Theory of Constraints Handbook - James Cox Iii [677]
Every function and task within the enterprise is connected and therefore its outcome will affect other parts of the enterprise. Therefore, regardless of the complexity we must understand the cause-and-effect relationships the functions and tasks have on the individual parts and more importantly on the performance of the entire enterprise.
Every part of the enterprise is subject to uncertainty, which is simply another way for describing the inevitable variability experienced in actual execution. Regardless of how meticulous our planning and scheduling, when actually executed, uncertainty and variability will inevitably affect our efforts.
These two tenets (dependent events and statistical fluctuations) provide the foundation for developing any breakthrough holistic approach (Goldratt and Cox, 1984, Chapter 15 and 17), leapfrogging our ability to significantly increase the Throughput (discussed later) of a single enterprise or the larger value-added processes of an entire supply chain. Another important element of this new holistic approach is providing relevant performance and operational metrics to monitor the stability of the enterprise on a day-to-day basis. These metrics must provide connectivity on the short term, highlighting when and where specific action must be taken while providing longer-term visibility for effective risk management.
An operational metric must have a cause-and-effect relationship providing connectivity between an action taken and the positive or negative impact it will have on the organization’s Throughput. Therefore, in most cases if these operational metrics are providing the priorities for managing, they are focused on increasing Throughput. As this is done, the recurring costs shall not increase and any variable cost increase will be significantly less than the corresponding increase in sales. An example of an operational metric is using the speedometer in an automobile while driving on a trip. The output of the speedometer is the effect of the input of how hard we press down on the accelerator pedal. Therefore, if we have calculated the average speed that must be maintained in order to complete the journey on time, the information received from the speedometer will allow us to take the correct action. This is in real time, not in hindsight. In this example, a performance metric would be measuring on the road map the distance covered during the journey. Measuring the variance of the distance covered vis-à-vis what was expected to be covered is important but of very little use in making real-time operational decisions.
Throughput Accounting
The Theory of Constraints (TOC)3 defines Throughput (T) as Sales $ (S) minus Truly Variable Costs $ (TVC). It should be pointed out that all recurring costs including fixed labor costs are captured as Operational Expenses (OE) (Corbett, 1998).
If decisions are being made using operational metrics and they are focused on increasing Throughput, then it is possible to have the organization’s financial metrics aligned as well (Corbett, 1998). TOC builds on this concept and recognizes that an organization is a system and therefore regardless of how well it is managed, its ability to increase Throughput will be limited by the system’s constraint. Furthermore, if we have identified what and where the constraint is and we are subordinating everyone’s efforts toward maximizing its effectiveness, then we have unlocked the secret for maximizing the organization’s Throughput (Goldratt and Cox, 1984).
As we can see in Fig. 35-2, we now have a model for resolving