Theory of Constraints Handbook - James Cox Iii [301]
1. How much constraint capacity (that governs the overall system throughput) and critical chain time (longest path of dependent events that govern total lead time) is being wasted (poor constraint or critical chain exploitation).
2. How much unnecessary costs or investment incurred to validate (or invalidate) the level of inherent potential (e.g., profitability) can be unlocked without any significant investment in more or better resources.
We can represent this opportunity within the model with Fig. 15-14.
We can apply the same logic to validate or invalidate whether it is possible to achieve the same Throughput with less resources (truly variable costs, Operating Expenses or Investments). We can determine this through observations, studying “best-of-breed organizations,” or simply identifying all possibilities where truly variable costs, Operating Expenses and Investments are incurred unnecessarily (events such as overtime cost, emergency shipments, or unnecessarily investing in more capacity than needed because of starvation or blockage caused elsewhere in the system). Once these categories of avoidable or unnecessary truly variable costs, Operating Expenses and Investments have been identified, we can then validate whether they exist within the organization we are analyzing and, if so, to what extent they exist as a reliable way to quantify the “inherent” improvement potential. Then, tests can validate how much of this potential we can unlock without significant investments.
FIGURE 15-14 Quantifying inherent potential by looking for performance gaps/variation.
Figure 15-15 shows a summary of the hypotheses, magnitude of inherent potential and validation that, in most organizations, it is possible to do more with less in less time. “More” by achieving higher Throughput by not wasting any constraint capacity;“with less” by achieving lower truly variable costs, Operating Expenses or Investments by eliminating the causes of avoidable costs and investments; and “in less time” by achieving shorter lead times by eliminating causes of delays on the critical chain.
Overcoming the Difficulty to Quantify the Impact of Change Initiatives
One of the key requirements of adopting a systems approach to continuous improvement and auditing is the ability to judge the impact of decisions on the system as a whole—especially the impact of financial decisions. For most managers in organizations, the idea of trying to evaluate the impact of their local decisions or proposed investments on the “system as a whole” is a daunting, lengthy, and frequently frustrating experience (especially if they need to make a decision quickly). Throughput Accounting (TA) was invented by Goldratt (1990a) to meet this challenge as an alternative to cost accounting. TA (according to the IMA Statement 4HH on TOC) differs from traditional cost accounting, first in its recognition of the impact of constraints on the financial performance of an organization (i.e., if a decision impacts the constraint, the system’s Throughput will be impacted and vice versa); and second in that it separates totally variable cost from Operating Expenses (OE) (all costs that are not totally variable with increased/decreased production) to assist with faster and better decisions. This definition removes the need to allocate all costs to products and services, which frequently results in sub optimum decisions when managers erroneously assume that once OEs are allocated they become variable.
FIGURE 15-15 Identifying the inherent potential to “do more with less in less time.”
TA improves profit performance (even for not-for-profit organizations) with better and faster management decisions (Corbett, 1998), by using measurements that more closely reflect the effect of decisions on three critical monetary variables—Throughput, Investment/Inventory, and Operating Expenses (defined below). Goldratt’s alternative begins with the idea that each organization has a goal and that better decisions increase the amount of goal