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THEORY OF CONSTRAINTS
ACCT 7320October 8, 2014
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What is the “Theory of Constraints” all about?
Developed by Eliyahu Goldratt in the mid 1980’s with his business novel The Goal.
Has a close relationship with other modern techniques (more about this later):
Just-in-Time Manufacturing Resource Planning Quality Management, Six-Sigma Activity-Based Management.
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Goldratt’s Biography Born in Israel in the late 1940’s. Bachelor’s degree in Physics. Masters and Doctorate degrees in Philosophy. Founder of a production scheduling software
company. Has helped many companies such as: GM, RCA,
Kodak, Westinghouse, Philips, etc. Wrote several books:
The Goal. The Race. What is this thing called TOC? Critical Chain.
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Eliyahu Goldratt’s “The Goal” Brief overview:
Midsize company having difficulty shipping products on time. Managed by a plant manager desperate to turn things around. With the help of a Physicist, the plant manager is able to locate
the bottleneck and find a solution.
Symptoms noted in the book: Obsolete inventory. Low inventory turnover and high amount of inventory in storage. Idle workers or machines. Machine breakdown. A large amount of scrap pieces. A large amount of retooling and rework needed.
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What is the “Theory of Constraints” all about? Looks at the entire supply chain and synchronizes the
chain to achieve ultimate performance.
Based on two assumptions: Every organization has a set of processes working together
to achieve a common goal. Every process has a [single] constraint that limits it from
higher performance.
Typical constraints: Time, Capacity, Materials, Human Resources, Capital Resources, Financial Resources
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Implementation of the Theory of Constraints Step 1: Identify the bottleneck(s)/constraint(s).
Look at your production plan as a whole and determine which resource is preventing you from achieving better performance.
Look at the cause (old machine, untrained employee, long setup times, machine breakdown).
According to Goldratt, an entire plant’s throughput (productivity) is limited to the bottleneck’s productivity.
Step 2: Exploit the bottleneck(s). All process efforts should be focused primarily on the constraint to
maximize throughput.
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Implementation of the Theory of Constraints
Step 3: Subordinate everything else to the bottleneck(s). According to the theory, other activities must be subordinated to the
actions taken to fix the bottleneck in hand.
Step 4: Elevate the bottleneck(s). At this point, management has to decide whether to purchase
additional capacity (new machine, better trained employee)
Step 5: Evaluate whether solving the current bottleneck(s) created other bottlenecks. Do not allow inertia.
The production plant has to be monitored carefully as to whether other constraints now exist and to monitor the progress of the old constraint.
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Common Terms in Theory of Constraints
Throughput: processing another unit of output Emphasis on Increasing Sales, Productivity, and
Market Demand Throughput contribution: Sales-(Material and
any other directly variable Costs). Bottlenecks: limited resource that prevent the
supply chain from achieving ultimate performance
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Benefits of implementing TOC Reduction in inventory. More productive machines. Ability to meet shorter lead times. More flexible. Better customer service. Better product mix. Better customer relationship.
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Shortfalls or Criticisms of TOC Focus on short-term goals as opposed to long-term with
ABC. Main emphasis on increasing sales and volume, not
quality. May lose overall picture when only looking at specific
constraints. Focuses on the push approach as opposed to pull
approach of JIT.
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The “Theory of Constraints” and Other Concepts
PROS CONS
J IT Emphasis on customer, flexibility, and low inventory costs.
Reliance on suppliers could be costly if your needs cannot be met.
MRP Reduction in inventory costs, storage costs, and better efficiency.
Focuses primarily on materials management and not overall supply chain management. Limited in scope.
ABC Dynamic optimization of resource supply, product design and mix, and pricing.
Emphasis on cost-cutting initiatives. Mostly used for accounting purposes.
TOC Optimization of productivity and customer satisfaction.
Primarily focuses on short-term profit maximization.
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Lean Accounting A practitioner-based movement Not much in accounting textbooks and courses Is it a fad? According to one recent research article*…
Lean manufacturing is a complete business system that combines advanced manufacturing techniques including
Just-in-time (JIT) Total quality management (TQM Total preventative maintenance (TPM).
Lean accounting seeks to Reduce steps in transaction processing Eliminate standard costs in favor of actual costs Discontinue cost allocations
Lean control practices re-focus the performance measurement system
Emphasize social and behavioral controls. Frances A. Kennedy & Sally K. Widener, “A control framework: Insights from evidence on lean accounting.” Management Accounting Research 19 (2008) 301–323
Another article… LEAN MANUFACTURING PRINCIPLES
eliminating waste, producing only to meet customer demand. typically require a company to move from a functional division of
work to work cells where all of the processes needed to manufacture a product or line occur next to each other in sequence.
IN THIS ENVIRONMENT… Accountants have begun to realize many traditional cost
accounting practices no longer make sense. A growing number of businesses are implementing lean accounting
concepts to better capture the performance of their operations. ADHERENTS PROPOSE A NEW WAY of looking at the
numbers. Rather than categorizing costs by department, organize them by
value stream, which includes everything done to create value for a customer the company can reasonably associate with a product or product line.
July 2004 article
http://www.journalofaccountancy.com/Issues/2004/Jul/TheLowdownOnLeanAccounting.htm
Key points about LA, cont’d. NEW ACCOUNTING CONCEPTS NOT A
PANACEA Difficulty accurately pricing products and
determining profitability when they analyze performance by value stream rather than by individual product.
The approach also may emphasize speed and quality almost to the exclusion of cost concerns.
SOLUTION MAY BE to supplement the company’s standard financial statements with additional information
Report improvements from efficiency Be aware of GAAP requirements
Velocity World- The Conference on TOC, Lean and Six Sigma
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Questions?
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