Haystack Syndrome 3

Wednesday, September 5th, 2007

In The Haystack Syndrome, which I was just discussing, Goldratt expands his original example by supposing that the marketing director visits Japan — the book was published in 1990, remember — where demand for Products P and Q is almost the same as in the states — but at a price 20 percent lower.

We previously calculated that each P sold was worth \$3 per minute on Resource B, the bottleneck, and each Q was worth \$2. Now, each P sold to Japan is worth less than \$3 per minute. In fact, each P sold to Japan is worth just \$27 — costs didn’t decrease by 20 percent, just the selling price — which is less than \$2 per minute. So we don’t want to sell any product to Japan.

What happens if we increase our capacity? Let’s assume that we can buy another B machine for \$100,000, and we can pay another B worker for \$400 per week. (These numbers obviously aren’t real, even for 1990.)

Now we can sell 100 of Product P and 50 of Product Q in the states for a total contribution (or throughput) of \$7,500. Even after we subtract out our now-higher fixed costs of \$6,400, our net profit is \$1,100, or \$800 higher than the \$300 we were making before. That machine will pay for itself in 125 weeks.

Right?

Oh, wait, maybe we can sell to Japan now. We’ve lifted the constraint on Resource B, but now Resource A has become the bottleneck. By selling 100 of Product P, we’re using 1,500 minutes of Resource A. By selling 50 of Product Q, we’re using 500 more minutes of Resource A. We only have 400 minutes left to throw at Japan. With 400 minutes at Resource A, we can produce about 26 more units of Product P, for another \$700 in contribution (or throughput). That almost doubles our previous improvement.

It’s a good thing we didn’t stop our analysis too soon; it almost cost us a lot of money.

Wait a minute, our constraint shifted from Resource B to Resource A, and we didn’t recalculate everything, even though changing our constraint changes everything. If Resource A is our constraint, then Product P has a throughput of \$3/minute, and Product Q has a throughput of \$6/minute! Product P sold to Japan now has a throughput of less than \$2/minute, and Product Q sold to Japan now has a throughput of \$4/minute.

With our 2,400 minutes of Resource A, we should be making Product Q for the states (500 minutes), then Product Q for Japan (500 minutes), then Product P for the states (1,400 minutes). We should produce no Product P for Japan. Then we can bring in \$3,000 + \$2,000 + \$4,200 = \$9,200 in contribution (throughput), for a net profit of \$2,800, which dramatically improves our profit again!

Inertia can cost you a lot of money.