Washington State University-2010,1,Fundamental Exam Review,Finance and Measures Segment,The Theory of Constraints,jholtwsu.edu http:/www.engrmgt.wsu.edu/,James R. Holt, Ph.D., PE Professor Engineering & Technology Management,Disclaimer: The material in these slides were developed over time and represents Dr. Holts personal views and approach to TOC. It is not the view of Washington State University nor TOCICO. It may be dated, incomplete or absolutely wrong. While the text and figures in this presentation are helpful to facilitate teaching and discussion of these topics, without the words that go with the slides, the presentation is not complete and may not even make sense. This material is made available in the public domain as a service. Individuals may use this material as resources to teach their own TOC review seminars as long as they give reference to the source. There is no promise nor expectation that these materials are either necessary or sufficient to pass any of the TOCICO certification exams. Anyone using these materials should continue to study from the many other sources of excellent TOC literature available. In many cases, common knowledge is included here without reference. If you would like to improve any of these files, please do so. Your contribution will be included in future postings. Dr Holt., Washington State University-2010,2,TOCICO Segmented Fundamentals Exam,Fundamentals Certificate Multiple Choice Exam (Identify, Exploit, Subordinate, Elevate, Go to Step 1),Fundamentals Certificate of TOC Philosophy,Fundamentals Certificate of TOC Thinking Processes,Fundamentals Certificate of TOC Applications,Fundamentals Certificate of TOC Finance & Measures,Inherent Potential Inherent Simplicity Inherent Win-Win Five Focusing Steps Three Questions,Conflict Cloud Negative Branch Ambitious Target,DBR,T, I, OE PQ Type Problem,Project Management,Replenishment, Washington State University-2010,3,Topics in TOC Finance & Measures,Purpose of Finance (invest in improvements) Purpose of Measures (keep everyone focusing on the constraint and subordination) Decide on Investment decision (make/buy, equipment purchase) Impact of poor quality/delivery on system Impact of poor inventory practices on the system Financial Buffer Management T, I, OE, Cash Flow, Profit, Return on Inventory/Investment TDD, IDD Throughput Accounting worksheet,Finance Processes,The Goal: Make Excellent Investments The Measure: Systems Profit, Inventory, Operating Expense The Constraint: Knowing What to Do,$,Cost of Raw Materials Cost of Labor Cost of Equipment Cost of Operations Cost of Marketing Cost of Management Cost of Expansion Cost of Projects,Wait?,4, Washington State University-2010,Finance Processes,A. Excellent Investments,B. Excellent System wide,D. Consider everything effected,C. Excellent use of Constraint,D. Consider only T, I, OE,The Conflict Cloud:,The Paradigm Shift: Focus on T, I & OE Relative to the Constraint,5, Washington State University-2010,The Finance Results,What do we learn here to apply to Daily Lives?,Confidence, Security and Predictability Improves.,Freedom of Actions Dramatically Improves.,6, Washington State University-2010,Financial Lessons Learned,Manage Costs Relative to the Constraint. Pick High T/Constraint Unit Projects Determine Needs Prudently Know the difference between Needs and Wants Stop Buying Junk (no payback) Be Frugal Everywhere but at the Constraint (Spend what it takes to improve the Constraint wisely) Avoid UnNecessary Debt (Earn Interest vs. Paying It) Have Cash and Other Financial Reserves Simplify Life and Decisions become easier,7, Washington State University-2010, Washington State University-2010,8,Consider a Simple Firm WXYZ,Only two employees: Mr. M and Mr. N They can choose between any one of Four Products: W, X, Y, or Z Unlimited materials and unlimited market demand They each get paid $10 per hour. The Firm operates 8 hours a day. They get paid whether they produce anything or not.,Work Flow,9, Washington State University-2010,Cash Flow Summary,10, Washington State University-2010, Washington State University-2010,11,So, What Product Should They Make?,Decision suggested by Accounting: Produce items with the HIGHEST PROFIT MARGIN That would be Z with a $26.17 Profit Margin selling at $52 each ($52)*(16 ea) - ($20)*(16ea) - (2 workers)*(8 hours)*($10/hour) = $352 /day, Washington State University-2010,12,What about Marketing,Decision suggested by Marketing: Produce items with the HIGHEST SELLING PRICE (paid on Commission) That would be Y at $55 Sales Price Each ($55)*(16 ea) - ($25)*(16ea) - (2 workers)*(8 hours)*($10/hour) = $320 /day, Washington State University-2010,13,What about Production?,Decision suggested by Production: Produce items that keep machine at HIGHEST EFFICIENCY That would be X at $50 profit each ($50)*(24 ea) - ($25)*(24ea) - (2 workers)*(8 hours)*($10/hour) = $440 /day, Washington State University-2010,1