Synchronous Management Principle 3: The Marginal Value of Time | Operational Excellence Quick Hits
Quick Hits share weekly tips and techniques on topics related to Operational Excellence. This week’s theme relates to understanding the marginal value of time. We hope you enjoy the information presented!
Speaker 1: (00:06)
In today’s session, we’re going to continue on the concept of synchronous management. And in this session, principle number three, we’re going to talk about the marginal value of time and that value as it applies to bottleneck resources and what that means for non-bottleneck resources.
Speaker 1: (00:23)
So the concept is the marginal value of time at the bottleneck resource is equal to the throughput rate of the products processed by the bottleneck. So in this case, bottleneck is synonymous with constraints. We’ll talk from this point forward about constraints.
Speaker 1: (00:39)
What is the marginal value of time? So it really looks at the increased amount of value that can be achieved by providing an additional source of output. We’re looking at the output through that resource and what that output’s worth relative to time. So in the case of marginal value of time, how much is a unit of time worth at the bottleneck or the constraint operation, and how much is that value of time worth at non-bottleneck or non-constraints? We’re going to answer that question through this session today.
Speaker 1: (01:14)
We’re going to start out by looking at the chain analogy. If you’ve seen my previous videos, you see me talk about the chain analogy a lot of times. So when we look at the chain, we have a bunch of dependent resources, and we have interrelationships and interdependencies. And in any system, there can only be one weakest link. So that weakest link determines the capacity of the system or the capacity of your organization. So if you know where that weakest link is, that determines the output of your whole organization.
Speaker 1: (01:47)
So in an organization to constraint what’s limits the throughput and therefore becomes the most valuable resource within any organization. So that’s why it’s very important to understand where this resource is within your organization.
Speaker 1: (02:01)
So what is throughput rate? So throughput rate is the rate which the organization generates value added through sales. So only when we sell an item to our customer do we generate throughput. Putting it into inventory does not generate throughput.
Speaker 1: (02:17)
The value added is the selling price minus the totally variable costs that go into making that product or service. So totally variable costs, I want to clarify this, it’s not insignificant organizational costs that increase as a result of producing an additional unit for sale. And where I say not insignificant organizational costs, because people will argue, oh, by producing one more unit, we’re going to generate the use of more electricity.
Speaker 1: (02:46)
Well, if we look at electricity in the big picture and we look at the amount of electricity to make one additional unit, it’s so insignificant, it’s not even worth measuring. It’s not insignificant organizational costs.
Speaker 1: (03:00)
So the ones that I see in most organizations, of course, if you produce a product that you need to buy materials, the materials are a totally variable cost. The outsource process, so we need to send it to an outside vendor to process that’s totally variable cost.
Speaker 1: (03:15)
Sales commission, if we pay sales commission to our sales people. And freight, if it’s paid by the organization. So these are four of the totally bearable costs that I see in most organizations. All other costs are fixed, especially within the relevant range of the organization.
Speaker 1: (03:34)
The value of improving the capacity of constraint is equal to the throughput rate of the products produced by that resource. So if we’re gaining additional amount of time on that resource, what’s that worth to the organization? The value of improving capacity at non-constraints is not related to the throughput rate of the products produced unless the capacity is used to offload constraint capacity.
Speaker 1: (03:56)
So only if I can increase the capacity here and offload capacity from our constraint operation, does it help the constraint to produce more units through that resource. So it’s very important to understand what is the value that goes through the constraint. What is the value of non-constraints?
Speaker 1: (04:15)
So by definition, the non-constraints have protective capacity, and therefore improving the capacity of non-constraints will only increase the amount of idle time of those resources. So it doesn’t do us any good to increase the capacity of these non-constraints or the links in the chain that have more capacity. It’s not going to strengthen the chain. Unless we can utilize that capacity to get more constraint units through the system, that’s the only way it’s going to improve the strength of the chain.
Speaker 1: (04:45)
Therefore the marginal value of time for constraints and non-constraints, it’s vastly different. So when we’re looking at measuring our performance of those resources, when we look at the constraints or the bottlenecks, we want to measure our overall equipment effectiveness there. So it’s the effectiveness, which is the utilization of that resource times the efficiency of that resource times the quality output of that resource.
Speaker 1: (05:11)
Measuring that in non-constraints, isn’t going to help us as an organization because the goal isn’t to increase the OEE of non-constraints. But I see a lot of organizations measure OEE across the board and trying to drive OEE high everywhere. All that does is increase inventory in the system and doesn’t help strengthen the chain. So therefore it’s very important to understand our system, where the constraint is, where non-constraints are, what’s the value of that time across that constraint, and doing everything we can to improve the utilization, efficiency and effectiveness of that resource.
Speaker 1: (05:51)
That’s our session for today. Next week’s session’s going to focus on again, marginal value of constrained material. So if you have a supply chain where your supply of material is limited and the constraints upstream in the supply chain to your organization, what’s that constrained material worth to you? It’s a purchase price of the constrained material plus the throughput value of the finished products requiring this material. We’ll get into that concept a little bit deeper in next week’s session.