MANAGERIAL ACCOUNTING

LUCENT TECHNOLOGY THEORY OF CONSTRAINTS

By: Eka Darmadi Lim May Eka Saputri Steven Auryn Hendro

3094802 3094814 3105812

Class: Y
University of Surabaya Faculty of Business and Economics International Class 2012

STATEMENT OF AUTHORSHIP

This article about Lucent Technology - TOC created by our team ideas and opinion, and this paper pure from our understanding not copy or paste from the resource that available, we use the appendix and references to describe everything. The person who signs this authorship statement, everything in this paper just for internal use only, we consider as a student we have limitation, and mistakes, so the whole paper is our group opinion for internal use only, for our case study. And we consider if there is plagiarism in this paper, we as the team member, we are ready for the consequences, that as our agreement before, and we understand that we must deliver on-time as scheduled.

The Authors,

Eka Darmadi Lim (3094802)

May Eka Saputri (3094814)

Steven Auryn Hendro (3105812)

Introduction: Each firm faces limited resources and limited demand for each product. These limitations called Constraint, theory of constraint admit that the performance of the company is limited by constraints. If the company wants to improve their performance, a company must identify the constraints, exploit the constraints in the short term and long term, and then find ways to overcome them. Theory of constraints focus on 3 activities, they are Throughput, Inventory and operating expenses. Management goals are increasing throughput; minimize inventory and decreasing operating cost. 1. Throughput: rate at which an organization generates money through sales. 2. Inventory: all the money the organizations spend in turning materials into throughput. 3. Operating expense: all the money the organization spends in turning inventories into throughput. By increasing throughput, minimize inventory, and decrease operating expense will give any impact on increasing finance performance, profit, return on investment, and cash flow. In traditional viewpoint, pressing in increasing throughput and decreasing operating expense are very important, and minimize inventory are not really important. TOC recognize that lowering inventory decreases carrying costs and thus decreasing operating costs expenses and improves net income. More deeper, TOC recognize lowering inventory helps produce a competitive edge by having, better products and lower price and responsiveness to customers needs. 1. Better products higher quality Company able to improve their products / product innovation, by lowering inventory there is innovation, company can market their product before their competitor market the same products, without waiting for last stock. 2. Lower prices 3. Responsiveness

TOC Steps: 1. Identify the organizations constraint(s) The constraints: External constraints limiting factors imposed on firm from external sources ( such as market demand ) Internal constraints limiting factors on firm from internal sources (Such as: product capacity, machine-time availability, etc.) Loose constraints constraints whose availability resources are not fully utilized. Binding constraints constraints whose availability resources are fully utilized. Constraints are used to optimal mix reveals which is will maximize throughput and how much of each constrained resources is used and which of the organizations are binding. For example Hello company produce 2 component of machine x and y, margin contribution for each $ 300 for x and $ 600 for y. Operation work 5 days in a week. In here we can said that Hello Company better produce and sell component y because y has a biggest MC/Unit. But this solution is not hundred percent good. One binding internal constraints: X Hour/unit MC/Unit 1 hour $ 300 Constraints : work processes 120 hours / weak We can produce MC total MC resources 120/1 = 120 units $ 36,000 / weak $ 300/1 = $ 300 ( TOP ) 120/3 = 40 units $ 24,000 / weak $ 600/3 = $ 200 Y 3 hour $ 600

Shown: Better just produce and sell product x, because x produce higher MC/weak ( $ 36,000 for x and $ 24,000 for y ) its because MC/unit rare from resources or constraints of product x higher than constraints of product y, although MC/unit product y 2x bigger than MC/unit product x MC/unit product is doesnt matter but MC/unit unavailability resources is important. Internal binding constraint and external binding constraint: If hello company can sell maximum 30 units component x and 100 units component y, so optimal mix will be: Component x because MC/highest resources maximize first 30 X 1 hour unit = 30 hours, and 90 hours for component y 90 hours: 3 hours = 30 units. 2. Exploit the binding constraint(S) In many companies there is some binding constraint, the main binding constraint is drummer, whereas level of productivity drummer constraint are level of production in all factory. TOC add 2 more feature: Rope Buffer

Rope = actions taken to tie the rate at which material is released into the plant (at the first operation) to the production rate of the constrained resource. The standard of the process that have constraint continued upriver to synchronize the basic materials used in accordance with the optimal product mix eliminate raw materials unneeded. Buffer : are made to ensure resource constraint that have kept busy, so for scheduling, operations must produce the component required by the resource drummer two days earlier before drummer constraints.

For example: Hello Company has 3 processes Drilling Grinding Polishing Assumption: the only internal binding constraint is grinding which spend 120 hours grinding/weak grinding process is drummer. With optimal mix (calculation before) 30 x and 30 y maximum grinding And, grinding and polishing loose constraints can produce more than of product mix required. 3. Subordinate everything else to the decision made in step 2 The drummer constraint essentially sets the capacity for the entire plant. Which make the company will change their way to think. This make the use of efficiency measures at the department level may no longer be appropriate. Consider that confer company once again. Encouraging maximum productive efficiency for the grinding department would produce excess work-in process inventories. For example assume that the capacity of the grinding department is 80 units per week. Assuming the 2 day buffer is in place, the grinding department would add 20 units per week to the buffer in front of the drilling department. Then there will be a large work-in process inventories. Polishing will produce at the rate of drilling since the polishing follows drilling in the sequential production process.

4. Elevate the binding constraints. Once actions have been taken to make the best possible use of the existing constraint, the next step is to embark on a program of continuous improvement by reducing the limitations that the binding constraints gave on the organizations performance. Assume that the polishing has 160 hours available. Part X uses 1 hours and part Y uses 3 hours and we want to produce 30 part x and 30 part Y. The total hours we spend is 120 hours ((30x1)+(30x3)). If we want to add more production to the product Y by 20 (from 30 to 50) is possible. Since the increase of production of part Y by 20 will increase the throughput by 12000 (20 x $600)

per week. If the cost of adding the half shift is $50 per hour. Then the incremental cost is $3000 per week. Then the decision to add the half shift is a good choice.

5. Repeat the process Eventually the drilling constraint will be elevated to a point where the constraint is no longer binding. Suppose for example that the company adds a full shift for the drilling operation. Increasing the resource availability to 240 hours. both the drilling and polishing constraints are capable of producing more of part X. but the grinding cannot since the maximum production of product mix is only 80 per week. Thus the new drumming constraint is grinding. Once the new drummer constraints identified. Then the TOC process is repeated. The main objective is to continually improve the performance by managing constraints

Summary TOC Theory of Constraints (TOC) is good theory for factory, because TOC will help factory to manage and solve their problems. After manage and solve the problems, are easy for factory to get more and more profit. Actually the main problems in factory, are managing the inventories. And TOC are really help in managing inventories. TOC has buffer and rope to solve the inventories, rope are to tie the rate at which materials is released into the plant to the production rate of the constrained resources. Buffer, are made to ensure resource constraint that have kept busy, so for scheduling, operations must produce the component required by the resource drummer earlier before drummer constraints. In our opinion, the main idea from TOC is Rope and Buffer, but all the process is related each other. And it will make TOC, as a union idea to managing inventories and be the first or main company in this or that product.

Case Study: Lucent Technologies implement TOC

Background:

The Lucent Technology is a corporate owned by bell lab innovation, as we know as AT&T (1970 2006) in United States America, but The Lucent Technology have different objective, The Lucent Technology build the semiconductor, fiber optic, fiber cable. Means that the Communication Equipment

The Lucent Technologies was built in 1970, and start producing wire, already produce up to 107 Billion conductors that manufactured that year. The purpose to build this company for takes a profit competing communication provider, start from $8 / Share up to $84 / Share in 1999, and now in 2006 Lucent bought by Alcatel and ready to start the most improvement ever, In 2011 for implementing TOC inside.

After Lucent implement TOC inside the operational system, there are lots of improvement that we get, for developing new product we need just half of time needed, 100% of project can be done on time, we can 3x more for product development capacity, 30% Revenue turnover, Multimillion dollar profit improvement.

The Problem 1. How Lucent become more productive? 2. How Lucent can improve their performance? 3. How Lucent can win the competitor? 4. How Lucent can increase their profit? Analysis: By implementing TOC inside operation we can see lots of improvement that we get, I will explain in a brief, using TOC system we can analyze which part is our bottleneck, and the most inefficient one, before they implement TOC, they kept producing in continuous number of a product, for example

Machine A Can Produce 100, Machine B can Produce 500. In the old time, their flow is like that, so machine B cant reach the maximum capacity, but after implement TOC after Machine A produce 500, then they continue to machine B, so machine B can maximize their capacity. When the machine A produces 500, we improve machine B to double size, so we can increase the overall throughput.

The Solution Step by Step A. Identify organization constrain Lack overload of some machine in production capacity Lack of innovation

Internal and External Factor Internal: Lack of technology that we have External: We cant fulfill the request of the market, may be our competitor can made product similar, and better. Or our production capacity is not enough to fulfill our customer request

B. Exploit the binding constrain Some machine need to be operated with more than 1 people, the reason, because while this people take some rest, the production kept going by the substitute people. And the process that breaks down should be repaired as a priority. Solution: A. Help the critically machine B. Dont allow the critically constrained resources run out of work. C. Realize just enough WIP into the system D. Remove all excess WIP from system, because WIP cost money, clutter, and slows the flow.

C. Subordinate everything else to the decision meet in step 2 Remove all excessive WIP, then if the buffer still full, do not release any work into the system. (Make done it first)

D. Elevate the binding constrain After we implement step 1-3, now to elevate the constraint, get another resource / workstation! E. Repeat the process Then we repeat the process to test if the system that already revised, work or not. And do not let inertia become the constraint, because the constraint becomes moved.

The Results: 1. New Product can be developed twice fast. 2. Project can be completed on time 3. More production capacity 4. Increase in revenue and profit

References: Book of Managerial Accounting by: Maryanne M Mowen http://en.wikipedia.org/wiki/Lucent

http://scmviews.blogspot.com/2011/04/toc-implementation-at-lucent2011.html http://tocca.com.au/toc