| Recommended: If you want to learn more on this topic.. Unless you are willing to commit to a workshop with a TOC Expert, you cannot beat the educational material developed by Eli Goldratt, the originator of the Theory of Constraints. He is an amazing teacher. The 8 Videos in his Satellite Program are a best-buy for a company, intended for use by groups of employees. His provocative coverage of every industrial application of TOC challenges managers to think in new directions, and to recognize the sacred cows in their organization and their own thinking. The 16-CD Self Learning Program is extracted from the same material but intended for use by individuals on their own PCs, rather than groups. The TOC Insights is a new interactive PC-based tool for individuals. As a TOC Expert I thought they were too "cute" ... until I used them with clients. They proved to be highly effective learning tools for the 5 major applications, and the Distribution and Supply Chain solution is documented in detail here for the first time anywhere. |
Planned: a Monthly TOC EZine This EZine is intended to be 100% practical, offering tips, advice and illustrations of users' experiences with the different TOC applications. TOC Experts with practical suggestions to real problems encountered with clients will also contribute. The EZine will promote the use of TOC in combination with other technologies, for improved results. We will be taking subscriptions soon. |
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Highlights the dysfunctionality of Cost Accounting for decision-making Simple, intuitive alternative makes sense to managers True relative profitability of products becomes clear Barriers to improvement are removed |
Throughput-Based Decision Making
In a near-legendary presentation in 1981, Eli Goldratt declared Cost Accounting to be "Enemy #1 Of Productivity." He could with equal accuracy have called it Enemy #1 of Profitability ... especially for a manufacturing business. Throughput Accounting, or as some prefer to call it Throughput-based decision making, is the replacement.
The need for new measurements
Once the Goal (or at least, a vital element of the Goal) of a manufacturing organization is acknowledged as "make more money, now and in the future," and the common measurements of global performance have been adopted – Net Profit, and some relative term such as Return on Investment or Return on Assets – the need for additional measurements is vital.
The role of these measurements is straightforward – to help managers judge the impact on the global performance of the organization of a "local" decision or action.
For example, how do decisions in production or sales or purchasing impact the global performance measures?
Most managers have assumed that Cost Accounting fulfilled that role, in the shape (originally) of fully-allocated standard cost accounting, and more recently in the shape of Activity Based Costing. It is relatively simple to show that the "information" derived from virtually any form of cost accounting does not support good decision making. In fact, it often encourages bad decision-making. That is, "bad" in terms of encouraging managers to make decisions that are counter to the organization’s financial goals. (This shouldn't be a surprise, by the way; Management Accounting texts have long had this right, it's just that no-one ever paid attention. Cost Accounting does have a valid role in organizations ... but NOT for operational decision support).
Corbett’s book Throughput Accounting, is one of several publications that provides detailed numerical examples to accompany an explanation. The Theory of Constraints and its Implications for Management Accounting by Noreen, Smith & Mackey provides analysis and some case studies. Various Goldratt books and other Goldratt publications have rigorously and vigorously been making the point for 20 years.
What replaces the flawed traditional measurements?
But what replaces these measurements?
That’s why Throughput Accounting was developed – to provide managers with a basis for accurately assessing the bottom-line impact of a decision or action, so that they know whether the action is leading the organization towards its financial Goal or away from it.
Throughput Accounting usually makes intuitive sense to everyone at all levels of a manufacturing organization – it is simple, and logical. It demands less data than conventional Management Accounting, and it is more tolerant of inaccurate or incomplete data. Its principal value, though, is simply that it supports better (and faster) decision-making. Moreover, the data needed for effective Throughput Accounting is mostly available within organizations using any form of conventional management accounting. It usually requires no additional effort to collect or maintain.
Prepare for surprises
Managers should be prepared for some surprises when they view their products and their operation from a Throughput Accounting perspective. The relative profitability of products in conventional accounting is often proven to be meaningless (which itself answers many frustrating questions for many managers), and many decisions that seem sensible but are contradicted by conventional cost accounting measurements will be found to have philosophical and numerical support in Throughput Accounting.