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Five Star Tools is a small family owned firm that manufactures diamond coated cutting tools (chisels and saws) used by jewelers. In the past two years, the company has experienced growth and is at capacity in the coating and sharpening process. This has created a constraint, or bottleneck, that has caused the company to miss deadlines from several important customers. This case analysis seeks to provide solutions to the constraint problem. The following is a table showing the costs associated with two chisels, the Model C210 and Model D400 Chisels.
The president of the company, Maxfield Turner, and Betty Spence, VP of Marketing, are looking for solutions to the constraints. There are quite a few steps that can be taken to loosen the constraint in coating and sharpening. Using Goldratt’s Theory of Constraints, the first step has been accomplished. Five Star Tools has identified the constraint to be the coating and sharpening department (which requires highly skilled workers and expensive equipment).
There are several steps that can be taken to loosen the constraint in coating and sharpening: Cross train workers in other departments so that they can help in the coating and sharpening process Add an inspection station before coating and sharpening so that valuable time is not wasted Invest in additional machinery.
Reduce defective units (each defective unit that is processed in the bottleneck and then scrapped is taking the place of a good unit that could have been sold for a profit) Subcontract some of the work so demands could be met (this could be variable based on demand) Implement a Resource Management team that would manage the scheduling of breaks so that all working are not taking breaks at the same time Have the management team along with REM team implement overtime hours Five Star Tools manufactures the C210 and D400 chisel models.
If they are unable to loosen the constraints then they need to determine which model that they would solely focus on. This calculation below shows that the C210 model provides the larger contribution margin in relation to the constraint.
The C210 model is more profitable than the D400 model. So if four hours were used to make 20 C210s (240min/12min) or 5 D400s (240min/48min). Because the additional contribution margin for the C210 model is larger and it makes the profitable use of the company’s constrained resource – coating and sharpening.
If Five Star were to gain one more hour in coating and sharpening, they will produce five more C210 models and one a quarter more units of the D400 model. Five Star will gain an additional $1,250 contribution margin for producing the C210 model chisels and $538 additional contribution margin for producing the D400 model chisels. These additional units would not incur any more fixed costs, so Five Star’s net profit will increase by $1,788. In conclusion, Five Star Tools can to remove the bottleneck in the coating and sharpening process. Following the suggested steps will ensure that they can continue to grow and meet demand. The steps are focusing on the more profitable chisel, subordinating everything to the constraint by adding an inspection station, breaking the constraints using the suggestions above and keeping an eye on the contribution margin. Five Star Tools should continue to identify any new constraints in different departments to continue to meet demand.
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