Price every loss before ranking it

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Most plants can list their losses. Fewer can say what each one costs. This piece sets out the argument for pricing every loss before ranking it, and the questions that pricing has to answer.

Price a loss in three steps

A loss becomes comparable once it is expressed in hours of the constraint. Hours convert to units at the line’s rate, and units convert to cash at the margin the plant would have earned. Each step carries an assumption, and each assumption belongs beside the number.

Exhibit 1 · The capacity you already own

In this illustrative line, four losses take 1,312 of 6,000 planned hours

Illustrative data

Planned production time and losses, one constraint line, one year, hours

Show data table

In this illustrative line, four losses take 1,312 of 6,000 planned hours (Planned production time and losses, one constraint line, one year, hours)
Item	Value	Unit	Cite
Planned time	6000	hours per year	`Illustrative`
Changeovers	-500.0	hours per year	`Illustrative`
Unplanned stops	-300.0	hours per year	`Illustrative`
Slow running	-416.0	hours per year	`Illustrative`
Scrap	-95.7	hours per year	`Illustrative`
Fully productive time	4688.3	hours per year	`Illustrative`

Link to this exhibit

Note: Not a description of any real plant. Replace the assumptions with your own.

Source: Illustrative data. Trapped Capacity illustrative line model; assumptions are listed in Chapter 5.

From: The capacity you already own, Exhibit 10

The ranking changes when the price arrives

A list sorted by frequency answers a different question from a list sorted by cash. Priced at $1,200 an hour of contribution, the four losses on the flagship report’s illustrative line cost $1.65 million a year (Illustrative). None of the line’s inputs describes a real plant.

Exhibit 2 · The capacity you already own

In this illustrative line, the four losses cost $1.65 million a year

Illustrative data

Annual cost of losses, one constraint line, thousands of dollars of contribution, plus variable cost of scrapped units

Show data table

In this illustrative line, the four losses cost $1.65 million a year (Annual cost of losses, one constraint line, thousands of dollars of contribution, plus variable cost of scrapped units)
Item	Value	Unit	Cite
Changeovers, contribution	600.0	USD thousand per year	`Illustrative`
Slow running, contribution	499.2	USD thousand per year	`Illustrative`
Unplanned stops, contribution	360.0	USD thousand per year	`Illustrative`
Scrap, contribution	114.8	USD thousand per year	`Illustrative`
Scrap, variable cost of scrapped units	76.5	USD thousand per year	`Illustrative`
Total	1650.6	USD thousand per year	`Illustrative`

Link to this exhibit

Note: Prices apply only on a constraint line with demand above output. A scrapped unit forfeits the contribution of its line time and its variable cost. Not a description of any real plant.

Source: Illustrative data. Trapped Capacity illustrative line model: price $2.00 and variable cost $0.80 a unit ($1.20 contribution), 1,000 units an hour ($1,200 a constraint hour).

From: The capacity you already own, Exhibit 11

Show the priced account in the capital request

Before a site asks for a new line, the committee should see the priced account of the lines it already has. The flagship report sets out how to build that account.