Concrete Forms as a Constraint, Chapter 3I wrote on August 18 about a construction site near my home in which progress seemed slow. I followed up with a post on August 21 in which I discovered the constraint, the limiting factor of this site's progress, was the fact that the concrete subcontractor owned only 45 lineal feet of concrete forms.
Well, today I happened by the site again and noted that they finally completed pouring the entire basement wall. However, they never did get any additional concrete forms; instead, they poured 45 feet at a time, all the way around the basement wall.
What do we do, practically, with this thing called constraints? I propose that we move with simple calculations to figure the value of one day's improvement in speed at the constraint. Stay with me here.
- From local press releases, I can roughly estimate the value to the owners of the new building, a medical device manufacturer.
- I'm guessing the expanded facility will generate sales of about $1 million per month.
- From my prior experience in the medical device industry, I would conservatively estimate their gross margin rate to be about 40%.
- This means they would generate about $400,000 to cover fixed expenses each month from the new facility.
- With an average of 21 business days each month, this works out to about $19,000 per day.
- Therefore, every additional day the plant is operating will be worth about $19,000 for the firm to cover fixed expenses.
- This figure can guide the contractor in how to spend money to speed the process. In this case, is it possible to rent concrete forms for less than $19,000 per day? Yes! At the high end, they could have doubled the number of forms for $1,000 per week!!
- As it was, it took them 20 work days to complete the basement walls.
- So, had they had 90, rather than 45, feet of forms it could have taken 10 work days to complete the basement.
- This would have sped the completion of the building by 10 days, allowing the company to make $19,000 times 10, or $190,000 in gross margin dollars. The cost to the contractor would have been $2,000.
- The decision is obvious.
- It requires clear conversation between the provider and the customer. Somehow, these rough calculations have to come out in the open. But, by using these calculations, the conversation is easier.
- The value of speed can be quantified.
- It only makes sense to do these calculations at the constraint! Speeding up nonconstraining steps will not generate the value to the customer.
- The numbers don't have to be perfect...they only have to be reasonable.
- This framework is marvelously simple and allows a clear framework for decision making.
I sure hope this makes sense. Try it out sometime and see for yourself.
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