Saturday, September 06, 2003

Concrete Forms as a Constraint, Chapter 3

I 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.

  1. 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.
  2. 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!!
  3. As it was, it took them 20 work days to complete the basement walls.
  4. So, had they had 90, rather than 45, feet of forms it could have taken 10 work days to complete the basement.
  5. 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.
  6. The decision is obvious.
DISCLAIMER: All of these numbers represent my estimates. They are not official. However, they DO illustrate how you would go about this process. If my assumptions are wrong, you could arrive at a different conclusion. But don't throw the baby out with the bath. I want you to understand clearly that this is one way we move the seemingly theoretical understanding of constraints into rapid, effective decision making. Note the process.
  • 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.
Feel free to forward to a friend. Email me

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