A Process Of On-Going Improvement (POOGI) - Part 33

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

If we can compute the impact of any action using T, I, and OE, which are global measures (and part of Throughput Accounting), then we can compute the bottom line financial impact quite easily:
· Throughput minus Operating Expense equals Net Profit (T-OE=NP).
· Throughput divided by Operating Expense is Productivity (T/OE=Productivity).
· Net Profit divided by Inventory is Return on Investment (NP/I=ROI).

We recommend measuring frequently enough to continuously improve. To improve, the causes of the effects must be managed:
· Sales Dollar Days and Inventory Dollar Days should be measured daily.
· Sales, Throughput, Operating Expense, Productivity, and Return on Investment each should be measured daily, weekly, and cumulatively month-to-date and year-to-date. It’s also helpful to track each with a 13 week and/or 12 month trailing average graphically.

For additional reading on measurements, reread “The Goal” and “The Haystack Syndrome” by Dr. Goldratt. And feel free to contact us if you have questions about measurements in your organization.

We’ll discuss why incentive systems don’t work as well as measurements in an upcoming post.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.

A Process Of On-Going Improvement (POOGI) - Part 32

We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

To make managing a complex organization easier, we break organizations into pieces. Many of the current measurements have the purpose of measuring local performance, under the erroneous assumption that the overall performance of the organization will be maximized if each department maximizes its performance.

The role of measurements is to induce the parts to do what’s good for the organization as a whole. What’s good for the organization as a whole is achieving the three objectives stated above.

In previous articles, we’ve referred to some of the measurements used by TOC practitioners:

• Throughput (T) is rate at which the system generates money through sales.
• Inventory (I) is the money invested in purchasing things which it intends to sell.
• Operating Expense (OE) is the money the system spends to turn Inventory into Throughput.

To determine Throughput, subtract truly variable costs (TVC) from Sales dollars. Truly variable costs include raw materials, outsourcing, freight, and sales commission. Throughput is most similar to Gross Profit, except that direct labor is considered an Operating Expense in Theory of Constraints (TOC). It’s not that direct labor does not vary, but it is a period expense and does not necessarily need to vary with sales. Dramatic improvements in Net Profit can be gained when Throughput increases without a proportionate increase in Operating Expense.

...to be continued.

Here's to maximizing YOUR profits!
Dr Lisa Lang
(c)Copyright 2008, Dr Lisa, Inc. All rights reserved.