how they measure the value of workers time and the value of the inventory. Currently they’re counting any work done on materials to be valuable. The material was improved therefore they did valuable work. But they’re not considering whether it gets put into a finished product on time. They’re not considering whether it’s blocking something else more important to be worked on.
Then I think about the “soft” things in business, things like knowledge—knowledge from consultants, knowledge gained from our own research and development. I throw it out to them to see how they think those things should be classified.
Classified as either operational expense or inventory.
I would think of R&D as an investment. That’s also knowledge you can sell. You can sell a patent or a course teaching the knowledge.
Knowledge from consultants I would imagine is not unique to you and I don’t think you can sell it. It’s also more of a fix now solution rather than R&D which is setting up for future progress. So I think I would classify knowledge from consultants as operational expenses. It’s a one time operational expense to improve now.
If it’s knowledge, say, which gives us a new manufacturing process, something that helps turn inventory into throughput, then the knowledge is operational expense. If we intend to sell the knowledge, as in the case of a patent or a technology license, then it’s inventory.
I thought about the definition for inventory so I got patents being inventory. But I didn’t think about the definition for operational expenses so I was worse on that one.
Definitions for reference and refreshing:
“The next measurement is inventory,” he says. “Inventory is all the money that the system has invested in purchasing things which it intends to sell.”
“Operational expense,” he says. “Operational expense is all the money the system spends in order to turn inventory into throughput.”
The R&D and consultants divide isn’t fundamental. Though I got the tendencies right. I don’t think consultants would give you knowledge you would sell as a patent. They would tell you how to improve operations and increase throughput. R&D can also produce knowledge that is used to turn inventory into throughput.
But if the knowledge pertains to a product which UniCo itself will build, it’s like a machine—an investment to make money which will depreciate in value as time goes on. And, again, the investment that can be sold is inventory; the depreciation is operational expense.
Project Notes
I’m in the middle of chapter 10. I’m taking more time to think through things and come up with some guesses before the characters figure things out.
I spent 5 hours today.