Determining product value based on consumption of factory constraints

Abstract

The thought process known as Theory of Constraints (TOC) proposes that the total throughput of a system is only as good as the throughput produced by the constraint of the system. Throughput, in terms of company performance, is the total revenue generated by sales less the material costs required to generate the sales. Harris Semiconductor has successfully used TOC to drive improvements in the company's manufacturing operations. Like most companies, Harris generates throughput by manufacturing and selling products to our customers. Our goal as a company is to make more money today and in the future. We can make more money if we identify our constraints and then maximize the throughput of our constraints. The throughput of a manufacturing constraint is maximized by examining the revenue generated by the products produced on a constraint and amount of time a product spends on the constraint. Since the production time of the constraint is limited, we need to manage our product portfolio and focus on those products that will generate the most throughput per unit time. Products which consume a large portion of the constraint must generate a proportionately larger share of the revenue in order to meet the earnings goals of the company. Typical cost accounting procedures focus mainly on revenue and cost, but ignore the time a product spends on the constraint. This focus can make for bad decisions on a product's value to the company. Managing a product portfolio is typically the responsibility of the Marketing organization. Marketing needs tools to strategically manage the company's product portfolio to maximize company earnings. Marketing decisions on what products to sell must include an analysis of how a product will consume the constraints in the factory. At Harris, we have designed and implemented software tools to help closely couple Marketing decisions to factory consumption. This paper will describe methods and tools implemented at Harris to help determine a products value based on the consumption of factory constraints.