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# Quality improvement : Theory of constraints

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The Wellesley Corporation's total monthly sales of printed cloth equal the Printing Department's output. Each requirement refers only to the preceding data. There is no connection between the requirements.

1)The Printing Department is considering buying 5,000 additional rolls of gray cloth from an outside supplier at \$900 per roll. The Printing Department manager is concerned that the cost of purchasing the gray cloth is much higher than Wellesley's cost of manufacturing it. The quality of the gray cloth acquired from outside is very similar to that manufactured in-house. The Printing Department expects that 10% of the rolls obtained from the outside supplier will be scrapped. Should the Printing Department buy the gray cloth from the outside supplier? Show your calculations.

2)Wellesley's engineers have developed a method that would lower the Printing Department's scrap rate to 6% at the printing operation. Implementing the new method would cost \$350,000 per month. Should Wellesley implement the change? Show your calculations.

3)The design engineering team has proposed a modification that would lower the Weaving Department's scrap rate to 3%. The modification would cost the company \$175,000 per month. Should Wellesley implement the change? Show your calculations.

#### Solution Preview

All calculations are given in the excel file with clear explanations.

Quality improvement, theory of constraints. The Wellesley Corporation makes printed cloth in two operations, weaving and printing. Direct materials costs are Wellesley's only variable costs. The demand for Wellesley's cloth is very strong. Wellesley can sell whatever output quantities it produces at \$1,250 per roll to a distributor who markets, distributes, and provides customer service for the product.
Weaving Printing
Monthly capacity 10,000 rolls 15,000 rolls
Monthly production 9,500 rolls 8,550 rolls
Direct materials cost per roll of cloth processed at each operation \$500 \$100
Fixed operation costs
Fixed operating cost per roll \$2,850,000 \$427,500
(\$2,850,000 / 9,500; \$427,500 / 8,550) \$300 per roll \$50 per roll

Wellesley can start only 10,000 rolls of cloth in the Weaving Department because of capacity constraints of the weaving machines. If the weaving operation produces defective cloth, the cloth must be scrapped and yields zero net disposal value. Of the 10,000 rolls of cloth started at the weaving operation, 500 rolls (5%) are scrapped. Scrap costs per roll, based on total (fixed and variable) manufacturing costs per roll incurred up to the end of the weaving operation, equal \$785 per roll as follows:

Direct materials cost per roll (variable) \$500
Fixed ...

#### Solution Summary

Excel file contains solution of a relevant costing problem.

\$2.19
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## Production Planning & Process

Scenario:
Manychip, Inc., is a specialty memory chip manufacturer located in Southern California with manufacturing plants located in the United States, Europe, Singapore, and Japan. Additionally, Manychip has branch sales offices located in major metropolitan areas across the globe. The market for Manychip's six key products included original equipment manufacturers of personal computers, cellular telephone manufacturers, electronics distributors, and government organizations. The market environment for Manychip's products is extremely volatile, with fluctuating demand and rapidly changing prices. The company uses short-term contracts (less than one month) and spot pricing for irregular customers. Internally, the operation is capital-intensive, with depreciation running approximately \$1.2 million per day (depreciation has an impact on revenue streams). The six key products had further specialized components, making the possible line mix total 24 distinct products. Further, the manufacturing process required high manufacturing lead times and various product yields. In the high technology memory arena, product life cycles were dramatically shortened because of rapid obsolescence. To coordinate the manufacturing activity, Manychip has an established process and system that helped optimize resource utilization, improve shop floor efficiencies, and manage customer demand.

Manychip is experiencing 10-15% growth in revenues and volume, primarily tied to increased worldwide demand, product type, and market variables. Most significantly, the company received a major pre-order for a new cellular phone memory chip that's schedule to come out in three months. This pre-order is scaled for up to 10 million units and management is concerned the existing process and system may not be suitably optimized for this order. Additionally, the forecast in sales figures for all six key product lines is higher than it has been in the past.
As the company examines various methods to assess its performance and design processes, it is looking for an analysis of the existing workflow production process and the factors that most directly impact such measurements. As a review, the most common metrics for production processes are as follows:

? Quality: the number of defects associated with a given product
? Cost: material and labor costs
? Timeliness: how quickly products are manufactured and delivered
? Flexibility: the degree to which the production process can be adapted to produce other products or specific products more quickly
? Productivity: a ratio of outputs divided by inputs
? Efficiency: a ratio of actual outputs divided by standard (or expected) outputs, multiplied by 100% to give a total efficiency percentage
? Cycle Time: the total time it takes to complete a production process
? Theory of Constraints and Queuing Theory

Review the scenario above: (Answer the following)

1. Explain how each measure can be applied to Manychip's production planning process - can the company use each one? How?
2. Rank the criteria listed above in order of importance to Manychip's production planning strategy, detailing your rationale for such a ranking.
3. Identify other measures that might apply to Manychip and explain them.

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