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Executive Summary
Five Star Tools has a bottleneck in its coating and sharpening operation leading to missed deadlines on orders from important customers. They have a few different products they are considering focusing more attention on, while eliminating less profitable products to increase process time. They are deciding on what product to cut to eliminate the wait time they’re customers currently experience. In hopes to improve production time by eliminating products, suggestions such as outsourcing employees to perform inspections and re-engineering the already expensive equipment are presented.
There are multiple steps that can be taken to loosen the constraint in coating and sharpening. Cross training workers in other departments so they can help out in coating and sharpening. Outsourcing some of the work that would normally be performed internally by coating and sharpening. Putting buffer inventory before coating and sharpening to make sure the department doesn’t run out of items to work on. Reengineering the coating and sharpening operation to make it more efficient. Make sure that coating and sharpening isn’t shutdown due to workers taking breaks at the same time.
Once the company decides on the best model to stick with they must calculate the higher contribution margin. The model C210 should be emphasized because it generates a higher contribution margin per unit of the constraint. According to the below chart, the contribution for the Model C210 is 250 per hour, the Model D400 is $430 per unit. It takes .6 less hours to get the Model C210 through the coating and sharpening process at a much lower cost. The production price output is double the when the Model C210 is compared to the Model D400.
Model C210 Model D400
Contribution margin per unit $250.00 $430.00
Time in coating and sharpening .2 hours .8 hours
Contribution margin per hour $1,250.00 $537.50
The benefit would be $1,250 since the time would be spent working on the Model C210. This would allow for the company to outsource or train other employees in different departments to help get the product through the process. This is assumed because of the amount of time it takes to finalize the product. The assumption is that it is easier to produce and more employees can grasp the concept of the process. To add, the average contribution margin per hour spent in coating and sharpening is $850. Given the inspection station will save 240 hours, this means the company can generate an additional $204,000 of profit ($850 contribution margin per hour × 240 hours). Hopefully, this makes the point that companies can generate large incremental profits by loosening constraints. The model C210 should be emphasized because it generates a higher contribution margin per unit of the constraint.