Another New Book Part 14

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.

In this post, we will now review the primary components of Throughput Accounting, starting with Throughput.  Throughput at your company is achieved by processing parts, selling and delivering then to customers, and receiving payment for all goods you sold. Again, inventory is not throughput!

Inventory or Investment ( I ) is primarily the amount of WIP and Finished Goods inventory, but it also includes all purchased parts for sales or the equipment, buildings and other assets required to produce parts, if you’re a manufacturer.  The real key to reducing “I” is to stop the practice of pushing orders through your processes and replace it with pulling orders through your processes. Use the concept of nothing comes into your process until something exits the constraint (synchronizing flow).  Too much WIP at one time leads to extending the productive cycle time of every part, causing late deliveries of parts and unhappy customers.

Operating Expense is all the money the system spends in order to turn inventory into throughput including all labor costs.  The key for your Company to reduce labor costs is by improving Throughput at a much faster rate by removing waste and variation within the constraint.  In doing so, this will reduce the dependence on overtime to play catch-up and reduce overall $’s spent on overtime.  It will also improve the morale of the workforce because you have eliminated the fear of layoffs.  Think about it, if you can generate additional Throughput with the same OE, you will return much more to your company’s bottom line.

So, there’s your comparison of these two distinctly different accounting methods.  It should be clear to you that if you continue using traditional Cost Accounting to make your key decisions, like product mix, your company could be missing an opportunity to make more money.  And since the goal of most companies is to make money now, and in the future, doesn’t it make sense to use Throughput Accounting to make your real time financial decisions?

[1] John Arthur Ricketts, Reaching the Goal – How Managers Improve a Services Business Using Goldratt’s Theory of Constraints, 2008, IBM Press

In my next post, we will begin a completely new subject.

Bob Sproull