Chapter 8: An Introduction to Synchronous Manufacturing

Umali, Lezette M.
Trio, Nikko R.
Velasco, Franz Christian S.
Villamil, Daniel James E.
Villanueva, Marc Edelbert S.
Abstract objectives of a firm (providing jobs, consuming
raw materials, increasing sales, increasing share
In this chapter, synchronous manufacturing, the of the market, developing technology, or
techniques used in implementing it, and its producing high-quality products) will only follow
significance to the industry and to everyones once it has enough money or profit (1).
lives were tackled. Synchronous manufacturing
was deliberately compared to MRP and JIT in
order for the readers to understand its Significance to the Industry and to Your
advantages and disadvantages relative to the Everyday Life
other two. Some concepts in synchronous
manufacturing were also discussed such as the Synchronous manufacturing elevates the
theory of constraints, drum buffer rope, and harmonious relationship between the processes
monetary unit days. and other elements (such as labor and
materials) in a firm. It then improves total
system performance. Same thing can also be
Introduction applied in everyday life. Working harmoniously
can help an individual prioritize what needs to
Around 1980, Dr. ElihayuGoldratt, founder of and perform well by considering the
Avraham Y. Goldratt Institute, argued that relationships between the factors that might
manufacturers were not being efficient in affect his/her decisions.
scheduling and controlling their resources and
inventories. In an attempt to solve this problem,
Dr. Goldratt and his associates at Creative Objectives of the Chapter
Output developed software called Optimized
Production Technology (OPT) which addresses This chapters objective is to briefly discuss the
the problem of inefficient scheduling and concept of Synchronous Manufacturing.
controlling of resources. The OPT schedules jobs Specifically, the audience should be able to:
through manufacturing processes subject
limited resources (e.g. limited facilities, Define what is synchronous
machines, personnel, tools, and materials). This manufacturing;
software was patronized by a number of large Describe a bottleneck and differentiate it
companies. When approximately 100 large from non-bottleneck;
companies have installed the software, Dr. Measure performance of a firm;
Goldratt proceeded to promote the logic and Enumerate and apply methods for
principles behind the software, rather than the control;
software itself (1). This chapter discusses the Differentiate synchronous manufacturing
principles and ideas of Dr. Goldratt in from MRP and JIT; and
synchronous manufacturing. Evaluate firms performance in
accounting.
Significance of the Chapter
Main Discussion
The goal of a firm is to make money. In order
to achieve this goal, the entire production Synchronous Manufacturing
process must work in harmony (Synchronous
Manufacturing). When manufacturing is truly Synchronous manufacturing refers to the whole
synchronized, its emphasis is on total system, production process working together in harmony
not on localized measures such as labor or to achieve the firms main goal to gain profit.
machine utilizations. Achieving all other

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This is the focus of Dr. Goldratts approach in
manufacturing, which emphasizes the
importance of the total performance of the whole
production system, instead of concentrating on
the localized measures of performance such as
labor or machine utilization (1).
In an attempt to achieve a truly synchronized
manufacturing system, Dr. Goldratt developed
his nine rules of production scheduling (1).
Goldratts Rules of Production Scheduling
These are the nine rules which explain the
principles behind OPT (1):
the idea that only improvements made on
constraints will yield significant benefits (2).
With this, TOC provides the Five Focusing Steps
(shown in Figure 8.1) which aims to identify and
eliminate constraints (2). The steps are as
follows (2):
1. Identify the constraint.
Identify the most significant constraint in the
system (the single part of the process that
restricts the system from achieving the goal).
2. Exploit the constraint.

1. Do not balance capacity balance the flow.
2. The level of utilization of a nonbottleneck
resource is determined not by its own
potential but by some other constraint in the
system.
3. Utilization and activation of a resource are
not the same.
4. An hour lost at a bottleneck is an hour lost
for the entire system.
5. An hour saved at a nonbottleneck is a
mirage.
6. Bottlenecks govern both throughput and
inventory in the system.
7. The transfer batch may not and many times
should not be equal to the process batch.
8. A process batch should be variable both
along its route and in time.
9. Priorities can be set only by examining the
systems constraints. Lead time is a
derivative of the schedule.
Each of these rules will be elaborated as the
discussion progresses.
Make quick improvements to the throughput
of the constraint by making the most of what
you have.
3. Subordinate and synchronize to the
constraint.
Review all the other processes if they support
the improvement of the constraint.
4. Elevate the performance of the constraint.
If the constraint still exists, consider what
further actions can be done to eliminate it.
In some cases, capital investment may be
required.
5. Repeat the process.
The Five Focusing Steps are a continuous
improvement cycle. After a constraint has
been improved, the next step is to find the
new limiting factor of the system.

After the nine production scheduling rules, Dr.

Goldratt proposed the Theory of Constraints
which became a well-known problem-solving tool
which can be applied, not just to manufacturing,
but to many business areas as well (1).

Theory of Constraints

Theory of Constraints (TOC) is a methodology

conceived by Dr. Goldratt to identify the most
significant limiting factor (constraint) in a
system and improve this constraint until it no
longer restricts the system from achieving its
goal. In manufacturing, this constraint is termed
bottleneck (2).
Figure 8.1.The Five Focusing Steps of TOC (2).
Every process has a single constraint which
determines the maximum output of the process. Once the TOC is applied accordingly, the
This is the core concept of TOC which results to following benefits will manifest (2):

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Increased profit (main goal of the firm)
Fast improvement
Improved capacity
Reduced lead times
Reduced inventory
Some of these benefits, however, do not
adequately measure the performance of the firm.
Performance Measurements
To accurately measure the performance of the
firm, two types of measurements are used:
financial measures and operational measures
(1).
The financial measures of the firm are as follows
(1):
Net profit absolute measurement in
monetary units
Return on investment a relative
measure based on investment
Cash flow measure of survival
These three must be used together always. For
example, a net profit of Php 10 million is a good
indicator of performance, but it has no real
meaning until the amount of investment made to
gain that much profit is made. If the investment
made was Php 100,000, there is a 10% return
on investment. Moreover, these two measures
will not guarantee the survival of the firm in the
day-to-day operations. The cash flow is the
important measure to ensure survival (1).
The next set of measures significant to the
performance is the operational measures. They
are as follows (1):
Throughput the quantity or amount of
raw material processed within a given
time
Inventory a complete listing of
merchandise or stock on hand, work in
progress, raw materials, finished goods
on hand, etc., made each year by a
business concern
Operational Expense a category of
expenditure that a business incurs as a
result of performing its normal business
operations
In terms of money, throughput is the rate at
which the firm generates money through sales;
inventory is all the money invested by the firm in
purchasing the things it intends to sell;
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operational expense is simply all the money
spent to transform inventory into throughput
(1). It is important to note also that not
allproducts that flow through the process are
throughput. Throughput is defined as all the
products sold. Those not sold are inventory (1).
Given these operational measures, the goal of
the firm is to increase throughput, and reduce
inventory and operational expense (1). This is
shown in Figure 8.2
Figure 8.2.The operational goal of the firm (1).
Another important measure of a firms
performance is productivity.
Productivity
Productivity is traditionally measured in terms of
output per labor hour. However, with this
definition, productivity does not ensure an
increase in profit. For instance, additional
output that will not be solved will only be an
additional cost. To know whether productivity
truly increased, throughput, inventory and
operational expense should be considered. Has
the throughput increased? Has the inventory
and operational decreased? Therefore,
productivity should be defined as all the actions
that bring a company closer to its goals (1).
Aside from the definition of productivity, another
misconception in many firms is the idea that
capacity must be balanced.
Unbalanced Capacity
Many firms still hold on to the belief that
capacity must be balanced across a sequence of
processes in order to match the demand with
the capacity. However, in synchronous
manufacturing, it is emphasized that
unbalanced capacity is better. Take for example
processes A and B. The time it takes to process a
job in process A is normally distributed with
mean 10 hours and standard deviation of 2
hours. Process B has a constant processing time
of 10 hours. Suppose that 5 items need to go
through process A then process B. Figure 8.3
 Figure 8.3. Processing and completion times of the items going through processes A and B (1).

shows the processing and completion times of utilized) and can be a bottleneck if not
the items going through processes A and B. Due scheduled properly.
to the variations in As processing time, the total
processing time for the 5 items is 66 hours, Methods for Control
instead of an expected completion time of 60
hours. This delay still happens even though the Using resource utilization may yield excess
capacities of the two processes are balanced (i.e. inventories since it encourages the overview of
both have an average processing time of 10 non-bottlenecks.
hours per unit) because time lost when the
second process is idle cannot be made up. This Figure 8.4 shows how bottleneck and non-
simple illustration shows that exerting effort to bottleneck resources should be managed.
balance capacity is not a good idea. To balance
capacity, adjustments must be made on
machines or equipment, tools, workloads, labor,
etc. These efforts will be made in vain since the
total completion time will still exceed the
expected completion time. Thus, instead of
balancing capacity, the focus should be on
balancing the flow of materials (1).

In balancing the flow of production, the

constraints which restrict the flow of materials
must be properly dealt with. As mentioned
above, these constraints are called bottlenecks.

Bottlenecks and Capacity-Constrained Resources

A bottleneck is a resource whose capacity is less
than the demand. It is the point in the
production process where the flow of materials
narrows. On the other hand, a nonbottleneck is
a resource whose capacity is larger than the
demand. Lastly, a capacity-constrained resource
(CCR) is a resource whose utilization is near or
equal to 100% (i.e. capacity is almost or fully
Figure 8.4. Possible arrangement of bottlenecks and
nonbottleneck resource (1).
For instance, resource X and resource Y are
work centers that can produce a variety of
products. Each of these work centers has 200
hours available per month. One unit uses 1
hour of production time for X and 45 minutes

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for Y. The market demands for both X and Y is
200 units per month (1).
If the resources are arranged as in Figure 8.4.A,
a bottleneck feeds a non-bottleneck. X is the
bottleneck since its capacity is less than that of
Y (200 units < 267 units) relative to the demand
of 200 units. No extra product accumulates in
the system because Y has to wait for X. All units
produced flow to the market. On the other hand,
if a non-bottleneck feeds a bottleneck, as in
Figure 8.4.B, 75 percent of Ys capacity (200
units) should be utilized or else work-in-process
will build up in front of X since its capacity is
only equal to 200 units (1). This situation
illustrates one of Goldratts rules: The utilization
of a non-bottleneck resource is not determined by
its own potential but some other constraint in the
system.
Figure 8.4.C shows that the products produced
by X and Y are assembled and then sold to the
market. Because one unit from X and one unit
from Y form an assembly, X is the bottleneck
with 200 units of capacity and, therefore, Y
should not work more than 75 percent or else
extra parts will accumulate (1).
For a part waiting to go through a bottleneck,
queue time is the largest. For a non-bottleneck,
wait time is the greatest (1).
Finding the bottleneck
Two ways can be used in finding the
bottleneck(s) in a system: (i) run a capacity
resource profile; and (ii) use the knowledge of
the particular plant, look at the system in
operation, and talk with supervisors and
workers (1).
A capacity resource profile is obtained by looking
at the loads placed on each resource by the
products that are scheduled through them (1).
The concept of utilization can also be used in
finding the bottleneck. Utilization is a measure
of how fully occupied a process step is or how
busy it is. It can be computed using the
following formula:
(Eqn 8.1) (3)
where

In Figure 8.4.D, equal quantities of product X

(Eqn 8.2.) (3)
and Y are demanded by the market. In this case
we can call these products finished goods
Example 1 (3):
because they face independent demands. Here Y
has access to material independent of X and,
Umalis Lomis cooking line has a daily demand
with a higher capacity than needed to satisfy the
of 25 bowls. Time spent in cooking per day is 6
market, it can produce more product than the
hours. If the cooking line has an effective
market will take. However, this would create an
capacity of 5 bowls per hour, what is the
inventory of unneeded finished goods (1).
utilization?
Time Components
Using Eqn. 8.1
The production cycle time is composed of the
Takt Rate=(25 bowls )/(6 hours)=4.17 bowls per
following:
hour
1. Setup time the time that a part spends
Solve for the utilization using Eqn. 8.2,
waiting for a resource to be set up to
work on this same part (1).
Utilization=(4.17 bowls per hour )/(5 bowls per
2. Processing time the time that the part
hour) =.834
is being processed (1).
3. Queue time the time that a part waits
The utilization of the cooking line is 83.4 %. A
for a resource while the resource is busy
relatively low utilization means higher
with something else (1).
probability that a bottleneck exists within the
4. Wait time the time that a part waits not
system.
for a resource but for another part so
that they can be assembled together (1).
Saving Time
5. Idle time the unused time; that is, the
cycle time less the sum of the setup time,
An hour saved at the bottleneck adds an extra
processing time, queue time, and wait
hour to the entire production system.
time (1).

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Time can be saved in a bottleneck through better
tooling, higher-quality labor, larger batch sizes,
reduction in setup times, and so forth (1).
On the other hand, time cannot be saved in a
non-bottleneck. An hour saved at the non-
bottleneck is a mirage and only adds an hour to
its idle time.
Trying to save time in a non-bottleneck can
only turn it to a bottleneck.
Avoid Changing a Non-bottleneck into
Bottleneck
When non-bottleneck resources are scheduled
with larger batch sizes, this action could create a
bottleneck (1).
Increasing batch size creates an illusion that
setup time is reduced. However, this saved time
serves no purpose other than interfere with
production (3).
Drum, Buffer, Rope
Every production line needs some control point
or points to manage the flow of products in the
system (1). Drum, buffer, rope is a principle that
addresses problems brought by bottlenecks and
capacity-constrained resource and in
production.
A system that does not inhibit the drum buffer
rope theory would most likely cause a large work
in progress inventory just before the bottleneck
of the current system. As shown in Figure 8.5,
products are queuing before the bottle neck, the
R2 in the figure, and is in a non-value adding
state in the system. Having this inventory adds
cost to the company by taking space. Products
in the work in process inventory state
accumulates risk of having defects from being
stacked on top of each other or mishandling
which, if happened, would require a production
of the certain item again to replace the broken
one.
Figure 8.5.System without DBR with R2 as bottleneck (4).
A system following the drum buffer rope idea
continues to have a work in progress inventory
but in a minimal sense as shown in Figure 8.6.
This would require a small amount of space
depending on the buffer size. In this system, the
risk of damaging the products while not being
processed is decreased and by adapting this idea
to a system would cause a greater quality of
products produced.
a
Figure 8.6.System with DBR with R2 as bottleneck (4).
To apply the idea of drum buffer rope, let us
recall that a bottle neck is a resource that does
not have the capacity to meet the demand while
capacity-constrained resource (CCR) is a
resource operating near capacity but has
adequate capability as long as it is scheduled
accordingly. A CCR starves downstream
operations of products when too many setups
are required thus causing the CCR to run short
of capacity, or producing too large lot sizes
which delays transfer of WIP (1).
The drum, buffer, rope principle sets the
bottleneck as the control point in a system. This
control point is called the drum because it sets
the rate in which other parts of the system will
function. Bottlenecks are chosen as drum
immediately to such that it is used in its
maximum capacity and works all the time by
making sure upstream operations do not
produce too much and build up WIP that the
bottleneck cannot handle. In the absence of a
bottleneck, the CCR is appointed as the drum
and in the case where both bottlenecks and CCR
are absent in the system, the drum is any part
of the system that produces outputs which will
be used by several different downstream
operations. After defining the drum, buffer is
placed just before the drum. This buffer makes
sure that our drum always has the resources to
continue producing all the time. Then rope is
placed which tells the upstream operations to
produce because the buffer is or is almost
depleted (1).
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The drum-buffer-rope method strives to achieve
the following (3):
1. Very reliable due date performance
2. Effective exploitation of the constraint
3. As short response time as possible, within the
limitations imposed by the constraint(s).
Linear flow of a product with a bottleneck
Dealing with a bottleneck is most critical, and
this discussion ensures that the bottleneck
always has work to do. Figure 8.7 shows a
simple linear product flow from work center A to
G where product D is a bottleneck and therefore
is the drum. As a bottleneck, capacities
downstream and upstream from it are both
greater than the bottlenecks capacity. If this is
not controlled, a large amount of inventory in
front of work center D to build up and very little
anywhere else in the line. There would be little
finished goods inventory because all the
products produced would be immediately taken
by the market (1).
Figure 8.7. Linear flow from work center A to F with
bottleneck at D (1).
The two things that must be done to properly
deal with the bottleneck after defining it as a
drum are (1):
1. Keep a buffer inventory in front of it to make
sure that it always has something to work
on. Because it is a bottleneck, its output
determines the throughput of the system.
2. Communicate back upstream to A what D
has produced so that A provides only that
amount. This keeps inventory from building
up. This communication is called the rope. It
can be formal as setting a schedule or
informal as a daily discussion.
Linear flow of products with a capacity-
constrained resource
In the case a CCR is present instead of a
bottleneck in the production two buffer
inventories and two ropes are needed. Figure 8.8
shows an example of a drum being a CCR (1).
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1. Create two buffer inventories: one in front of
the CCR and one at the end of production
which is just before going to market. The
buffer at the start of CCR protects the
throughput while the buffer at the end,
which is the finished-goods, protects the
market. Unlike when the drum is a
bottleneck where the market gets all the
finished products immediately, finished
goods are not taken all at once by the market
thus a buffer is needed such that when the
market decides to purchase, goods are
available for transaction (1).
2. Create two ropes: one communicates the
finished goods inventory back to the drum,
and the other communicates the drum back
to the material release point. The rope
communicating finished inventory back to
the drum is responsible for the increase or
decrease of output while the rope
communicating the drum to the material
release point specifies how much material is
needed (1).
Figure 8.8. Linear flow of product from A to H with CCR on E
(1).
These steps may not hold true for all cases of
bottlenecks being a capacity constrained
resource. For instance, the second drum which
is placed at the end would not be necessary in
the system if the capacity of the CCR is equal to
the demand of the market. And as follows, the
rope connected to this drum would also be
nonexistent. Because the market has an equal
demand to the capacity of the CCR, there would
be no inventory that would pile up at the end of
production since the market takes the finished
goods just in time as it is being produced. It
could be analyzed that when a CCR has an
equal capacity to the demand, the CCR is the
bottleneck since it comes first before the
market while when the CCR has a capacity more
than the demand of the market, the market is
the bottleneck of that system. This is the
reason why we put buffers before the market.
Network flow of a product with bottleneck
A network flow is a combination of many linear
flows which makes the network flow much more
complex thus a more thorough analysis is
required.
Figure 8.9 shows a network flow of a product
with a bottleneck at machine center A. Just like
in a linear flow with a bottleneck, a time buffer
is placed right before the bottleneck. Next a
buffer inventory is placed after the non-
bottleneck sequence of processes that feed the
subassembly. This ensures that the flow of
product does not slow down after leaving the
bottleneck (1).
Figure 8.9.Network flow of a product with a bottleneck (1).
Determining the size of time buffer
Time buffer is the term used for buffer inventory
placed before bottlenecks. The size of the time
buffer is as large as it needs to be to ensure
continuous production in the bottleneck. The
size of the time buffer can be calculated by
examining past performance data, or sequence
could be simulated. The precision of the size of
the buffer is not critical thus we have the
freedom to estimate the buffer as one-fourth of
the total lead time of the system. Let us look
back at Figure 8.5 the sequence A to H took a
total of 16 days, a 4 day buffer could be placed
before the bottleneck. Suppose that the buffer
runs out, the buffer size should be increased.
This is done by releasing extra material to the
first operation A. on the other hand, if buffer
never drops below three days, the release of
material to A should be reduced and our buffer
size should be decreased to three days. It is
experience that best determines the final buffer
size of the system (1).
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Importance of Quality
In MRP, a bigger batch is produced than what s
actually needed, serving as an allowance for
defective units. In JIT, poor quality cannot be
tolerated as it is based on a balanced capacity,
meaning it may shut down if there exist a
defective unit. In synchronous manufacturing, if
there is a defective unit upstream of a
bottleneck, only material loss will be incurred. It
is due to the fact that there is an excess capacity
throughout the system (except for the
bottleneck), in which there is still time to do
another operation to replace the scrapped ones
(1).
It is important to do quality control inspection
prior to the bottleneck to make sure that the
bottleneck works only on good product. Also,
there should be quality assurance downstream
the bottleneck to ensure that good materials will
not be scrapped (1).
In order to decrease the time it takes to get
products out to the customers with the quality
demanded, synchronous manufacturing helps
firms to trim down excess costs and use
resources efficiently. Synchronous
manufacturing follows the JIT process of
keeping low inventories and focusing on
customer satisfaction (5).
Batch sizes
Two types of batch sizes are to be discussed in
this chapter: process batch size and transfer
batch size. In an assembly line, a process batch
can be as large as it can be while a transfer
batch can be as small as one (1).
Process batch is the quantity of material
manufactured as a result of one setup. Larger
process batch sizes require fewer setups, which
generates more processing time and more
output (1). For non-bottleneck, smaller process
batch sizes are desirable, whereas for bottleneck
resources, larger process batch sizes are
desirable.
Transfer batch refers to the number of units that
move as a group from one workstation to
another. A batch that has been processed by a
specific workstation can be moved to the next
downstream workstation so that it can begin
working on that batch (1). Smaller transfer
batches give lower WIP inventory and faster
product flow, but require more material
handling. Larger transfer batches give longer
lead times and higher inventories. In other
words, the transfer batch size is a tradeoff
between production lead times, inventory
reduction benefits, and cost of material
movement (1).
A transfer batch should always be less than or
equal to the process batch. The advantage of
using transfer batch that is smaller than the
process batch quantity is that the total
production time is shorter and the amount of
WIP is smaller (1).
An example of a process that utilizes transfer
batches is shown in Figure 8.10. The process
consists of three operators and one driver. The
driver performs both of the transfer operations.
Figure 8.10.An example of a system utilizing transfer
batches.
In this process map, each operation has its own
waiting station for WIP. Each operation uses WIP
as an input and outputs WIP to a different
location. For example, OP1 processes parts into
WIP1, and OP2 pulls parts to work on from
WIP2. When WIP1 reaches the transfer batch
size, it moves and becomes WIP2 (7).
How to determine process batch and transfer
batch sizes
According to Srikanth, in determining process
and transfer batch sizes, it is important to
identify first the probable CCRs and bottlenecks,
which should then be reviewed by managers in
order for them to know which resources are
actually controlling their plan (1). It is more
practical to control the flow at each bottleneck or
CCR to bring the capacities in line, rather than
trying to adjust the MPS to change resource
loads. The process batch sizes and transfer
batch sizes are changed after comparing past
performances in meeting due dates (1).
9
There are four possible situations when
controlling the flow at CCRs and bottlenecks (1):
1. A bottleneck with no setup time required
when changing from one product to
another
2. A bottleneck with setup time required to
change from one production to another
3. A CCR with no setup time required to
change from one product to another
4. A CCR with setup time required when
changing from one product to another
How to Treat Inventory
In synchronous manufacturing, inventory is
treated as a load or a without any accounting-
type value added from the production (1). In
measuring the value of the inventory and the
time it stays within an area, the concept of
monetary unit days is used.
Monetary Unit Days
In using the concept of monetary unit days, total
value of inventory is multiplied to the number of
days that the inventory spends within a
department (1).
Monetary unit days = value of inventory x time it
stays within an area (Eqn. 8.3)
Monetary Unit Days Example:
Villanueva Electric Industries has an inventory
amounting to PhP 80,000, and stays within the
department for 6 days. It means that Villanueva
Electric Industries is charged with Php 480,000
in monetary unit days.
Monetary day measurements could also be used
in other areas (1):
Marketing to discourage holding large
amounts of finished-goods inventory. The
net result would be to encourage sale of
finished products.
Purchasing to discourage placing large
purchase orders that on the surface
appear to take advantage of quantity
discounts. This would encourage JIT
purchasing.
Manufacturing to discourage large WIP
and producing earlier than needed. This
would promote rapid flow of material
within the plant.
Project management to quantify a
projects limited resource investments as
function of time. This promotes the
 proper allocation of resources
competing projects.
Comparing Synchronous Manufacturing to MRP
and JIT
MRP and JIT are frequently compared to
synchronous manufacturing. MRP uses
backward scheduling after being given a master
production schedule while synchronous
manufacturing uses forward scheduling because
it focuses on the critical resources (6).Because
synchronous manufacturing uses a schedule
work to each workstation, there is no need for
more WIP other than that being worked on (1).
JIT like synchronous manufacturing does an
excellent job in reducing lead times and work in
process but is limited to repetitive
manufacturing and requires a stable production
level (6).JIT is a trial-and-error procedure
applied to a real system. In synchronous
manufacturing, the system can be programmed
and simulated on a computer because the
schedules are realistic and computer run time is
short (1).They both try to get material through
the manufacturing process as quickly as
possible, while at the same time meeting
customers requirements and expectations.
Relationship with Other Functional Areas
To achieve the best operating system, the
production system must work closely with the
other functional areas. The firm should operate
as a synchronized system with all parts in
harmony and supporting each other. Companies
that do this well can be successful in achieving
their fundamental goal of profitability (6).
Accountings Influence
There are two accounting performance measures
viewed in cost accounting, namely the local
measurement and the global measurement.
Local measurement shows efficiencies and
utilization rates of a certain firm, which in effect
forces the supervisors to activate their workers
all the time. On the other hand, global
measurements show net profit, return on
investments and cash flow (1).
Marketing and Production
Marketing and Production working
coordination ensures a success for the company.
However, this is difficult to achieve since most of
the time, the two act very independently. One
reason for this is personnel from both fields have
to varying personalities and cultures. Marketing
are oriented into making the most sales for the
growth of the company. Production, however, is
more focused minimizing cost and maximizing
utilization. Table 8.1 summarizes the differences
between marketing and production.
Table 8.1. Differences between marketing and production
Marketing Production
Evaluation Growth of the Cost and utilization
company in
terms of sales,
shared and new
products
Data used Qualitative Quantitative
Experience Sales and Productive
(People) association with operations
customers
Culture Driven by ego Meticulous and
and are more more introverted
outgoing
We now present examples to show different
situations for a company and use the correct
measurement criteria appropriate for the
problem.
Example 1 (3):
AliBABra sells three products at Php50, Php75,
and Php60 per unit, respectively. It is also
assumed that the market will take everything
that can be supplied. Three work centers (X, Y,
and Z) process the three products as shown in
Figure 8.11. Processing times for each work
centers are also shown. Raw materials, parts,
and components are added at each worker to
produce each product. The unit cost of these
materials is shown as RM. Which product or
products should be produced?
in
Figure 8.11. Product price and work center summary (1).
10
Solution: minimum amount sold. Simply put, the
minimum amount of a product cannot be lower
Objective 1: Maximize sales commission than 10 % of the maximum amount of the
product. Operating expenses amount to Php
Get the limiting resource or process for each 126,000. Figure 8.12 shows the production
product and solve for the production rate per requirements and selling price of the four
hour. Compute for the revenue using the selling products.
price of each product and the number of outputs
per hour. Computations are shown in Table 8.2.
Table 8.2. Summary of solutions for Objective 1
Prod Limiting Time Product Sellin Sales
uct Resourc Require s g Reven
e d produce Price ue
d per
Hour
A Y 10 min 6 50 300
B X 6 min 10 75 750
C Z 5 min 12 60 720

Objective 2: Maximize unit gross profit

To get the gross profit per unit, subtract the raw Figure 8.12. Price and Raw Material Costs of the four
products
material costs from the selling price of that unit.
Table 8.3 summarizes the computation for gross Solution:
profit per unit.
First, summarize the prices, processing time and
Table 8.3. Summary of Solutions for Objective 2
Product Selling Raw Gross Profit per
raw material costs per product. Table 8.5 shows
Price Material Unit the summary of the processing time of each
Cost worker for each product and the raw material
A 50 20 30 cost per unit.
B 75 60 15
C 60 40 20
Table 8.5. Summary of Prices and Cost of products
Product Selling Processing Time Raw
Objective 3: Maximize total gross profit Price Material
Cost
Worker 1 Worker 2
Get the profit per hour by multiplying product A 1260 15 min 20 min 750
output rate per hour and profit per unit. The B 1340 15 min 20 min 920
summary is presented in Table 8.4.
C 1260 5 min 30 min 750

Table 8.4. Summary of Solutions for Objective 3 D 1340 5 min 30 min 920
Product Products Gross pofit Profit per
Produced per unit hour Objective 1: Maximize sales commission
per Hour
A 6 30 180
B 10 15 150 To maximize sales revenue, the product with the
C 12 20 240 highest selling price will be the most produced.
Taking into account the 10% constraint stated
We choose B to maximize sales revenue in the problem, the ratio of the products
(Marketing) produced would be 1A:10B:1C:10D.
We choose A to maximize profit per unit
(Manufacturing) To compute for the labor constraint (available
We choose C to maximize total profit minutes per week):
(Optimal Decision for the firm) 5 days* 3 shifts* 8 hours* 60 mins. = 7200
minutes available
Example 2 (3):
Using the ratio 1A:10B:1C:10D and the labor
There are 2 workers producing 4 products (A, B, constraint, the following equation is generated.
C, and D). The plant works on 3 shifts and it is
assumed that the demand is unlimited. The ratio 20x + 10x(20) + 30x +10x(30) = 7200
of the product sold is constant in which it cannot 550x = 7200 where x is the number of units
exceed 10 to 1 between the maximum and produced

11
 The company will gain a profit of Php 18,540 if
Solving for x, we get 13.09 or 13 units the company decides to maximize per unit gross
So, the company will produce 13 units of A and profit per week.
C and 131 units of B and D
Objective 3: Maximize total gross profit
The total revenue is
13(1260)+131(1340)+13(1260)+131(1340) = The profit per hour can be computed by
Php383,840 per week multiplying the product output rate per hour
and gross profit per unit. The results are
The total gross profit is summarized in Table 8.7.
13(1260-750)+131(1340-920)+13(1260-
750)+131(1340-920)-126,000 = Php -2,700 per Table 8.7.Summary of Solutions for Objective 3.
week Product Product Profit per Total profit per
Output Unit hour
rater per
There will be a weekly loss of Php 2,700 if the hour
company decides to maximize sales commission. A 3 510 1530
B 3 420 1260
C 2 510 1020
Objective 2: Maximize per unit gross profit per
D 2 420 840
week
Based from Table 8.6, Product A has the largest
To compute for the gross profit per unit, total profit per hour, thus it will be maximized.
subtract the raw material costs from the selling
price of that unit. Table 8.6 summarizes the Therefore, the ratio of the products is
gross profit per unit of each product. 10A:1B:1C:1D
Table 8.6. Summary of solution for Objective 2
Giving us the equation
Product Selling Raw Gross Profit per
Price Material Unit 10x(20) + 1x(20) + 1x(30) +1x(30) = 7200, where
Cost x is the number of units produced.
A 1260 750 510
B 1340 920 420 Solving for x, we get 25.7
C 1260 750 510
D 1340 920 420
So, the company will produce 257 units of A,
and 25.7 units of B, C and D.

As seen on Table 8.6, products A and C have the The total revenue is
highest gross profit per unit, thus both products 257(1260)+25.7(1340)+25.7(1260)+25.7(1340) =
have to be maximized. Php425,078 per week

Therefore, the ratio of the products is The total gross profit is

10A:1B:10C:1D
Giving us the equation
10x(20) + 1x(20) + 10x(30) +1x(30) = 7200, where
x is the number of units produced.
Solving for x, we get 13.09 or 13 units
So, the company will produce 131 units of A and
C, and 13 units of B and D.
The total revenue is
131(1260)+13(1340)+131(1260)+13(1340)
Php364,960 per week
The total gross profit is
131(1260-750)+13(1340-920)+131(1260-
750)+13(1340-920)-126,000 = Php 18,540 per
week
257(1260-750)+25.7(1340-920)+25.7(1260-
750)+25.7(1340-920)-126,000 = Php 39,765 per
week
The company will gain a profit of Php 39, 765 if
the company decides to maximize per unit gross
profit per week.
In summary, different objectives for the
company yields different results, namely:
Maximizing sales commission resulted in
= a Php 2,700 loss in gross profit per week
Maximizing gross profit resulted in a
gorss profit of Php 18,540 per week
Maximizing the total gross profit gave us
a profit of Php 39,765 per week
Other financial measures include accounts
receivable turnover, inventory turnover,
accounts payable turnover, total assets
turnover, and operating expense ratio. These

12
measures may also be used to evaluate which would they sell and how many could they
product should the company produce (3). The sell?
following are the formulas used for the said c) Which and how many product or
measures: products should you produce to
maximize gross profit for one week?
d) From question c, how much gross profit
would there be for the week?

(Eqn. 8.4)(3) Solution:

a. Maximizing gross margin per unit

(Eqn. 8.5) (3) To get the gross margin per unit, subtract the
raw material costs from the selling price
(Summarized in Table 8.8).

Table 8.8. Summary of solutions to maximize gross margin

per unit
(Eqn. 8.6) (3) Product Selling Raw Gross Margin
Price Material
Cost
A 20 3 17
B 25 7 18
(Eqn. 8.7) (3) C 30 14 16

Product B will be produced since it has the

highest gross margin of $18
(Eqn. 8.8) (3)
b. Maximizing sales commission

Example problems for these financial measures Product C, with the highest selling price would
are given after Example 5. be preferred by sales personnel since it gives the
highest revenue.
Example 3 (3):
We assumethat the market will take all that we
can make, employees work 7 days a week and 8
hours per day. The units of C we can make in a
week is:

C= = 672 units

To maximize sales, 672 unitsof product C will be

produced.
Figure 8.13. Raw Material Cost of each resource and selling
price of the three products c. To maximize profit, profits per hour will
be compared, as shown in Table 8.9.
Products A, B, and C sells for $20, $25, and
$30, respectively. There are only one Resource X Table 8.9.Maximizing profit per hour.
Produ Constra Producti Numb Selli RM Gro
and one Resource Y, which are used to produce ct int on Time er of ng Co ss
A, B, and C for the numbers of minutes stated Resourc on Units Price st Profi
on Figure 8.13. Raw materials are needed at the e Resourc Outp t
process steps, with the costs per unit of raw e ut per per
hour Hou
material. (One unit is used for each product). r
The market will take all that you can produce. A Y 2 30 20 3 510
B X 4 15 25 7 270
a) Which product would you produce to C Y 5 12 30 14 192
maximize the gross margin per unit?
b) If sales personnel are paid on From Table 8.8, it can be seen that Product A
commission, which product or products has the highest gross profit per hour. However,
Product B has a different constraining resource,

13
so the answer could be a combination of A and
B. To test this, we compute for the value of each
hour of Y while producing B.
( )
This is still lower than the gross profit per hour
of A. Therefore, we only produce A. The number
of units of A produced during the week is:
d. Gross profit for the week is:
Using the gross profit per hour,
Example 4 (3):
Shown in the Figure 8.14 is the income
statement of Company XYZ. Calculate the
operating expense ratio of the company
Figure 8.14. Income Statement of Company XYZ
The operating expense ratio is computed by:
(Eqn. 8.8)
Example 5 (3):
ONeill Enterprises manufactures three unique
products (A,B,C) that are fabricated and
assembled in four different workstations
(W,X,Y,Z) using a small batch process. Each of
the products visits every one of the four
workstations, though not necessarily in the
same order. Batch setup times are negligible. A
flowchart of the manufacturing process is shown
14
in Figure 8.15. ONeill can make and sell up to
the limit of its demand. Each workstation is
staffed by a worker dedicated to work on that
workstation alone, and is paid $12 per hour.
Variable overhead costs are $8000/week. The
plant operates one 8-hour shift per day, or 40
hours/week.
Figure 8.15. Flowchart of the manufacturing process of
products A, B and C.
Which of the four workstations W, X, Y, or Z has
the highest total workload, and thus serves as
the bottleneck for ONeill Enterprises?
Solution:
The first step is to determine the bottleneck.
This is shown in Figure 8.16.
Figure 8. 16. Solution for finding the bottleneck.
Available capacity= (40hrs/week) x (60mins/hr)=
2400mins/week
We determine that work station Z is the
bottleneck since its total load is greater than
available capacity of 2400 minutes.
The senior management at ONeil Enterprises
wants to improve the profitability of the firm by
accepting the right set of orders. Currently,
decisions are made to accept as much of the
highest contribution margin product as possible
(up to the limit of its demand), followed by the
next highest contribution margin product, and Step 3: Compute for the profitability. See Table
so on until no more capacity is available. Since 8.12.
the firm cannot satisfy all the demand, the
product mix must be chosen carefully. Jane Table 8.12.Computation of profit for the traditional method.
Hathaway, the newly hired production Profits
Revenue $15400
supervisor, is knowledgeable about the theory of
Materials $2500
constraints and bottleneck based scheduling. Overhead $8000
She believes that the profitability can indeed be Labor $1920
approved if bottleneck resources were exploited Profit $2980
to determine the product mix. What is the
change in profits if instead of the traditional
method that ONeil has used thus far; a The profit for product A,B,C is $2980 when they
bottleneck based approach advocated by Jane is are produced by the sequence A then B then C
used instead for selecting the product mix? following the traditional method.

Decision Rule 1: Traditional method Decision Rule 2: Bottleneck-based approach

In the traditional method, the best product mix
is selected based on the overall profit margin of
each product.
Step 1: Calculate the profit margin unit of each
product. See Table 8.10.
Select the best product mix according to the
dollar contribution per minute of processing
time at the bottleneck workstation Z. This rule
would take advantage of the principles outlined
in the theory of constraints and get the most
dollar benefit from the bottleneck.

Table 8.10.Computation of contribution profit margin. Step 1: Calculate the contribution/minute of

A B C processing time at bottleneck workstation Z. See
Table 8.13.
Price $90 $85 $80

Raw Material and $13 $14 $15 Table 8.13. Contribution per minute of processing time at
Purchased Parts workstation Z.
A B C
Labor $10 $9 $7.40 Contribution $67.00 $62.00 $57.60
Margin
Contribution Profit $67 $62 $57.60
Margin Time at 16 min 13 min 10 min
Bottleneck
Looking at the contribution margin for products Contr. 4.19 4.77 5.76
A, B, and C, we can conclude that A should be Margin per
processed first then produce B and lastly min
produce what the system can of product C.
Step 2: Allocate resources W, X, Y, and Z to the
Step 2: Allocate resources W, X, Y, and Z to the products in the order decided in step 1. Satisfy
products in the order decided in the previous each demand until the bottleneck resource
step. Satisfy each demand until the bottleneck (workstation Z) is encountered. Subtract
resource, i.e. workstation Z, is encountered. minutes away from 2400 minutes available for
Deduct minutes from 2400 minutes available for each week at each stage. See Table 8.14.
each week at each stage. See Table 8.11.
Table 8.14.Computation for the best product mix.
Table 8.11.Computation for the amounts of A, B, and C. Work Starting After 80 After 70 Can Only
Center C B Make 43 A
Work Starting After 65 After 70 Can only
Center A B make 45 W 2400 1440 740 310
C X 2400 1600 760 373
Y 2400 2000 1300 655
W 2400 1750 1050 510 Z 2400 1600 690 2

X 2400 1815 975 525

The best product mix is 43A, 70B, and 80C.
Y 2400 1425 725 500

Z 2400 1360 450 0 Step 3: Compute profitability for the selected

product mix. The new profitability figures are

15
shown below based on the new production
quantities of 43A, 70B, 80C. See Table 8.15.
Table 8.15. Computation of profit of bottleneck-based
approach.
Profits
Revenue $16220
Materials -$2739
Overhead -$8000
Labor -$1920
Profit $3561
Manufacturing the product mix of 43 A, 70 B,
and 80 C will yield a profit of $3561.
Additional Examples: Other Financial Measures
Example 6: Accounts Receivable Turnover (8)
During 2014 Company A had $800,000 in net
credit sales. Also suppose that on the first of
January it had $64,000 accounts receivable and
that on December 31 it had $72,000 accounts
receivable. Calculate the accounts receivable
turnover.
Solution:
Using Eqn. 8.4:
( )
An accounts receivable turnover equal to 11.76
means that the company collects its accounts
receivable 11.76 times per year.
Example 7: Inventory Turnover (9)
Company A has $1 million in sales. The cost of
goods sold is only $250,000. The average
inventory is $25,000. Compute the inventory
turnover.
Solution:
There are two approaches to this:
Approach 1: Sales Divided By Average Inventory
Using Eqn. 8.5:
This means that the companys inventory is sold
and replaced 40 times within a year.
Approach 2: Cost of Goods Sold Divided By
Average Inventory
16
Using the second approach, inventory turnover
is calculated as the cost of goods sold divided by
average inventory, which in this example is
$250,000 divided by $25,000, or 10. The
number of inventory days is calculated by
dividing 365 by 10, which is 36.5. Using the
second approach, inventory turns over 10 times
a year and is on hand for approximately 36
days.
Example 8: Accounts Payable Turnover (10)
Company A made $100 million in purchases
from suppliers during the previous year, and at
any given point it held an average accounts
payable of $20 million, the accounts payable
turnover ratio for the previous accounting period
was 5, or $100 million / $20 million. Assume
that during the current year, company A had
cost of goods sold (COGS) of $120 million,
accounts payable of $30 million for the start of
the accounting period, and accounts payable of
$50 million for the end of the period.
Solution:
To calculate the average accounts payable for
the fiscal year, sum the two accounts payable
amounts, and divide by two. Therefore, the
average accounts payable was $40 million, or
($30 million + $50 million) / 2, for the current
year. Consequently, the accounts payable
turnover ratio was 3, or $120 million / $40
million.
Assume that during the current year, company
B, which is in the same industry as company A,
had COGS of $110 million, accounts payable of
$20 million for the end of the accounting period,
and payables of $15 million for the start of the
accounting period. This means that company B
had an average accounts payable of $17.50
million, or ($15 million + $20 million) /
Company B had an accounts payable turnover
ratio of 6.29, or $110 million / $17.50 million.
Therefore, when compared to company A,
company B is paying off its short-term debt at a
faster rate.
Example 8: Total Assets Turnover (11)
Suppose company X has an asset base of $400
million at the beginning of a given year and $500
million at the end of the same year, and suppose
that company X generated $900 million in
revenues over the course of that year. Compute
the asset turnover ratio for Company X.
Solution: Operating Expenses all the money that
the system spends to turn inventory into
Using Eqn 8.7: throughput (3)
Productivity All the actions that bring a
company closer to its goals (3)
( ) Synchronous Manufacturing entire
production process working in harmony
A total asset turnover ratio of 2.00 means that to achieve the profit goal of the firm (3)
for every $1 asset, the company generates $2 of Throughput the rate at which money is
sales or revenues. generated by the system through sales
(3)

Conclusion Formula Review

Synchronous manufacturing is a production

process managed for operations to work in
harmony to achieve the fundamental goal of a (Eqn. 8.1)(3)
firm which is profitability. Its main purpose is to
downsize excess costs in order to decrease the
time it takes to get products out to the
customers with the quality necessitated. The key (Eqn. 8.2)(3)
to competitive advantage is for the firm to
operate in a synchronized system with all parts
working in concert.
(Eqn. 8.3)(3)

Challenges and Areas for Further

Investigation
(Eqn. 8.4)(3)
Synchronous manufacturing relies on a
calculated aggregate demand and not its true
demand. This puts the profit of a company at
risk if ever the true demand for a products (Eqn. 8.5)(3)
significantly varies from the computed. This
could produce high amounts of inventory and
backlogs.

(Eqn. 8.6)(3)
Key Terms to Remember and Formula Review

Key Terms
(Eqn. 8.7)(3)
Bottleneck any resource whose capacity
is less than the demand placed upon it.
(3)
Capacity Constrained Resource (CCR) (Eqn. 8.8)(3)
one whose utilization is close to capacity
and could be a bottleneck if it is not
scheduled carefully (3) References
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Inventory all the money that the system Companies, Inc., 2006, pp. 721 749
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intends to sell (3) constraints.html
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Manual, 2nd ed.,
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(4) DBR Drum Buffer Rope by HohmannChristian.
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