Five Star Tools, a tools manufacturer is faced with production constraints. Overview of the Situation
•Focuses on various ways to loosen constraints
•Demonstrates how to identify which products are most profitable and which products are less profitable when confronted with constraints
•Makes the point that large profits that may be lost if a company does not adequately deal with constraints Issues Addressed
1.What is the situation facing Five Star Tools?
2.What steps can be taken to loosen the constraint in coating and sharpening?
3.Which product should be emphasized (C210 Chisel or D400 Chisel) given the constraint in coating and sharpening?
4.Focusing only on the Model C210 and Model D400 chisels, what would be the benefit of gaining one more hour of production time in coating and sharpening?
5.What would be the incremental profit associated with adding an inspection station before coating and sharpening?
What is the decision facing Five Star Tools? Five Star Tools has a bottleneck in its coating and sharpening operation leading to missed deadlines on orders from important customers. What steps can be taken to loosen the constraint in coasting and sharpening? A number of alternatives exist, they may include:
•Cross training workers in other departments so they can help out in coating and sharpening
•Adding an inspection station before coating and sharpening so valuable time is not wasted working on defective units
•Outsourcing some of the work that would normally be performed internally by coating and sharpening
•Putting buffer inventory before coating and sharpening to make sure the department does not run out of items to work on
•Reengineering the coating and sharpening operation to make it more efficient -Purchase additional equipment for the coating and sharpening operation -Hire additional workers for the coating and sharpening operation -Train the workers in the coating and sharpening department so they can perform their jobs more efficiently
•Make sure that coating and sharpening is not shut down due to workers taking breaks simultaneously Which product should be emphasized (C210 Chisel or D400 Chisel) given the constraint in coating and sharpening? The model C210 should be emphasized because it generates a higher contribution margin per unit of the constraint. This leads C210 to produce a higher profit.
Model C210Model D400
Contribution margin per unit$250.00$430.00
Time in coating and sharpening0.2 hours0.8 hours
Units produced per hour5 units1.25 units
Contribution margin per hour$1,250.00$537.50
Profit per unit$65.00$200.00
Profit per hour$325.00$250.00
Focusing only on the Model C210 and Model D400 chisels, what would be the benefit of gaining one more hour of production time in coating and sharpening? The benefit would be $1,250 of contribution margin and $325 of profit since the time would be spent working on the Model C210.
What would be the incremental profit associated with adding an inspection station before coating and sharpening? The average contribution margin per hour spent in coating and sharpening is $850. Given the inspection station will free up 240 hours, this means the company can generate an additional $204,000 of profit ($850 contribution margin per hour 240 hours).
The main point that can be taken away from this analysis would be that companies can generate large incremental profits by loosening constraints.