A Tale of Two Companies
The following narratives are very representative of the types of projects we work on. We hope they give you a sense of our approach to increasing profits through the affordable application of quantitative techniques.
"A Little Adjustment"
Wrought-Secure Inc. manufactures intricate, high-priced decorative wrought-iron security fences. In the factory a single clerk checks out tools to a number of different craftsman, each doing their special part to complete the fences into the final product. This setup is commonly referred to as a "tool crib" structure and exists because the tools are much too expensive to allow each craftsman to have a personal set. The time between tool requests and the time needed to process a request depend upon the craftsman involved. These tool lending statistics are kept on a daily basis. The tool crib clerk has been using the FCFS (First Come First Served) method for handing out the tools.
The present workflow configuration has been in place for over twenty years. The plant manager, Karl Pfeiffer, has, over the years, approached numerous business consultants with the thought of restructuring the line to improve efficiency, and therefore profits. Unfortunately implementing the proposals he has received would necessitate a major disruption of business and incur a great deal of up-front costs for various experts and feasibility studies. So Karl follows the "if it ain't broke don't fix it " principle.
Rather than immediately opt for a radical and expensive overhaul of the factory's entire assembly line structure, we first explored the possibility that a simple and inexpensive reconfiguration of one or more workstations could yield a significant increase in production.
Our analysis determined that if the tool crib clerk replaced the present FCFS lending method with a Shortest Processing Time (SPT) method, then the average waiting time for craftsmen would decrease by almost 12%. This translated into less craftsmen wasting time waiting for their tools and that resulted in an increase in production with a corresponding increase in monthly profits of approximately 9% or about $3800 a month.
All we needed from Karl to perform our analysis was three months worth of daily tool crib lending statistics which he already had. Our fee was $1100 - period. Does this sort of "minimalist" approach to profit enhancement always work? - Honestly no, not always. But there are many instances where our approach to improving a client's bottom line by optimizing a certain facet of their existing operation rather than a "major remodeling" of the operation has worked remarkably well.
"Hate To Turn Down An Order?"
One of the truly frustrating situations that a small business owner can encounter is not being able to accept an unexpected and substantial product order due to a lack of available manufacturing time. Confronted with such a situation, a manufacturer has three realistic options:
1) Decline the order outright.
The first impulse is probably to try option 2. But more likely than not the logistics of rearranging the existing production schedule to fit in a big order that comes out of the blue would probably be a nightmare. The second impulse is probably option 1, arguably the path of least resistance, yet one that most business owners detest. Option 3, though, can lead to the following interesting possibilities investigated in the following description.
Acme International Widgets
Acme International Widget's (AIW) receives an unexpected order for 7,880 widgets (worth $860,000) from Van de Velde PLC (VdV), a Belgian widget distributor. The VdV order breaks down as follows:
VdV Widget Order Breakdown
AIW's in-house widget production information is summarized in Table 1:
In-House Production Times Per Unit
Table 2 below reveals that the total in-house production times needed to fulfill the VdV order are 15,140 hrs. for stamping/polishing and 11,080 hrs. for painting/curing. Unfortunately, due to other commitments, AIW only has a total of 10,000 hours of stamping/polishing capacity available and a total of 5,000 hours of painting/curing capacity available to devote to the VdV order.
Production Times For Total Order
The owner of AIW, Jack Smeeton, believes that filling this order could be his small firm’s entrée into the European markets and decides to look into the feasibility of fulfilling as much of the order as possible in-house and out-sourcing the remaining production shortfall to his competitor DL-Zimmerman Inc. (DLZ). Simply stated, the question for Jack comes down to this: Is there a way in which AIW can use their limited production hours in conjunction with purchasing finished widgets from DLZ so that the entire order can not only be filled but, more importantly, result in a profit? This is a major concern as the owner is acutely aware that, in his present financial situation, even a small loss on the deal would seriously hurt his operation. So taking a loss, no matter how small, to garner a goodwill situation of fulfilling a "prized" order is out of the question. Table 3 summarizes the costs involved.
Cost Of Widgets
Contrary to what you might think, this situation happens often enough for us to have created a proprietary optimization algorithm to quickly determine if there is a combination of in-house production and out-source purchasing that will yield an acceptable profit. (In a very interesting variation on a theme, i.e. not being able to fully fill an order, we have a number clients who actively bid on projects they can't fill in-house after we run the numbers and show them that they can make a profit by going "out of house".)
The result of implementing our model appears in Table 4 below. The numbers appearing in the cells are those quantities of widgets to be manufactured in-house and out-sourced that fill the entire VdV order while at the same time minimizing Jack's cost for the entire order. Although the mathematical theory is a little beyond the scope of this presentation, it can be shown that there is no other combination of widget in-house production/out-source purchase that will result in a lower cost to fill the order. In plain English - of all the literally thousands of possible combinations of in-house production and out-sourcing, the widget production numbers displayed in Table 4 is that combination that is mathematically "guaranteed" to be the minimal cost for AIW to fill the order.
Optimal Profit Configuration
Table 5 below compares the profit outcome for “joint venturing” the project which is about $238,000. Had it been possible to fulfill the entire order in-house, the profit would have been $282,000. The difference is a loss of about $44,000, not bad when you consider that the alternative would have been to turn the whole deal down due to a lack of production capacity time for the entire order and earn nothing!