Theory of Constraints Handbook - James Cox Iii [256]
Other TOC Metrics
An ideal TOC operation has minimal fire fighting and expediting, no chaos or brutal overtime, and sufficient orders with reliable promise dates entering the system. In order to accomplish this desirable environment, it is critical that sufficient raw materials are on hand,41 minimal (but sufficient) WIP and FG inventories are held, orders are delivered on time, appropriate buffers are established, buffer penetration (consumption) is tracked, and performance is continuously improving. In addition to the previous metrics, some general measures that organizations have found useful include the following:
On-time deliveries—1 minus the ratio of late orders, weighted by days late, divided by total orders.
Throughput per employee—Throughput (revenue minus variable costs) divided by number of employees.
Inventory turns—Variable cost of sales divided by average Inventory held during the period.42
Throughput per unit of Operating Expense—Throughput divided by Operating (fixed) Expenses.
Of course, specialized industries have developed many other TOC metrics to provide feedback and control information in real time, or close to real time.
Sensitivity Analysis
The same metrics used for Throughput control can be used to perform “What if?” types of calculations. Sometimes decisions must be made quickly without time for submission to another person or department for analysis. In order for operating people to be able to analyze a situation quickly, they need a simple-to-understand method. For example, the same “value days” formula illustrated earlier for Inventory and Throughput control can be used to compare various possible investments. Four examples of $60,000 investment opportunities, each with different cash flows, are shown in the “Investment Examples” spreadsheet of the file “VALUE-FORMULAandEXAMPLES” (located online at: www.mhprofessional. com/TOCHandbook.
A “flush” point, where all value days’ cash investments have been recovered, follows Goldratt’s (1997, 246) development and is contrasted with payback period.
For comparison purposes, net present value (NPV) calculations are shown alongside the value-days calculations. For short-term (less than one year) decisions, NPV does not change significantly when using discount rates ranging between 10 and 20 percent. While the decisions indicated by NPV match those of the value-days calculations for three of the investment opportunities, although with much less clear discrimination, in one example, NPV indicates an acceptable investment and the value-days analysis shows it is unacceptable. The rationale behind using value days rather than NPV is that investment amounts are constrained by availability, not interest rates.43
Throughput Accounting Approach to Performance Evaluation
TOC is very much a team sport. Therefore, evaluation should be on a team basis. Individual evaluation should be in the form of mentor feedback for improvement, as indicated by a request from the individual involved or a supervisor. In the absence of a clear need, feedback provided to individuals should not be used to evaluate performance. If a team is downgraded due to performance of one or more individuals, the team is expected to correct the problem. One company in Austin, Texas, hires all employees on a temporary basis for three months. At the end of the trial period, the team meets and decides whether a permanent position is offered.
Possible Explanations for the Lack of TOC Literature in Accounting and Finance
Three major reasons account for a dearth of TOC literature in accounting and finance. First, accounting students generally are not well trained in internal reporting and operations management. I believe that this may be because the Certified Public Accounting (CPA) professional examination has contained only about 10 percent of internal reporting material