(Note: This case relates to the appendix on the Theory of

Constraints.)

Five Star Tools is a small family-owned firm that manufactures

diamond-coated cutting tools (chisels and

saws) used by jewelers. Production involves three major processes.

First, steel "blanks" (tools without the diamond coating)

are cut to size. Second, the blanks are sent to a chemical bath that

prepares the tools for the coating process. In the third major process,

the blanks are coated with diamond chips in a proprietary

process that simultaneously coats and sharpens the blade of each

tool. Following the coating process, each tool is inspected and defects

are repaired or scrapped.

In the past 2 years, the company has experienced significant

growth and growing pains. The company is at capacity in the coating

and sharpening process, which requires highly skilled workers

and expensive equipment. Because of the bottleneck created by

this operation, the company has missed deadlines on orders from

several important customers.

Maxfield Turner, the son of Frederick Turner, founder of

Five Star Tools, is the president of the company. Over lunch he

and Betty Spence, vice president of marketing, discussed the

situation. "We've got to do something," Betty began. "If we don't

think we can meet a customer's order deadline, we should turn

down the business. We can't simply keep customers waiting for

product or we'll develop a reputation as an unreliable supplier.

You know as well as I do that this would be devastating to our

business."

"I think there may be another approach, Betty," replied Max.

"Some of our products are exceptionally profitable. Maybe we

should concentrate on them and drop some of the less profitable

ones. That would free up our production resources. Or maybe we

can figure out a way to run more product through the coating

process. If we could just loosen that constraint, I know we could

improve our response time and profitability. I'll tell you what I'll

do. I'll get the accounting department to prepare an analysis of

product profitability. That should help us figure out which products

to concentrate on. And I'll get the production people thinking

about how to free up some time in coating. We'll meet early

next month and try to get a handle on how to deal with our production

constraints."

Required

a. What steps can be taken to loosen the constraint in coating

and sharpening?

b. Consider Model C210 and Model D400 chisels. Which

product should be emphasized if the constraint in coating and

sharpening cannot be loosened?

c. Focusing only on the Model C210 chisel and the model D400

chisel, what would be the benefit to the firm of gaining one

more hour of production time in coating and sharpening?

d. In coating and sharpening, the operator begins by inspecting

items that have arrived from the chemical bath. If rough edges

or blemishes are detected, the operator smooths and/or buffs the

items before actual coating or sharpening takes place. (Note that

this process is in addition to the inspection that takes place at a

separate inspection station following coating and sharpening.)

In order to save valuable time in coating and sharpening, management

is considering forming a separate inspection station

before

the coating and sharpening process. The inspection station

can utilize existing smoothing and buffing equipment, and it can

be staffed on an as-needed basis by an employee who normally

works in the chemical bath area, which has excess capacity (so

the employee will not be missed for brief periods). Management

estimates that this action will free up 240 hours in coating and

sharpening ([an average of 5 minutes per hour 8 hours per

day 360 operating days per year]/60). Management has calculated

that the average contribution margin per unit for its products

is $300. The average contribution margin per hour spent in

coating and sharpening is $850.

Based on this information, estimate the incremental profit per

year associated with adding the new inspection station.