Theory Of Constraints And Applied Research In The Traditional Enterprise

The theory of constraints (TOC)is a systems-management philosophy developed by Eliyahu M.Goldratt since the early 1980s in a series of nonfiction books, articles, and novels. The fundamental thesis of TOC is that constraints determine the performance of any system and that any system contains only few constraints. A constraint is anything that limits a system抯 performance relative to its goal. For example, a production bottleneck that limits the overall profitability of a manufacturing company can be considered a constraint. TOC advocates emphasize the importance of constraints and insist that managers should focus on these constraints rather than on product costs. Despite being consistent with these well accepted management techniques, TOC has proved controversial. Goldratt describes TOC as deametrically opposed to traditional costing. In fact, he has called cost accounting the 搖nmber one enemy of productivity.?He argues that managers must break out of the 揷ost world?and even suggests that managers should drop the term product cost from their vocabularies. The term cost world apparently refers to the misguided empasis managers place on cost reduction, especially the reduction of a product抯 cost per unit. Before implementing TOC, managers must first consider their fundamental assumptions about the goals of the owners of their companies. TOC assumes that the goal of owners of for-profit companies is not reducing costs or improving efficiencies, but to make money, both now and in the future. While lowering costs or increasing efficiencies may support the achievement of this goal, often they do not. In their efforts to reduce costs or increase efficiencies, managers often make decisions that make it more dufficult for the company to make more money. The Throughput accounting(TA) support the goal of making money and provide a way of making the ideas expressed in TOC operational. TA measurements answer the following questions: 1. How much money is the company generating? 2. How much money does the company capture? 3. How much money does the company spend to operate the company9 The three measurements used to answer these questions are, respectively: 1. Throughput(T); is the rate at which a system generates money through sales. 2. Inventory(I); 3. Operating expense(OE). Inventory is defined as all the money a system invests in purchasing things the system intends to sell, including buildings and machinery. Of course, buildings and machinery are not normally classified as inventory because managers usually do not intend to sell the company抯 buildings and machinery. The TOC position, however, is that everything in the system is for sale. On the controy for tradational economics theory and tradational costing theory, TOC suggests that performance measures can be prioritized in terms of their importance in achieving the goal. These priorities are as follows: 1. Throughput; 2. Inventory; 3. Operating expense. Managers should thus place the most emphasis on increasing throughput, though they cannot ignore inventory levels and operating expenses. These priorities con...