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Within manufacturing, the production of revenue is distributed over many different revenue streams. A revenue stream is a path through the company that, when completed brings in money to the company. A revenue stream starts when a customer places an order and finishes when he pays his bill. In accounting, we recognize revenue when the order is shipped and the invoice issued.

Each revenue stream will have a constraint. Once and order is received it sets in motion a series of events which, when executed, will bring money from the customer to the company. The problem becomes more complicated when resources used to produce output are shared by multiple revenue streams.

In the world of cost accounting, what something cost if calculated by adding the cost of the raw material to the labor, machine rate, and the manufacturing overhead burden rate. What something will sell for is calculated by taking the cost and adding a margin to it which is used to cover the Sales General and Administrative overheads.

The Labor, Machine and Burden rates are multiplied by the time recorded for the set up time and run time for each operation. When you sum up the total time it takes to set up and run each operation you find that it is a relatively short period of time. However, if you compare that to the total time span to produce you find a great disparity. For example, let us say a manufacturer is producing a formed metal part that requires five manufacturing steps. Each step has a setup time and a run time. He has to produce 50 pieces. Each operation has a set up time of 30 minutes and a run time of 60 minutes. The sum of the process time would be 2.5 hours of set up and 5 hours of run time for a total of 7.5 hours. In most manufacturing companies if you tracked the total time to produce, you would find the time span can be several weeks from start to finish. Let us say it tracks to be 14 shifts total time span. If it only takes 7.5 hours (roughly one shift) to produce per the sum of process times, what is it doing for the remaining 13 shifts? It is sitting and waiting to be worked on. The result is that the recognition of revenue is delayed for 13 shifts because of time lost waiting for the part to be worked on.

Being in the manufacturing business, I have always watched as estimators and schedulers would give customers 8 to 10 week deliveries on parts that had total process times on only several hours. How could this be? In order to understand this we began to track the amount of work that would accumulate in front of each work center. We called this Queue. It was simply a list of all the jobs that had arrived at that operation and had not yet been worked on. We totaled the amount of set -up and run time and arrived at the total number of hours of work that had to be performed by that work center. In order to make the time span meaningful we factored that total by the historical efficiency (Total estimated times divided by the total actual times). In doing this it would give us a better picture as to the actual time span it would take to do the work in that work center. If we then summed the total number of days of queue for all of the work centers in the revenue stream we would be able to give a prediction as to the time span through manufacturing for the next part starting the process.

After we added it all up we discovered something that seemed to contradict what we thought we would find. What we thought we would find was that the queues would be high in front of the constraint and low every place else. What we actually fond was that the queues where high everywhere. How could this be? According to constraint theory, we could only have one weak link. But here, we had week links all over the place. Could we have discovered the method for making all the links equal? I knew that this was a mathematical impossibility. It took me awhile to figure it out. I finally realized that I was seeing Parkinson's Law in the flesh. Parkinson's Law says that "Activity will rise and fall to meet the available work load". If you crawled inside the skin of a factory worker you would find and person who is very aware of their surroundings. They have watched foreman and managers for years. They have learned that people who have gotten all their work done get to help someone else who hasn't. And people who are always jammed up with work don't laid off when it gets slow. They have also learned that if they are jammed up with work they are likely to get overtime when a customer starts complaining about a late shipment and parts need to be expedited. Anyone who thinks that the foreman runs the shop is living in denial. The people on the floor have learned to perform based on the real measures we have imposed on them.

The formal measures are invalid. What are the formal measures? Well, for each operation, we develop a standard or estimated time for set up and run. Then we track how long it actually took. What are we measuring and what does it say about performance? Remember our original assumption about what something cost and what we sell it for? That is what typically generates the standards. If we measure the performance of the operator based off the standard then is he performing poorly if it takes longer to do? Or is the estimator performing poorly by not estimating correctly the time it will take to do. Or is the pesky customer having an influence on the estimator because he wants to pay less, so the estimator shaves the times so that the price will work? It doesn't take long for the people on the shop floor to figure out that they can justify their way out of any variance to standard that comes down the pike. It also doesn't take long for the foreman to figure out that it is hopeless to try to hold floor people accountable for the times it takes to do things.

So what do they all resort to doing. Well in the absence of a truly meaningful goal, which has to come with a truly meaningful measure, decisions of each person involved become based on what is good for them. Remember, when we originally created the estimate it was based on our goal of making a profit on this particular order. Now the foreman is making decisions to keep the salesman off his back because the order is late, the estimator is making decisions based off of pressure from the customer sales person about prices, and the people on the floor are making decisions about what they should do based on making overtime, postponing lousy jobs hoping someone else might end up doing it, and keeping the work piled up in front of them so as to not get laid-off when things slow down.

It is a wonder that manufacturing can even still exist in this country. It is not surprising that manufacturing has moved to those areas of the world where the work force is not only less expensive but the work ethic is better. That is not to say that the work ethic in this country is bad. It is just confused and mismanaged beyond belief. Why? Well, it all goes back to the government. The government collects taxes. Therefore they have rules by which the taxes are determined. These rules drive the accounting rules and the accounting rules are what we use to measure our profitability so we can determine how much to give to the government and how much to keep. The fundamental flaw in all of this is that we are measuring how much profit the company is making and we assume that the same formulas to determine profit and loss apply just as logically to a specific order as it does to a company. It does not. Also keep in mind that the government has a vested interest in you maximizing your profit so as to maximize its tax. That is why you can spend $500,000 on a piece of equipment and pay it all out in cash at one time, but the government says that you can only take 1/15th of its value against cost of doing business. Or that you still own, even though you've paid someone for it, all the labor and overhead that gets buried in your inventory and work in process. You see the problem that this creates is that while according to accounting practices you can be making all kinds of profit yet at the same time run out of cash. And cash is what keeps you in business. And cash is what you use to pay, bills, taxes, dividends, materials, airline tickets, and greens fees with.

So why not measure your business on how well it creates cash as opposed to how much profit it makes?