Monday, September 9, 2019

Another New Book Part 13

This post is, once again, taken from my newest book, Theory of Constraints, Lean, and Six Sigma Improvement Methodology – Making the Case for Integration. Specifically, the material for this series is taken from Chapter 5 entitled, A Better Way to Measure a System’s Success. As I explained in my last post, readers that are totally familiar with the Theory of Constraints might find this series a bit basic, but I’m writing this series for those who are not totally familiar with the Theory of Constraints.

Let’s now look at this same company using Throughput Accounting (TA) and see if the results tell us the same things or not as described in the table below.  TA provides an entirely different perspective when looking at this business and its potential product mix.


TA ranks product profitability according to Throughput on the constraint per minute (T/CU/t).  In addition, it does not allocate Operating Expense (OE) to products.  So, based upon this, Product A yields $4 per minute on the constraint, Product B yields $4.17, and Product C yields $4.44.  TA says the priority should be to produce as much of Product C as capacity will allow, then Product B, then Product A (the exact opposite priority of CA).  Because Step 2 is the system constraint, producing 100 units of Product C, 100 of Product B, and 20 of Product A is all that can be done.  With this product mix from Throughput Accounting, instead of a $250 loss when using Cost Accounting, this business generates a net profit of $200.  The only difference being the product mix!

[1] Effective use of Throughput Accounting requires different information than from Cost Accounting, so new report formats must be implemented.  For example, a Throughput Accounting earnings statement shows T, I, and OE relative to the constraint, while conventional Cost Accounting reports are oblivious to the constraint.  Just as CA and TA rank product profitability differently, they may also rank customer profitability quite differently.  Several Throughput Accounting outcomes are noteworthy:
  •       Financial measures reverse management priorities from OE, T and I (for Cost Accounting) to T, I, and OE (for Throughput Accounting).

  •       Performance measures for Throughput Accounting are not distorted by cost allocations for Cost Accounting.

  •       Constraint measures eliminate conflict between local measures (machine utilization or operator efficiency) and global measures (performance of the business).

  •       Control measures remove the incentive to build excess inventory and replace it with the incentive to deliver products on time.

In my next post, we will review the primary components of Throughput Accounting, starting with Throughput.  As you will see, Throughput at your Company is achieved by processing parts, selling or delivering them to customers and receiving payment for all goods you sold.