Page 4 - CIMA MCS Workbook November 2018 - Day 2 Suggested Solutions

CIMA NOVEMBER 2018 – MANAGEMENT CASE STUDY

This will mean practical things such as not letting the bottleneck process go idle as this means
zero production capacity while it is idle. It also means that the products that generate the most
cash flow should be made while there isn’t enough capacity to make everything that we want to.
This involves the use of throughput accounting.

In throughput accounting we can identify the products that make the most efficient use of the
bottleneck by calculating something called a throughput accounting ratio (TPAR). This takes into
account both how much throughput contribution the product earns (a measure of profitability in
the short‐term) and how long the product takes on the bottleneck. The higher the TPAR the more
efficiently the product makes use of the bottleneck.

Production should focus on products with higher TPARs to ensure that the highest level of
throughput is earned while the bottleneck exists.

The third TOC step says that everything else should be subordinated to the decisions made in
step two. This means aligning factory operations with the production of a limited range of goods,
as decided using throughput accounting.

This may mean cancelling orders for raw materials of the products we won’t be making, or asking
other workers to come and help out on the bottleneck process so that it is never idle.

The fourth step of the TOC is the one that addresses the bottleneck over the longer‐term.
Businesses shouldn’t wait to do the fourth step until the second and third have been addressed,
but should start on it as soon as the bottleneck is identified. It aims to elevate the bottleneck, or
remove it.

If a machine has broken down, then the best case scenario is that we engage somebody to fix it.
This could mean having to order and wait for parts. The worst case is that the machine would
have to be replaced completely. This would take an even longer time, needing for a capital
purchase to be authorised and possibly even for funding to be sourced for the purchase. Steps
two and three of the TOC will be ongoing while we wait for step four to be achieved.

Once step four has been completed, we then need to look at the final step, which is to go back to
the beginning and identify if we still have a bottleneck or whether we are now able to produce
everything our customers need. If another bottleneck is identified then we repeat the steps.

The theory of constraints doesn’t mean that we will be able to satisfy customer demand when a
bottleneck exists, so we wouldn’t be able to prevent all of the issues that TigerFizz had. But it
would allow us to continue making as much of a positive cash flow as possible while it was being
dealt with.

However, other considerations may apply. It may be that we feel that we have to supply to our
most important customers even when production is limited. This may mean making products that
wouldn’t be chosen using throughput accounting. This would be a commercial decision to be
made in such an event.

Finance Manager

94 KAPLAN PUBLISHING