TOC - Theory of Constraints and Throughput Accounting
- The Ultimate Management Tools For Value Creation -
68% Revenue Increase
50% Inventory Reduction
82% Combined Financial Improvement
69% Lead Times Reduction
Average Performance improvements reported on "Analysis and discussion of successful TOC applications" by S. J. Balderstone and V. J. Mabin (2003) surveying a sample of 81 Organizations - from large multinational manufacturers to local enterprises - implementing TOC
Principles of TOC
"Theory of Constraints" (TOC) is the ultimate management tool to help companies maximizing their organization's goals, being them Profit or no-profit objectives.
TOC starts from a simple observation: whatever the complexity, each organization is limited by few or perhaps only one variable to optimize its result.
Those variables are the constrained resources, may them be the market, capacity or behaviors.
The Theory of Constraint is a holistic approach to help organizations managing at best or elevating their constraints to maximize the creation of Throughput, that ultimately is the amount of money an organization is able to produce through sales.
More than just a Theory
The "Theory of Constraints" is far more than just a theory. TOC provides tools and approaches alternative to Lean for balancing the flow of operations aiming to maximize the creation of Throughput.
While Lean principles for optimizing flow - Heijunka Scheduling and Kanban System - have been designed to fit a specific operating context (the Toyota Production System), TOC has been developed around holistic principles that can be applied by any organization.
TOC perfectly fits with Lean and Six Sigma applications, giving life to a new practice called TLS: TOC for the flow optimization, Lean to standardize and reduce waste, Six Sigma to reduce variability and defects.
Why Throughput Accounting
Traditional management accounting systems - Full Manufacturing Costing or Activity Based Costing - are based on an "inherent wrong assumption": the possibility to manage capacity costs as a like-kind of variable costs.
Due to unstable product mix, demand and volumes, they both fail allocating costs to products and thus require complex variance analysis and leading to wrong decision making.
They provide incentives for local optimizations, that in turns do not favor the optimization of flow.
Throughput Accounting removes the limits of such accounting models, introducing a measurement system that promotes actions and behaviors oriented to improve flow.
Maximize Value with Theory of Constraints & Throughput Accounting
Theory of Constraints aims at balancing the flow of operations as the most effective approach to maximize throughput, the ultimate Goal of a profit-oriented organization.
To speed up the production flow, TOC suggests approaches oriented to increase the flexibility - like reducing batches, increasing the number of set-ups, using suboptimal routings to off-load the constraints - that are necessary to improve the flow but that are in conflict with traditional measurement systems focused on local optima.
Throughput Accounting with its simple and linear approach to manage costs, removes all such conflicts, becoming the perfect link between Finance and Operations.
It is extremely simple to link for instance Sales & Operations Planning and Resource Planning processes to your P&L results. With the support of Theory of Constraints Principles, Throughput Accounting helps simulating quickly your MPS to optimize throughput at constraints.
It is simple and flexible to adapt to very dynamic environments, where traditional systems fail to adapt or requires too much efforts to adapt.
Take Advantage of TOC and Throughput Accounting
Maximize Productivity and Throughput
How this set of solutions help to maximizing throughput and profits?
First of all, because TOC and Throughput Accounting set the focus on the right variables to improve profitability: a manager that knows the TOC principles knows exactly what to do and what not to do to improve the flow and thus profitability performance.
Second, because - given the same conditions, Throughput Profitability Analysis as well TOC scheduling Drum-Buffer-Rope and the 5 focusing steps provide tools for management for making the right decisions how to improve performance of constraints with the goal to maximize the organization's global outcome rather than achieving only local efficiencies.
Improve the Cash-to-Cash Cycle Time
TOC approach, with its focus to improve flow, allows to expedite the Cash Conversion Cycle, that in certain environments represents the root cause of long Cash-to-Cash Cycle Time.
By improving flow, lead times gets shorter, resulting in improvements in the level of WIP and in the overall level of inventory, leading to a better financial position.
Contrary to full-costing methods, Throughput Accounting provides no incentives to build extra-inventory as they will not improve the economic performance, due to the different costing logic behind.
With better cash-to-cash-cycle times, the organization enjoys more resources that improve its competitive position on the market and toward its customers.
Defines Different Behaviors
Thanks to its different approach, Theory of Constraints principles force management to think differently.
Rather than setting the focus on reducing Operating Expenses - that beyond certain limits create risks to operations performances - TOC and Throughput Accounting force managers to think with different priorities: (1) improve throughput; (2) minimize inventories and (3) then look at the operating expenses when the flow is optimized.
A different mindset and a different approach to gain a better competitive positioning to disrupt the market: a way to take the lead rather than being a follower of the leaders.
Discover WeeonD TOC Starter Kit and launch your TOC journey
Adopting TOC is first of all a cultural change in the management principles and beliefs and thus it requires a gradual approach.
So we have developed a TOC Starter Kit that starts the journey with an initial Inception Phase, aiming first to train the management team on the key concepts, principles and advantages of TOC.
Our program moves its steps from an initial training module with learning sessions, use cases and demo of TOC principles applied to reality - the Proof of Concept.
A double advantage as such training can be also funded with the funds for Innovation.
Once the Organization has learned the advantage of TOC, the next step is a Discovery phase oriented to identify the problems to be solved to enable throughput and profitability improvement.
This phase focus on:
Analyzing current performance with a data driven approach
Applying TOC Thinking Processes for problem solving to identify the issues - capacity, behavioral and cultural, market constraints, etc. - that are preventing the growth.
Collecting the data needed to define the business case for proceeding further
Define - Implement - Monitor
Once it is understood the constraint(s) preventing the growth and that it is possible to improve the performance, it is time to start the project.
Proejct should be grounded upon a well defined business case and scope.
It is important to understand if the project can be implemented with current existing technology in place or if it requires the adoption of an ad-hoc TOC software (depends on the context complexity).
Once the project is implemented then it is necessary to keep focus and constantly monitor the result and the environment dynamics.
Set the TOC principles to the Foundations of your Restart Strategy
On top the Health and Economic crisis, COVID-19 has brought VUCA - Volatitlity, Uncertainty, Complexity and Ambiguity - into scene, and every function in the value chain - Sales, Operations, Sourcing and Supply Chain, Services and Aftermarket - has to face such new variables to deal with the New Normal.
With its focus on Throughput, Inventory and Cash FLow, TOC sets the right principles Organization shall focus on their Restar Strategy.
Discover how Theory of Constraints defines the strategic priorities to set the Restart Strategy after the COVID-19 lockdown.