How Much Money Is Stuck In Your Factory?
In the book, The Goal, Alex and his team narrowed down on three basic measures they thought would tell them how their factory was performing.
? How much money is going in the factory?
? How much money is stuck in the factory?
? How much money is flowing out of the factory?
In technical terms, the money going in the factory is operational expense whereas the money flowing out is the sales. And the money stuck inside your factory, is nothing other than Work in Process (WIP).
Somehow everyone keeps a track of inflow and the outflow of money but rarely is the money stuck in the factory accounted. Even if it is accounted, very few managers are able to predict threatening situation due to it.
What is WIP and why is it important?
WIP is basically any inventory which has begun the manufacturing process but is not a completed product. If we wanted to represent WIP in form of a formula it would be:
Actual WIP = input – output
WIP inadvertently is a very good cloaking technique. A higher WIP helps everyone to keep busy without actually increasing the production. Understanding the drags of having a higher WIP is important here, few of which would be:
? Not realising the pain areas of the production line,
? Having a higher reaction time to quality problems and
? Having a higher throughput time for orders.
Whereas having a lower than required WIP will result in drying up your line, reducing your production output, lowering your efficiencies and increasing your operational expenses. This makes it quite unprofitable for any manufacturing set up.
Running a factory with optimum WIP levels across all the departments makes it quite literally a balancing act on a tight rope. One of the major reasons of higher WIP in the manufacturing process are the variations in the output of different processes or simply put an unbalanced manufacturing process.
Suppose there are two processes, Process A & Process B, each producing at a rate of 50 pcs/hour and 100 pcs/hour. If process A is preceding B in sequence then B will never be able to produce at its highest capacity and there will be no WIP in between these two processes. If process B precedes A in sequence then at the end of first hour there will be a WIP of 50 pcs and will keep increasing every hour.
Every factory management in the designing phase tries and balance the manufacturing setup based on standard assumptions. This balanced state is even though planned with best assumptions will never be able to predict day to day variations and will result in abnormal WIP levels with progression in factory operations.
This results in a disrupted flow of the material through the setup, resulting in money being stuck in the factory.
How much money is stuck in a factory?
For the sake of deriving a functional depiction, let us consider a factory producing 25,000 denims every day, working for 8 hours with 1,000 machines. If we were to put a number to money stuck in this factory based on standard WIP assumptions, then the total money amounts to $ 2.33 Mn*.