impacting the bottom line planning z...

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Cost Reduction: Planning & Control

Break‐Even Point & Decision Tree Analysis(l.u. 4/2/13)

Impacting the Bottom Line

Calls for an understanding of:

Variation

Waste & Value

Investments (time capital resources ) - ROIInvestments (time, capital, resources, …) - ROI

Design

Relationship of activities (sequence, connection) - TIME

Bottom Line (costs)A = Costs (what we expend)

B = Revenue, sales (what we generate)

Below intersection = LOSS Above intersection = PROFIT

LOSS

(Minty, 1998, p. 98)

Bottom Line (costs)1. Fixed (rent, property taxes, loan payments) – can be estimated in

advance, year or more

2. Variable (labor, contracts, utilities, travel) – difficult to estimate, apply ceiling/limits for further expenditures (what we target in cost reduction)

Direct (labor, materials)Overhead

Indirect (benefits, purchasing, marketing, management, travel)Facilities (rent, maintenance)Taxes/insurance)

(Angus, Gundersen & Cullinane, 2000)

Bottom Line“The comparison of project income versus project expenditures is referred to by business and industry executives as the bottom line” (Angus, Gundersen & Cullinane, 2000, p. 186)

(Angus, Gundersen & Cullinane, 2000, p. 186)

Want Decrease Slope

Want Increase Slope

Bottom Line: InvestmentsBreak Even point? Capital cost of Machine + Operational Costs

“Face value” profit if the machine

lasts 10 years

(Minty, 1998, p. 104)

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Investments: Break‐Even PointCapital cost of Machine + Operational Costs do not cover everything (DOUBT, maintenance, time value of money, scrap value)

Maintenance Overhaul

(Minty, 1998, p. 104)

Steeper – Increase Wages

Uncertainty Investments: 10 Year Projection

However, data conflicts (so we use decision tree) with probability

Senario1: $80k startup, t = 10 years (10 x 2000 hrs), $5/hr operation/maintenance, $0 scrap value. Cost = $180,000

Senario2: $80k startup, t = 10 years (10 x 2000 hrs), $5/hr operation/maintenance, $10k scrap value. Cost = $170,000operation/maintenance, $10k scrap value. Cost $170,000

Senario3: $80k startup, t = 8 years (8 x 2000 hrs), $5/hr operation/maintenance, $40k 2‐years labor. Cost = $200,000

Senario4: $80k startup, t = 5 years (5 x 2000 hrs), $5/hr operation/maintenance, $80k new robot. Cost = $260,000

Investments – Decision TreesFrom Data/Research Startup, Maintenance

$5/hr, & Scrap ValueProbability x Cost

(Minty, 1998, p. 107)

Break Even Point weighing risks

Questions?If you are a manager (project, site, operations, engineering,

supply chain):

What common variable significantly impacts bottom line? What are decisions based on for any project?

What activities do we improve/eliminate?

How do we determine where to deploy resources?

Cost Reduction: Planning & Control

Project Flow (Theory of Constraints)(l.u. 4/2/13)

Fallacy = Fix Everything that is Waste!1. PROBLEM! Diminishing returns: “Traditional cost accounting

attempts to maximize the utilization of resources and work centers even if they build inventory that is not needed and even if the work centers are not bottlenecks” (Schroeder, 2008, p. 301).

• When companies spend $ if this does not positively impact the bottom line, then it is waste

2. “Most companies use lean tools to make point‐based improvements that do not impact the bottom line – this is not lean.” (Kevin J. Duggan, personal communication)

• PEOPLE MUST UNDERSTAND THE FLOW OF OPERATIONS AND HOW PROCESSES INTERRELATE WITH ONE ANOTHER

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Theory of Constraints (TOC)Decisions are based on money (hopefully long‐term)! Businesses exist to make $ ‐ if they don’t make $, they cease to exist (unless the government, “AKA you”, bail them out!)

EliyahuGoldratt, author of “The Goal”

1. Identify bottleneck in system

2. Seek to improve capacity of bottleneck to improve throughput (reduce setup time/changeover time, better scheduling, 24 hour operation, better workforce policies, reducing inventory, etc.)

(Schroeder, 2008)

Where is the Bottom Line?If you are a manager under time/resource constraints, how do you determine WHERE to make improvements?

HOW do you identify the time that impacts the BOTTOM LINE?

TOTALSYSTEM CAPACITY CAPABILITY ($)TIME

Gantt ChartsBar Chart – “…oldest and most frequently used chart for plotting work activities against time” (Angus, Gundersen & Cullinane, 2000)

Quickly interpreted

(Minty, 1998, p. 67)

Gantt ChartsInevitably, schedules become off track and adjustments must be made (with perhaps little understanding of consequences).

(Minty, 1998, p. 69)

Gantt ChartsUsed to allocate resources (e.g. Scheduling people) –projecting days/weeks in advance

Best used for simple/few operations

(Minty, 1998, p. 68)

Gantt ChartsDisadvantages: “…they do not display the relationships between activities. If one of the activities is delayed, the chart does not convey whether this will affect the beginning of some other activity. For example, in the building of a house, if the plumbing is delayed, can the exterior painting and siding continue as planned? You cannot tell from a Gantt chart.” (Minty, 1998, p. 68)

So, Gantt charts do not illustrate how disruptions in a schedule result in disruptions in FLOW OF OPERATIONS (delays)!

“…Gantt charts are justified for projects where the activities are not highly interconnected or for small projects” (Schroeder, 2008)

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Simple Question You have 3 suppliers providing 3 parts for an assembly project (all 3 parts must be received before assembly begins)

Delivery: Two suppliers = 1 periods, One supplier = 6 periods

Where do you invest your time/money? What company are you concerned with most?

Common Mapping Approaches:CPMPERTVSM

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Network Charts – PERT Chart Program Evaluation and Review Technique (PERT) –1950’s (Minty, 1998; Schroeder, 2008)

Polaris nuclear submarine project (1st one ever), 3000 contractors, 2 years ahead of schedule (Schroeder, 2008)

(Minty, 1998, p. 71)

Network Charts – PERT Chart Reveal sequence of events in path ‐ Reveal simultaneous paths – precedence relationships are explicitly shown (Schroeder, 2008)

Longest path is the Critical Path; delays are detrimental along this path (Minty, 1998).

“Elsayed and Boucher (1985) cite a study that found as y ymany as 80% of 400 construction firms were using the critical path method” (Angus, Gundersen & Cullinane, 2000, p. 179).

CPM (Critical Path Method) estimates a single time value estimate for completion, while PERT Methods calculate uncertainties and probabilities (Angus, Gundersen & Cullinane, 2000).

PERT/CPM Supporting Software To name a few:

Omnilab

Microsoft Visio

Primavera

SuperProject

Microsoft Project

Pert Chart Expert

PlanBee

Scitor PS Suite

ProChain Solutions

RFFlow

PERT Chart Paths ‐ CPCritical Path = Greatest elapsed time = ACFHJLP = 20 days

(Minty, 1998, p. 71)

Example Problem A1. Determine the shortest time (days) to complete the project.2. How many person/days are needed to complete the project?3. What day will activity H-M require resources?

(Minty, 1998, p. 75)

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Example Problem A

4. What day will activity L-N require resources?5. If K-L requires 2 days more than projected, how long will it take

to complete the entire project?6. Construct a Gantt chart (schedule) for the project.

(Minty, 1998, p. 75)

Problem 1: Network Chart Calcs1. What are the events along the Critical Path?

2. How long to complete this project?

3. How long to complete the project if Activity E‐I takes 3 days longer?

4. How long to complete the project if Activity K‐N takes 1 day longer?

5. How long to complete the project if Activity C‐G takes 5 days longer?

(Minty, 1998, p. 87)

Project Delays: Management OptionsImpact Critical Path NO

1. Note slack taken.2. Verify impact on other paths.3. Root‐Cause‐Analysis: verify what went wrong & why. Then

“Design‐out” problems for future projects.

Impact Critical Path YES

1. Contact the customer – verify their impact2. Reallocate resources to other phases of project (overtime,

extra shifts, temporary workers, etc.)3. Root‐Cause‐Analysis: verify what went wrong & why. Then

“Design‐out” problems for future projects.

Problem 2: Network Chart Calcs1. Draw a Network Chart (ACTIVITY‐ON‐NODE) with the

following Parameters: • Z can not be completed until A and B occur• A cannot occur until C and D occur• B cannot occur until E, F, G occur• E, F, and J cannot occur until H occurs• G cannot occur until I occurs• I cannot occur until J occurs• C, D and H cannot occur until K occurs

2. Each activity takes 3 periods What is the completion time?

3. What path do you target for making improvements?

4. If Activity C is delayed by 4 periods, what is the earliest completion time?

Network Chart Calculations• Some activities in projects have uncertainty due to variables,

estimates made from statistical data

• Times for activities: OPTIMISTIC (we hope), PESSIMISTIC (1/100, with delays), and PROBABLE (highly likely)

Optimistic Probable Pessimistict

PERT: Estimated Time

Time Estimatest = single time estimate o = optimistic timen = probable timep = pessimistic time

t = (o + 4n + p)/6

Estimated completion time A-B:t = (5 + 4(6) +10)/6 = 6.5 periods

(Minty, 1998, p. 78)

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PERT: Estimated Time• First Calculate all probable times between each event• Second Determine the CP• Third Add probable times

• OR

• First Add all o, n, p about the CP• Second Apply the standard PERT Single Time Estimate

Formula(easier)

te = (o + 4n + p)/6

Earliest A G = 13 periods, Latest A G = 24 periodste =


(13 + 4(17) + 24)/6 = 17.5 periods (total time estimate) ORte = 6.5 + 3 + 4.83 + 3.16 = 17.5 periods (total time estimate)

TIME ESTIMATE

(Minty, 1998, p. 78)



Problem 3: Estimated TimeGiven the data, calculate the probable time for completion

(Minty, 1998, p. 89)

Problem 4: Calculating Slack with CPM



• Earliest Start ES(X) = 0 [starting activities]• Activity time t(X)• Earliest Finish (EOT) EF(X) = ES(X) + t(X)• Latest Start LS(X)• Latest Finish LOT LF(X) = LS(X) + t(X)• Earliest Occurrence Time EOT• Latest Occurrence Time LOT

• Slack = Amount of time an event can slip without affecting project completion date

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(Angus, Gundersen & Cullinane, 2000, p. 181-2)

Problem 4b: Calculating Slack with CPM

(Schroeder, 2008, p. 323)

Problem 4b: Calculating Slack with CPM


Calculating Variability & Probability• NOTE: “Experience shows that time estimates often exceed the most

likely time or best estimate in project activities because people tend to be overly optimistic in their time estimating” (Schroeder, 2008, p. 325).

• Variance of the complete project can be computed along the critical path using the time estimate and ACTIVITY VARIABILITY. It is likely that each activity will experience some variability from the time y p yestimate.

ACTIVITY VARIANCE

Problem 5: Calculating Variability/ProbabilityQ: Given the history of the following process, what is the

probability that the project will be complete within 12 timeperiods?

1. Construct chart2. Compute estimated times


Activity On Node(AON) Technique

p3. Compute time variances

Then

4. CP

Problem 5: Calculating Variability/Probability• Construct chart Compute estimated times Compute

time variances Determine CP Time


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Advantages/Disadvantages

Network Diagrams:

• Illustrate disruptions in flow of activities• Show interrelationships between/among activities • Reveal the bottom line [CP](where improvements are

significant) – helps prioritize expenses

• Do not differentiate time (value vs waste) as in VSM• May be complicated by statistics if management is not

trained or unwilling• Scale of some large projects may be difficult to display• Resources expended may not justify benefits due to

short project duration

References

Angus, R. B., Gundersen, N. R., & Cullinane, T. P. (2000). Planning, performing, and controlling projects: Principles and applications. Upper Saddle River, New Jersey: Prentice Hall.

Minty, G. (1998). Production planning and controlling: A problem‐based approach. Tinley Park, Illinois: Goodheart‐Willcox.

Schroeder, R. G. (2008). Operations management: Contemporary concepts and cases. New York: McGraw‐Hill Irwin.

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