Performance Measurements For Traditional Cost Accounting Approaches To Manufacturing Versus Theory Of Constraints (ToC)

By Carol Ptak, vice president, manufacturing industry, PeopleSoft

As simple as Theory of Constraints (ToC) is to grasp in theory, in many ways it turns traditional cost accounting approaches to manufacturing -- and the corresponding focus on optimizing production resources – on its head. As such, ToC implementations often require significant paradigm shifts in the ways in which we think. Below, performance measurements for these two approaches are juxtaposed, to highlight how companies and executives may need to start adopting new methodologies.

Traditional Cost Accounting: Production performance is measured by the degree to which factory resources are utilized and optimized.
ToC: Maximizing throughput (product revenue minus cost of raw materials) is the critical measure of production performance.

Traditional Cost Accounting: A heavy focus on complex planning and scheduling applications. Virtually all resources are modeled and scheduled in the production plan. The focus is internal efficiency, often at the expense of maximizing market responsiveness.
ToC: A heavy focus on bottleneck and throughput management – the only resources modeled are those that limit a manufacturer's throughput. The focus is effectiveness in manufacturing to demand.

Traditional Cost Accounting: A belief that all machine and labor resources should be utilized to their maximum.
ToC: A belief that plant operations need to be paced around a key bottleneck, often using drum-buffer-rope (DBR) techniques – even if it means under-utilizing one or more non-bottleneck areas. It's equally detrimental to not be doing what you're supposed to be doing, as it is to be doing something you're not supposed to be doing – e.g., continuing production in spite of a constraint upstream.

Traditional Cost Accounting: A desire to keep all your resources busy all the time. Companies think this will make them a lot of money, but this notion is badly flawed.
ToC: Instead of keeping all resources busy all the time, the focus is on minimizing lost throughput dollar days – the value of a delayed order and the number of days of the delay -- and lost inventory dollar days – the value of inventory that's been hanging around, multiplied by how long it's been hanging around. These numbers tend to grow very quickly if production schedules are not centered around bottlenecks.