Throughput accounting F5 Performance Management ACCA Qualification Students

To be honest, before I read the book, I wasn’t really convinced about throughput accounting – although the theory of constraints has always made perfect sense to me. But, having read about both in the context of a very believable plant that was representative of many at the time, my views have changed. Part of the reason is that with no buffer built into time estimates, critical chain managed projects avoid the student syndrome and Parkinson’s Law. Shorter projects with higher on time completion rates has been the experience of many companies employing the critical chain approach. There are now at least three software companies offering critical chain software and consulting services. In the real world, there is always a need to compromise, since all companies have finite resources.

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Theory of Constraints (TOC), a process improvement approach that aims to improve the performance and profitability of any system by identifying and eliminating the “constraint” that limits its output, throughput, and goal achievement. By prioritizing decisions that increase throughput, reduce operating expenses, and minimize investment, organizations can align their actions with the ultimate goal of maximizing profitability and efficiency. These steps provide a roadmap for organizations to methodically identify, exploit, and ultimately eliminate constraints, fostering a culture of continuous improvement. Theory of Constraints is often compared to Lean Manufacturing, in that both are concerned with maintaining an efficient flow in production and both focus on continuous improvement.

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Meanwhile the slow movers linger around taking up valuable display space and are eventually sold at substantial discounts at end-of-season clearance sales. Since there never were as many of the slow sellers made during the season the number of items that have to be sold through clearance sales also declines substantially. Schragenheim, Dettmer, and Patterson generalize this solution to all supply chains in Supply Chain Management at Warp Speed. As was true with drum-buffer-rope, the critical chain control process relies on buffer management. The project completion buffer exists to protect against overages on the critical chain.

The transfer batch may not and often should not be equal to the process batch

There should always be enough (but not excessive) work in the time queue before the constraint and adequate offloading space behind the constraint. While TOC has helped organizations improve productivity, quality, customer satisfaction, profitability and more, its principles can be equally beneficial when applied to individual problem-solving endeavors. While unit economics drive decisions in most companies, the goal-optimized process flow in TOC demonstrates how constraint elimination can have a huge impact on the Revenue and Profitability of a company. When eliminating constraints, companies encounter situations where expensive or less efficient alternatives could increase throughput. But in such cases, decisions are driven by isolated cost considerations or local optima rather than throughput. An hour earned on a non-bottleneck does not benefit the system’s throughput but will only increase the inventory.

In this case the constraint would move to worker D, who requires 3150 minutes and has only 3,000 minutes available. The new product mix and weekly profit would need to be found and a new drum schedule developed, this time using worker D rather than worker C. The non-constraints would need to understand that now they need to subordinate to D’s pace rather than C’s pace. If, for example, material was released to the shop at C’s new pace, this inertia of continuing to act as though C were still the constraint, would cause a buildup of unneeded and expensive inventory at worker D. Now that firm FGH knows what to make its next task is to decide on a production plan and how to control that plan.

How Does the Theory of Constraints Relate to Lean Manufacturing?

• If there are unforeseen delays in the upstream stations (D and E), the constraint has material to work on while the problem is fixed; it avoids starvation from lack of work.
• To effectively navigate the constraint-elimination journey, TOC offers a structured, five-step process known as the Five Focusing Steps.
• The assembly buffer maintains a schedule tied to the drum but slightly ahead of the drum so that constraint parts need not wait at B for matching parts to arrive.

If I don’t do this, you’ll just go away having read yet another article about throughput accounting, and any doubts that you have about its relevance today will remain the same. On the other hand, I’m also aware that, when sitting professional exams, you need to have a working knowledge of throughput accounting that you can apply job order costing vs process costing similarities and differences in the exam hall. Consequently, I’ve decided that, in this first article, I’ll summarise the story contained in The Goal, bringing out some of the basic principles of the theory of constraints and throughput accounting. Then, in the second article, I’ll talk you through a practical approach to questions on throughput accounting.

Of course in a project as simple as Figure 4 it is easy to spot the resource conflict and allow for it. However, in a large project diagram as would exist for a road, bridge, building, or software project, resource conflicts would be hard to spot. Critical chain software exists that can detect and allow for resource conflicts in large projects and thus develop project schedules that do not have resource conflicts.

Not every aspect of every process is truly worth optimizing, and not all waste is truly worth eliminating. In this light, the Theory of Constraints can serve as a highly effective mechanism for prioritizing improvement projects, while Lean Manufacturing can provide a rich toolbox of improvement techniques. The result – manufacturing effectiveness is significantly increased by eliminating waste from the parts of the system that are the largest constraints on opportunity and profitability. The Theory of Constraints takes a scientific approach to improvement. It hypothesizes that every complex system, including manufacturing processes, consists of multiple linked activities, one of which acts as a constraint upon the entire system (i.e., the constraint activity is the “weakest link in the chain”). Sprint capacity is an excess amount of production capacity that is assembled in the work stations that are positioned upstream from the constraint operation.

Constraints are anything that prevents the organization from making progress towards its goal. In manufacturing processes, constraints are often referred to as bottlenecks. Interestingly, constraints can take many forms other than equipment. There are differing opinions on how to best categorize constraints; a common approach is shown in the following table.