BA 341 5th Edition Lecture 5 Outline of Last Lecture I. Steps of the Theory of ConstraintsII. Goldratt’s scheduling rulesIII. MeasurementsOutline of Current Lecture IV. ObjectivesV. Throughput PerspectiveVI. Continuing with the ProcessVII. “Cost World” ApproachCurrent LectureApplication of the Theory of Constraints: P & Q ExerciseObjectivesUnderstanding the role played by the Theory of Constraints in decision making - Which products to make?- New equipment necessary?- How should we price our products?- These questions aren’t only about finding constraints, this process can be applied to other thingsWhich products should we produce?- Goldratt’s P & Q example (The Haystack Syndrome, Goldratt 1991)- A process can produce 2 products P and QThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. DCCABCBBAD$5 $20 $20 $20 $25101015 51051025105QP1P2P3 Q1 Q2ProcessTimeComponentCostComponentPCost and Demand Info:Raw materials = sum of P3+P1+P2P&Q require processing on four machines; processing time (minutes) per product are:Each machine runs 2400 mins/week, fixed costs $4000/weekDecision Analysis- Goal: maximize our profit- Decision (output): How many units of P and Q should we make?- Model Inputs: Costs of components of P and Q, machining times for components, sales price of P and Q, maximum machine time available, etc.Using the “Throughput Perspective”- Step 1: can we make 110 units of P and all 60 units of Qo Ex: Time needed on machine A:o 110 units of P x 15 min/unit + 60 units of Q x 10 min/unit = 2250 mino Cannot satisfy demand for both products because Machine B is over 2,400 minutes- Step 2: Exploit the constrainto Which product generates the most throughput on the bottleneck machine? Why? Product Q  $55 per unit / 35 mins = $1.57/min Product P  $45 per unit/ 10 mins = $4.50/mino Which product is most profitable to produce? Answer: “P” generates the highest profit per unit of time on the bottleneck machine.o Which is the most profitable product mix?  Answer: 2400mins/(10 mins/unit) = 240 units > Demand (110)  produce 110 units to meet demand @ 1100 mins Make product Q in the remaining time, i.e., 1300 mins / (35 mins/unit) = 37 units o The “Throughput World” Approach Profit is: 110 units of P x $45/unit + 37 units of Q x $55/unit – $4,000=$6,985-$4,000=$2,985- Going on with the process…o Now how can we Subordinate the system to our production plan? Make sure that all resources work toward producing 110 units of P, and 37 units of Qo How about elevating the constraint? Increase Capacity What changes would you make if we increased capacity of machine B to 3,300 minutes? Does the constraint change? – There would be no constraint What is the maximum acceptable cost for this elevation?- Can produce 110 units of P, and 60 units of Q.- 60-37=23 more units of Q.- Additional profit 23*55= $1,265- This is not beneficial because the company would be paying more than it is getting in return $2000>$1265An alternative approach – “Cost World” approach- How would the P&Q problem be approached using conventional wisdom (i.e., the “cost world” approach)?o Rank the products in order of revenues margin per unit. (Highest to lowest) Answer: Q ($55)  P ($45)- Which product appears to be the one that you would like to produce the most? Why?o Answer: “Q”, as it has the highest profit margin per unit- Which is the most profitable product mix?o 2400mins/(35mins/unit)=68 units > Demand (60)  produce 60 units of product Q @ 2,100 minutes, to meet demando Use remaining time to produce product P  produce 300mins/(10mins/unit)=30units- The “Cost World” Approach Profit is:o 60 units of Q x $55/unit+30 units of P x $45/unit – 4,000=$4,650-$4,000=$650o This is $2,335 less than the Theory of Constraints