TOCPA 15* International Conference of the TOC Practitioners Alliance - TOCPA 15fETOCPABIRS& - 2014 TOCHITS November 14-15, 2014, China 2014F11914-15H , "Al Gunning www.tocpractice.com TOC for Financial Decision Making TOCMS AK ZIE 14 Nov. 2014TOCPA www.tocpractice.com 5 +HES, {iH SRCaS StH LIE RATETOC AAR, TR Sie. {DESTAEARES , SURAT FeaB Ever Improve—A Guide to Managing Production the TOC Way ( ft-TOCE Stems , BFL MHRA ) , RRAE SE /ESEDeming & Goldratt: The Theory of Constraints and the System of Profound Knowledge - The ea tietabet fal St ETheory of , FRRTOCIR AAA JRE5MA. 18H TOC StrategicSolutions Ltd 9 EVENS , RTOCPAAAERER RAISE. Decalogue, S(# Constraints Fundamentals Copyright © 2014 by Oded Cohen aT FFERE FT RBAHRSOEHAR BE SSCHETOCH ZSME ARMED , SESAME S PREG , MOE MSA. SE AA Eh RE. WR SRE. He, SA, WS. oded.cohen.gs@gmail.com www.toc-strategicsolutions.com 15® International Conference of the TOC Practitioners Alliance - TOCPATOCPA) Gunnin ‘www.tocpractice.com Oded has 40 years of experience in developing, teaching and implementing TOC methodology, solutions and implementation processes working directly with Dr. Goldratt all over the world. Among the countries to which Oded brings his expertise are the USA, Canada, Japan, India, China, the UK, Poland, Russia, Ukraine, Colombia, Chile, Peru, Turkey and many others. Oded has authored multiple TOC articles and contributed to numerous TOC books. Oded in the is the author of Ever Improve — A Guide to Managing Production the TOC Way, published in June 2010. Oded co-authored the book Deming & Goldratt: The Theory of Constraints and the System of Profound Knowledge ~ The Decalogue. er with Jelena Fedurko Oded has co-authored » The purpose of measurements > Types of flow within systems » Problems with using cost accounting for decision making TOC Ope measurements decision making ternational Conference of the TOC Practitioners Alliance-TOCPASxrca www.tocpractice.com Low ee ET i What to Change? What to eres ied Bai re BD introcucea Which parts pond Pg The purpose of measurements ruc tur ae pCa cag eee ay well the system is performing Deed CaM deel: edt Gay Poetic rien! CEPTS ete | )s5-1) Pen ee a CT UR tou eel lis eek Ue a of PCaCuuEURC Mune ls There is a strong belief that the eur een ee ules eis y 15" International Conference of the TOC Practitioners Alliance-TOCPA.TOCPA Understanding the flows of TOC") a Commercial Business www.tocpractice.com The Goal: To make money now and in the future Management / Workforce Decisions Flow Information Flow Goal units $ 15® International Conference of the TOC Practitioners Alliance- TOCPA.Creating value in Make Supply Chain www.tocpractice.com The customers expect to get quality products, within agreed price, in agreed quantities with agreed time frame! Tocss Decisive Competitive Edge Competitive prices * Short QLT (Value for money) + Flexibility + On Time Deliveries + Availability 2 15" International Conference of the TOC Practitioners Alliance- TOCPACore Problem in Value Chain 'OC™ ‘xvenience www.tocpractice.com The whole chain and every link find themselves in the following conflict D Take actions that increase expenses and investments Increase budgets and resources for marketing and sales “Invest into new equipment and technology -Inctoase production capacity + Buy materials based on long-term sales forecast Expedite orders (im production and from supplier) Invest in new product development Agree tol0tfer discounts on big order quantities “ete Increase sales Have successful business today and in the future Do not take actions that increase expenses and investments Operate on existing budgets and resources for marketing and sales “Manufacture products suitable for the exiting equipment “Make do withthe current production capacity Buy materials ony for concrete client orders ‘Agree wth clients on postponing DD for late orders + Majorfocus to be directed on finding clionts for existing products Do not agreoiDe not afer discounts for big ordar quantiles eleExample: TOC se Aanains Inventory Turns Development www.tocpractice.com Inventory Turns Progression vs Historical Average = Historical Average , | Task — Invontory Turns i Date Since start of Supply Chain Excellence program January 2011 we have achieved promising results towards the desired turn level. nternational Conference of the TOC Practitioners Alliance- TOCPAExample: TOC se Aanains Inventory Turns Development www.tocpractice.com Average inventory: Inventory Turns Progression vs Historical Average Down from 20 to 17.14m . Cash - Generating 2.8m - Historical Average OE - Saving 280K on 2m interest (10%) fee Mr / And what about 2 VJ Throughout? m Is there a market value “ * for reducing the cycle odo who wiles abe tu wd eda ed ode time by 10-15%? | Conference of the TOC Practitioners Alliance-TOCPAVe Supply Chain Flow www.tocpractice.com Casting Smoothing Machining Painting Assembly [_ranspon 180 locations On-hand Stock: Avg 12 weeksStock Calculations TOC se june | DIOH - Days a On Hand Casting [> Smoothing >| Machining ae aa Annual Sales(TVC): $15.84m * Daily sales (TVC): $63K * Day of sales from production: 12.7K * Production WIP: 762K/12.7K=60 days Day of sales from PI: 63K x 0.8 = 50.4K * PI Stock: 907K/50.4K = 18 Days * WIPin Assembly: 315K/63K = 5 Days Copyright © 2014 by Oded Cohen 15® International Conference of the TOC Practitioners Alliance - TOCPA * Annual Sales: § 22m * Working days: 250 days * %ofTVC: 72% * % ofthe parts that produced in house: 20% in financial valueUDEs aie ers There is too much overtime in part production There are too many items that 2 have excess stock in front of assembly Too much efforts and 3 negotiations required to make a production plan Many Improvement initiatives don’t provide expected results 5 international Conference of the TOC Practitioners Alliance-TOCPAFinancial Impacts due to UDEs TOC: PA Avanine ) UDEs Financial Impact There is too much overtime in _For Part Production Sections — Workers: part production Overtime cost = 450K USD per year Currently the total production WIP is 60 days. If There are too many itemsthat PLT is three days, there are 57 daysin the 2 have excess stock in front of warehouse. Some must be obsolete (how much?). assembly Estimated excess. — 40 days. Representing investment of $ 508K Too much efforts and 3 negotiations required to make a production plan For PPC people: Overtime cost = 150KUSD per year Waste of money invested in the initiatives— paid to vendors and consultants. No data— yet, can be investigated. Wasted time and energy of the employees and the managers. 15" International Conference of the TOC Pract Many Improvement initiatives don’t provide expected results ers Alliance-TOCPARequest units from Sales vs. TOCE. Produced units (es ves I cn crosses NM es ™ ' toy | 708 I pe Gotau) am | 20000 Request_190 K units a \ Reply_168 K units (Response Rate_89%) i son p : 7 . [ What is the financial damage? | .,, 20 08 units —e— Response Rete nternational Conference of the TOC Practitioners Alliance- TOCPATOCPA Making Money TOCs Global Measurements www.tocpractice.com There are two major financial measurements of any commercial business: — An absolute financial measure: Net Profit - NP — Arelative measure: Return on Investment — ROI Together they measure well the goal of making money. TOC clai do not guide well daily decisions! idge between the local bal performance.TOCPA The Problem with TOC Cost Accounting ‘www. tocpractice.com The bridge provided by Cost Accounting is the Unit Cost. It contains: > Cost of raw materials and components used > Cost of direct labor > allocation of overhead (fixed cost) e concept allocating the fixed cost. location i is the amount of time of s the IMPRESSION that have gone down. But, if there is no reduction in the fixed cost — then when updated the allocated amount will be raised! 1 ternational Conference of the TOC Practitioners Alliance- TOCPAProblems in using Sranns Cost Accounting ToCEs. ‘www.tocpractice.com Valuating Inventory —- According to Cost Accounting, the value of WIP. increases as the material is moving from one operation to another (value added). TOC Claims: In most cases WIP has no market value, sometimes it has the value of the scrapped material. The value of Finished Goods can be materialized ONLY if the goods are sold. The problen jing value added for inventory assessmentis that ma play games that are leading to inventory gains g the bottom line of the company Therefore, TOC suggest to record the value of WIP and FG as the amount of money that was invested in purchasing them and any other money directly spent on them 15® International Conference of the TOC Practitioners Alliance- TOCPA.TOC Operational TOC SS Measurements www.tocpractice.com For profit: NP ROI The System The bridge is: TIOE OF | T Operating “To become an Ever i Expenses Flo npa Investment Throughput > NP=T-OE * ROI = (T-OE)/I ternational Conference of the TOC Practitioners Alliance-TOCPATOC Measurements for the TOC:" company www.tocpractice.com Hierarchical Structure of Top Measurements Goal of the Company _ ivestment | ternational Conference of the TOC Practitioners Alliance-TOCPATOCPA Throughput TOCs www.tocpractice.com Throughput, T —is the revenue from the sales for a certain period minus Totally Variable Costs (TVC). TVC is the cost of raw materials and components for production of products to be sold or the cost of products bought for reselling. TVC is the cost that grows directly proportionally to the sales of every additional unit of the product, including: — The cost of buying additional raw material/components/product subcontracti or example, commissions paid to an agent that are jto the amount of units sold, etc. uld incur anyway - like the pay for the direct labor yt piece incentive), salaries for s, telephone bills, electricity bills, premises d from the revenue for the calculation of od. 15® International Conference of the TOC Practitioners Alliance- TOCPA.TOCPA Throughput TOCes= ‘www.tocpractice.com Throughput per product unit (or order): Tu = P-TVC Tu— Throughput from the sale of one unit of the product (or one order) P -selling pri of one unit of the product (or one order) oe a ‘ost oduct or order we DO head costs per International Conference of the TOC Practitioners Alliance-TOCPA.| The cost of generating T TOC ss www.tocpractice.com In order to generate T we must spend two types of costs: Investment (I): The money that is held within the organization — Usually measured by the assets purchased value minus the depreciation — Investment includes also the Inventory — the money that was ry with a single sale. ion must have to ensure its 15" International Conference of the TOC Practitioners Alliance-TOCPA.TOCPA www.tocpractice.com + TVC -all the money thatis directly associated with the produced item + TVC goes up if we produced one more unit and goes down if we produce one less unit. + Any payment which is not subject to the above criteria is not considered as TVC. but OE. + Direct labor: — When people are paid timely salary (weekly or monthly) is consider OE even if the data about the direct minutes exists — When people are paid per piece — this can be considered as TVC. — Subcont if pay per piece — this is TVC. What falls under OE and what under TVC TOCs 15" International Conference of the TOC Practitioners Alliance-TOCPATOCPA) www.tocpractice.com TVC and Investment ‘'0C°= + Investment is all the (shareholders) money that is captured in the system. It includes the physical assets or the company - the land, buildings, machinery, branding, patents, etc. + Inventory is a part of the investment. It is the money the system invests in purchasing things it intends to sell. + TVC is coming under the heading of inventory/investment. + TVC is used in order to calculate Throughput and conceptually belongs to the profit and loss (P&L) statement of the company Inventory Is used in order to show the use of the shareholders funds for terials and services from the outside for the Eee of 15® International Conference of the TOC Practitioners Alliance - TOCPATOCPA www.tocpractice.com Operational Measurements TOC: and Calculating ROI > For decision making management needs to know the impact of their decision on the value creation of their system. >» The assessmentis through the checking the impact of the decision on of T-I-OE Example: + The company is producing products that are sold in department stores in Europe. There is market opportunity to sell more products. But, they are lacking oie especially, in the high season (8 months a year). costs 16K Euro. There is enough capacity of all the to the company is 1K E per month. 100 products a day (with 2 operators 2 shifts). 15® International Conference of the TOC Practitioners Alliance- TOCPA.a Operational Measurements TOC S Gunning and Calculating ROI www.tocpractice.com The specific investment A | = 16,000 Euro Calculating Return: « AT permonth = 100X25X 4 = 10,000E For 8 months a year + AT per year= 80,000 Euro + AOE=1Kx 4=4,000 E/month x 12 month = 48,000 per yearI Capacity profile — Toc /L.| Bottleneck, CCR, non-CCR ——— www.tocpractice.com There are 3 categories of resources from the point of view of capacity: Bottleneck — demand on the machine is higher than the available capacity. Works 24x7x364 Set-up Production time CCR (Capactiy Constraint Resource) — ea to the available time that Idle 15" International Conference of the TOC Pra ers Alliance- TOCPATOCPA) www.tocpractice.com + When one or few of the resources lack capacity management has to consider the capacity when committing deliveries to their customers. + The most common it the use of Throughput/constraint unit. + Usually, management underestimate the impact of the constraint on the value creation. Example + We had a meeting with top management of a company in September 2010 (week 34). The company manufactures products based on high tech cables. The company was struggling to breakeven. We learn that they were constraining by the supply of the major raw a that was Pao bya sister company that had only one Constraint and Operational TOC::> Measurements - T/CU the raw material as the constraint of the company prioritizing the sales to those products that have er prices to the sister company. 15® International Conference of the TOC Practitioners Alliance - TOCPA7 | Constraint and Operational TOC=~ en Measurements - T/CU www.tocpractice.com Sales started to grow already in Q3 of 2010. In 2011 they implemented more decisions: + Find another supplier and work with them to get the required quality of raw material + Invest in buying their own extruder. Moved to new facilities in August 2011. 5" international Conference of the TOC Practitioners Alliance- TOCPA7 | Financial Decision Making TOC si Gane The TOC Way www.tocpractice.com Managing the TOC way is FOCUED FLOW It means that management has to make decisions that are ensuring the purpose of the system while focusing on the Constraint(s) oT TODAY THE FUTURE The financial considerations dominate management decisions. Traditional ways tend to ignore the constraint! That is why the Financial function should support management in making decisions the TOC Way! 15® International Conference of the TOC Practitioners Alliance- TOCPA.Improvement Solution Ce Performance asurements Asuanine A he ; What to Change to? Current Reality Solution all Which new parts must 19 introduced Managing the TOC Way TOCEE Future RealityTOCPA Z| The Five Focusing Steps TOC s wwwitocpractice.com (¥0e 1. Identify (choose) the system’s constraint 2. Decide how to exploit the system’s constraint 3. Subordinate everything else to the above decision tem’s constraint roken go back to step one but do use the system’s constraint 15" International Conference of the TOC Practitioners Alliance- TOCPA‘aes Improving the Company 10°C: www.tocpractice.com Potential impact of improvement % Expand the market Introduce new - acquire new products, new clients services and sell capabilities 15" International Conference of the TOC Practitioners Alliance-TOCPA.Toes iat ia vank you 15" International Conference of the TOC Practitioners Alliance- TOCPA