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TPACC CLARIFIES THE MEANING OF
TERMS
The following are definitions help
clarify the meaning of terms used in business. TPACC keep a
record for members to refer to when needed as we have found
incorrect interpretations that caused confusion and in some
cases loss of profits. If you have any doubt, rather ask a
professional organization for assistance with your management
accounting projects.
A - PLANT
A production
environment that begins with a relatively large number of raw
materials that pass through a succession of converging
operations which create subassemblies and assemblies, and,
finally, a relatively small number of end items. The logical
network of material flow resembles the letter A in that it is
wide at the bottom (many raw materials), and converges at the
top (few end products). Examples include the manufacture of
desks, cell phones, and kitchen cabinets.
ACTIVITY
A series of related
tasks undertaken as part of an objective.
ACTIVITY BASED
COSTING (ABC)
A method of costing
in which activities are the primary cost drivers. By totaling
costs in cost pools and then allocating from the cost pools to
products and services via cost drivers, product and services are
identified for their profitability. It is the most accurate way
of allocating costs.
ADMINISTRATION COSTS
Administrative costs
include salaries and wages of the administrative personnel and
contribution paid for their upkeep. They include, amongst
others, office rental, directors remuneration, debtors/creditors
clerks, the buying function, stationery, audit fees, bank
charges, settlement discounts, communication costs, all
insurance and total costs of motor vehicles used by the
above-mentioned functions.
AGGREGATE
VARIABILITY
The concept of
considering the statistical fluctuation of a series of dependent
events/processes as if the chain is a single event/process as
opposed to considering individually the statistical fluctuation
of each event/process. Because the aggregated variability for a
chain of events/processes is significantly less than the sum of
the statistical fluctuations of each individual event/process,
TOC and TA uses the concept of aggregated variability to size
buffers.
ASSUMPTION
An assumption is a
statement, condition, or belief about why a logical relationship
exists between entities. Assumptions may or may not be
verbalized, but they always exist. They may or may not be valid.
Every logical relationship portrayed in all sufficiency-based
and necessity-based logic TP diagrams has one or more underlying
assumptions. Some assumptions are considered to be true and well
understood by most people throughout our world, and thus do not
have to be documented. When a scrutinizer says, "what's
underneath the arrow?" he/she is really asking the TP diagram
creator to explain the assumption(s) that allow the cause to be
connected to the effect.
BATCH - PROCESS
A Process Batch is
the quantity or volume of output that is to be completed at a
workstation before switching to a different type of work or
changing an equipment set-up.
In most
drum-buffer-rope implementations, the transfer batch is set at
less than the process batch. This action creates a flow through
the production network thus eliminating wandering bottlenecks.
BATCH - TRANSFER
A Transfer Batch
is the quantity or volume of output that is to be completed at a
workstation before that output is transferred to the next
workstation. In many cases, it is better if the transfer batch
size is less than the process batch.
BOTTLENECK
A Bottleneck is a
resource or process that restricts the flow of Throughput
because its capacity is less than the demand placed upon it. A
Bottleneck is a constraint, but a constraint is not always a
Bottleneck. See Constraint for more information.
BUFFER - ASSEMBLY
An assembly buffer
is a time buffer used ensure that parts that do not flow through
a constraint resource, but are assembled with parts that do, are
released early enough so that the probability is very high that
the constraint parts will continue to flow quickly once they
arrive at the assembly operation.
BUFFER - CAPACITY
A capacity buffer
is a time buffer used only in multi-project environments that
chokes the release of new projects into the system and ensures
the effective use of the drum resource. It also helps reduce the
amount of WIP, or number of tasks in progress, in a
multi-project environment. This buffer is based on the capacity
of a resource or resource skill set (e.g., firmware engineers ).
It ensures that there is enough stagger between the start of
projects to minimize peak loads on all resources. It also
minimizes delays on the drum resource tasks so delays in one
project do not delay the start of drum tasks in the succeeding
projects. See Capacity.
BUFFER -
CONSTRAINT
The time buffer in
a plant that has an internal constraint such as a CCR (see CCR)
and the plant is scheduled accordingly. Buffers are protection
against uncertainty. The protection is aggregated and may take
the form of time, stock (inventory ), capacity/resources, or
money. We often refer to assembly buffer, drum buffer, capacity
buffer, feeding buffer, project buffer, shipping buffer, stock
buffer, time buffer.
BUFFER -
CONSTRAINT
The time buffer
offset used to schedule the release of materials that feed the
constraint. The constraint buffer is sized to dramatically
reduce the likelihood that variation in the system prior to the
constraint will cause the constraint to starve yet will not
contain excessive WIP.
BUFFER - FEEDING
A time buffer
placed between non -Critical Chain work and the Critical Chain.
It is used
to protect the
Critical Chain, the Project Constraint, from variation on
non-critical chain paths of work as they feed into the Critical
Chain. It also helps determine the start of non-critical chain
work.
BUFFER - INVENTORY
(STOCK)
A quantity buffer
of inventory items held in a MTS (see MTS) system. Often
referred to as a Stock Buffer, it is a physical inventory buffer
(as opposed to a time buffer) held in the system to protect the
system's throughput.
BUFFER MANAGEMENT
One of the most
powerful tools to come from the Dr Goldratt stable. Buffer
Management (BM) is a feedback mechanism used during the
execution phase of production, distribution, or project
management that signals when an action beyond what was planned
is necessary in order to meet the intended due date. The buffer
is divided into three zones, known as the red zone (3), the
yellow zone (2) and the green zone (1). The term "hole" is used
when a part is due in a specific zone of the buffer but has not
arrived or is not available for a stock buffer. A hole in the
green zone is not a problem. A hole in the yellow zone causes
the buffer manager to investigate the situation and, if
necessary, plan what action to take if the hole reaches the red
zone. If the hole reaches the red zone, (the buffer manager
should not 'panic but be paranoid' - tong in cheek) the
pre-planned action is taken or expedited if necessary. Buffer
management includes documenting and analyzing the major causes
of holes in red zone and uses the Pareto Principle (80/20 rule)
to decide when and where to take actions to overcome the biggest
cause(s) of holes in the red zone. Buffer Management also
provides the information needed to make decisions about resizing
the buffers, i.e., making them larger or smaller if necessary.
BUFFER - PROJECT
A Project Buffer
is a time buffer placed at the end of the project. It is a time
buffer at the end of a project activity chain known as the
critical chain. This time is obtained by removing safety time
from individual time estimates of the activities on the critical
chain and positioning part of this removed safety time
strategically at the end of the critical chain in a project
schedule to protect the overall schedule. A simple rule of thumb
is to cut the task times in half for all tasks in the network
and put half of the safety time removed in the project
completion buffer. Another rule we can use is the square-root of
the sum of the squares of the variations of the critical chain
tasks. The project completion buffer will
be depleted after
a feeding buffer has been used up and task(s) on the associated
non-critical chain activities are not complete or when the
critical chain takes longer than estimated.
BUFFER -
PROTECTIVE
A time buffer of
the CCR (see CCR) that protects the system from variability of
orders or schedule demand.
BUFFER - RAW
MATERIALS
A Raw Material
Buffer is a inventory stock buffer of raw materials that
provides instant availability to a beginning process or
resource.
BUFFER - RESOURCE
A Resource Buffer
is a buffer used in single -project environments. The resource
buffer is used to ensure that resources working on a critical
chain task or most penetrating chain task are available early if
needed. It is merely a warning mechanism. It is sized based on
the level of warning that is needed in the environment. This
allows us to take advantage of early finishes. It does not add
time to the project lead time.
BUFFER - SHIPPING
A Shipping B is a
time buffer used to protect the shipping date of finished goods.
It is used to establish the release schedule for raw material
that do not go through the constraint or assembly buffers. A
time buffer protects the system from TDD greater than zero (see
TDD).
CAPACITY - BUFFER
A capacity buffer
is a time buffer used only in multi-project environments that
chokes the release of new projects into the system and ensures
the effective use of the drum resource. It also helps reduce the
amount of WIP, or number of tasks in progress, in a
multi-project environment. This buffer is based on the capacity
of a resource or resource skill set (e.g., firmware engineers ).
It ensures that there is enough stagger between the start of
projects to minimize peak loads on all resources. It also
minimizes delays on the drum resource tasks so delays in one
project do not delay the start of drum tasks in the succeeding
projects. See Buffer.
CAPACITY - EXCESS
Contrary to
popular belief, excess capacity is partly a necessary condition
where capacity that is not used to produce, partly protects the
creation of throughput. When production has excess capacity, the
exact amount is unknown because it is not known how much
protective capacity is needed for each resource.
CAPACITY - IDLE
Idle capacity is
capacity generally not used in a system. It consists of excess
capacity and protective capacity and is the difference between
the available capacity and the productive and protective
capacities.
CAPACITY -
PRODUCTIVE
Productive
Capacity is resource time capacity that is required to produce
sufficient output to satisfy the demand of the constraint.
Productive Capacity is the maximum of the output capabilities of
a resource or in some cases a process of several resources and it is the capacity that
the company uses to process things. Productive Capacity for a
constraint is equal to the full capacity of the constraint, and,
productive capacity for a non-constraint is equal to the
equivalent productive capacity of the constraint.
CAPACITY -
PROTECTIVE
Protective
Capacity is resource capacity above the capacity required to
exploit the constraint; protective capacity is needed to protect
against the uncertainty inherent in the production system. This
uncertainty is the result of such things as normal variation in
process times, unplanned downtime, late deliveries from
suppliers, etc. Protective capacity is also called "sprint
capacity", and is needed after some disturbance has reduced or
stopped the flow of work from processes feeding the constraint
or the
shipping schedule.
Non-constraint resources need protective capacity to rebuild the
bank in front of the CCR or on the shipping dock before
throughput is lost. CCRs sometimes need protective capacity so
that "positive" uncertainty in the form of unexpected demand for
more product/service by a key customer/market can be
accommodated in the short term.
CAPACITY - SPRINT
Sprint Capacity
has the same meaning as Protective Capacity is needed for
utilization when e.g. there is unexpected demand for more
products or services than usual, or it is desirable to supply a
key customer or service a key market. When statistical
fluctuations occur, Sprint Capacity protects against
interruption of production flow through the constraint.
CAPACITY
CONSTRAINED RESOURCE (CCR)
A Capacity
Constrained Resource is a resource whose capacity is constrained
by the schedule it has to meet. The letters CCR refer to a
Capacity Constrained Resource. A CCR is not always a bottleneck
and can be a CCR simply because it has the potential of becoming
a bottleneck.
CAPACITY
CONSTRAINED RESOURCE (CCR)
A Capacity
Constrained Resource (CCR) is any resource that, if its capacity
is not carefully managed, compromises the throughput of the
organization.
CAUSE-EFFECT LOGIC
A method used to
identity of core causes through establishing cause-and-effect
relationships and supporting each relationship with a validating
additional effect. This approach advocated continuous 'deep
diving' from UDEs down to potential core causes and used the
effect-cause-effect approach to validate each step logically
down to the proposed core cause. The method proves the existence
of an underlying cause. When a possible entity is proposed as
the cause for an indicated effect, the existence of an
additional effect proves the existence of the cause. That is, by
showing that the second effect exists, the existence of the
common cause is supported.
CHAIN
Most organizations
can be compared with a chain because, just as a chain
accomplishes work through a series of dependent links, an
organization produces output through a series of dependent
"links" (i.e. marketing, sales, engineering, procurement,
production, etc.); and, just as the "capacity" a chain to do
work is limited by its weakest link, the capacity of an
organization to achieve its goal is limited by the "link" with
the least capacity, which is called the constraint. The chain
analogy is used to make the point that generating significant
improvement in organizational performance quickly cannot be
accomplished through improvements anywhere and everywhere, but
rather only through focusing on the constraint. See Critical
Chain
CHANGE SEQUENCE
The three stages
that must be completed in the successful management of change
within a system. The change sequence answers the following three
questions ns in sequential order:
1 - What to
change? (The Evaporating Cloud and Current Reality Tree are the
TP logic tools that are used to help determine the answer to
this question.)
2 - To what to
change? and
3 - How to cause
the change? (Typically, the prerequisite tree (PRT) and the
transition tree (TRT) are the TP logic tools that are used to
help determine the plan and detailed actions required to respond
to this question.)
CONFLICT
A situation in
which there are two 'wants' that you can not have at the same
time. A want is a condition or something you desire to have.
CONSTRAINED RESOURCE
(CR)
A resource that is
constrained such as a bottleneck. In order for anything to be a
resource, it must provide something The market can
be a constraint but it can not be a Constrained Resource (CR).
CONSTRAINT
A Constraint is
anything that blocks the system from achieving its goal. A
constraint is not always a resource such as a machine or a
bottleneck as it can often be in the marketplace. A constraint
can be found at the weakest link (e.g. resource) in a chain
(e.g. system) that limits the performance of the overall
enterprise. There are many types and classifications of
constraints such as internal or external to the system (see
System). An appropriate analogy could be e.g. a production
bottleneck. The acronym CR stands for Constrained Resource. To
understand the meaning of 'constraint', read The Goal (at least
twice).
CONSTRAINT BUFFER
The time buffer in
a plant that has an internal constraint such as a CCR and the
plant is scheduled accordingly.
CONSTRAINT BUFFER
The time buffer
offset used to schedule the release of materials that feed the
constraint. The constraint buffer is sized to dramatically
reduce the likelihood that variation in the system prior to the
constraint will cause the constraint to starve yet will not
contain excessive WIP.
CONSTRAINT -
MARKET
A Market
Constraint is a condition whereby the market demand is less than
the organization's capacity to deliver its product(s) or
service(s). The lack of customer orders is actually the
constraint of the company.
CONSTRAINT -
POLICY
This condition
rarely exists and the term is a common misnomer. Bad policies
are not the constraint, rather they hinder effective constraint
management by inhibiting the ability to fully exploit and/or
subordinate to the constraint.
E.g. Many
manufacturers have a policy to build parts in an "economic order
quantity", i.e., to build in large batches in an effort to save
costs. Building in large batches can cause periodic starvation
of the constraint. Note that when this happens, the bad policy
is not the constraint, rather it is inhibiting the ability to
fully exploit the constraint. However, note that these so-called
'policy constraint' conditions are very prevalent in businesses.
CONSTRAINT -
STRATEGIC
A Strategic
Constraint is a selected of chosen Constraint. It is usually not
a current constraint and is chosen by management to guide the
system into sustainable profitability. The five focusing steps
are not intended to be used as an infinite
loop whereby an
organization identifies and eliminates the current constraint
over and over again, rather, top management should determine
where to move and hold the constraint with the intent of
optimizing the organization's strategic ability to achieve its
goal in the longer-term planning horizon.
CONSTRAINTS
ACCOUNTING
An accounting
reporting technique consistent with a process of on-going
improvement. In constraints accounting, accounting income
statements are presented that distinguish between internal and
external constraints related Throughput. In essence its the same
thing. See Caspari & Caspari: Management Dynamics, for their
interpretation.
CORE CONFLICT
A Core Conflict is
the systemic conflict that causes the vast majority of the UDEs
(Undesirable effects) in the CRT (Current Reality Tree). The
conflict appears between two opposing entities that are
prerequisites for two necessary conditions for satisfying the
systemic goal. A core conflict is often generic in nature and
restates the generalized conflict that underlies the entire
system. Using the three cloud approach, it is synthesized from
three specific conflict clouds that together reflect a
fundamental issue responsible for most of the system management
problems. A core conflict is expressed in two entities in the
core conflict cloud, namely, D and D'.
COST
The monetary value or
measure of a resource. When resources are purchased, costs are
incurred, and in the 'cost world' the costs are presumed to be
consumed by products, services, functions or activities. In the
'Throughput world' the only costs incurred by products and
services are TVC (see TVC) and all other costs are incurred by
systems.
COST ALLOCATION
The apportionment or
distribution of cost to two or more cost objectives, assigning a
divided portion of the cost to a location. The concepts of
Throughput variability are not adhered to in the 'Cost World'.
The term cost is often associated with the price of service or
product. This cost is then allocated to products and services,
however there are many different ways of allocating costs. See
ABC and TA for examples.
COST DRIVER
The activity that
drives cost in the 'cost world'. In an ABC environment it is
usually the item according to which the activities costs are
allocated to products and services.
COST WORLD
A paradigm, or way of
thinking that emphasizes the reduction of existing costs as a
means of bottom-line net operating profit improvement. In a
cost-world paradigm, there is a view that a system consists of a
series of independent variables, each being an independent cost
driver. The cost-world paradigm makes an unavoidable conclusion
that the way to judge actions and decisions is by their local
impact, and in order to quantify local impact cost allocation
must be used. This paradigm is in conflict with the
throughput-world paradigm. See Throughput World.
CRITICAL CHAIN
In Critical Chain
Project Management, the longest time route of tasks through a
project network considering both technological precedence and
resource contention in completing the project. It is the
constraint of a project. The critical chain plus the project
buffer defines the lead time for the project. Where no resource
contention exists the critical chain would be the same as the
critical path.
CRITICAL CHAIN
PROJECT MANAGEMENT (CCPM)
CCPM is the TOC
solution for a project environment. It consist two solutions
together, one for single project environment and the other for
multiple project environments. In the single project environment
the solution has these elements:
1. removing
existing behaviors which are harmful to the goal of the project,
such as the student syndrome and work expanding to fill
available time
2. plan – create a
project network ensuring the inclusion of all dependencies and
add time estimates that do not include safety time, and
3. schedule –
create the critical chain schedule and insert buffers which
consist of part of the safety time removed from the individual
tasks.
For the multiple
project environment the solution has this element: staggering
the release of projects according to a synchronizing mechanism
known as the drum (can be either physical - a resource, or
virtual - a phase). For both solutions there is an additional
element: project control and visibility, i.e. use buffer
management with real-time data on project status to take action
only when necessary.
CURRENT LIABILITIES
(CL)
Current liabilities
are made up from creditors, bank overdrafts, short-term loans
and accruals. Short-term portions of long-term loans are
included here.
CURRENT OPERATING
ASSETS (COA)
Current operating
assets are at market/book value and consist of trade debtors and
inventory (finished products, work-in-progress and raw
materials). Cash, incentive claims, other debtors and provisions
for debtors should be treated as other current assets.
CUSTOMER TOLERANCE
TIME (CTT)
The quantity of
time that a customer is prepared to wait for a product or
service. When a customers CTT is long the system has more time
to generate Throughput, and when a customer has a short CTT, the
system is in danger of loosing Throughput. CTT is used to decide
where to keep inventory, i.e. closer or further to the customer.
See Little's Law which is used in conjunction with CTT.
DEPENDENT EVENTS
A series of events
where each event requires, before it can be completed properly,
the output of certain preceding event(s).
DISTRIBUTION COSTS
Distribution costs
are all the costs the company incurs to deliver its products to
its customers. This is usually included in TA Operating
Expenses. Distribution costs include fuel and oil, maintenance
and depreciation of vehicles, and the salaries and wages of
transport and dispatch personnel. Transport and delivery costs
of outside parties such as contractors should also be included
here.
DRUM BUFFER ROPE (DBR)/(SDBR)
The TOC method for
scheduling operations. DBR uses (1) the drum or constraint to
create a schedule based on the finite capacity of the
constraint; (2) a (time) buffer which protects the drum (and
shipping) schedule from variations; and (3) a rope mechanism to
choke early release of raw materials to the production system.
It is a powerful technique of linking the constraint to the
beginning of a set of processes and the resources, and managing
buffers to avoid the loss of Throughput. DBR is used when their
is an internal CCR, and SDBR (Simplified Drum Buffer Rope) is
used when the market is the constraint. A drum schedule is used
which details the production schedule for the resource that sets
the pace for the entire system. The drum schedule must reconcile
the customer requirements with the system's constraints. For
more information read books such as The Race and Manufacturing
at Warp Speed.
EVAPORATING CLOUD
(ALSO CALLED A CONFLICT DIAGRAM)
This is a
necessity based logic diagram that helps describe and resolve
conflicts in a 'win-win' manner. It has two primary uses, first
as a structured method to facilitate the description and
resolution of a conflict, and second, as an integral part of the
three cloud approach to creating a core conflict cloud which
then forms the base of a CRT. Initially, a brief storyline is
developed that describes this conflict situation. Next, a
five-entity diagram used to capture the essence of the conflict
situation. The five entities are one objective, a necessary
condition and prerequisite for one side of the conflict and
another necessary condition and prerequisite for the other side
of the conflict. Five arrows represent the relationships between
adjacent entities and allow the verbalization using
necessity-based logic. Finally, assumptions underlying each of
the EC's relationships are identified. This surfacing of
assumptions is the key to resolving the conflict presented in an
EC by either:
1 - revealing an
erroneous assumption or
2 - identifying an
assumption that can be invalidated.
Either approach
will resolve the conflict or ‘evaporate the cloud’. The
situation presented in a cloud is verbalized by the following
phrase: "in order to (entity at head of the arrow), I/we must
(entity at the tail of the arrow) because (one or more of the
surfaced assumptions)".
EXPLOIT
An often
criticized word but it is a key word in the second of the five
focusing steps: decide how to exploit the system constraint. It
is the process of getting more goal units by taking actions that
focus on the constraint. Illustration: In the book "The Goal"
(Goldratt, North River Press, 1984), when the constraint was
internal actions that UNICO took to exploit the NCX10 included
staffing the machine during lunch, breaks, and shift changes and
doing quality inspection just prior to the NCX10 so that any
defective parts were pulled before wasting constraint time.
Other actions used to exploit a constraint include, but are not
limited to, creating a schedule, implementing statistical
process control and/or total productive maintenance, reducing
setup times, and implementing an 'unrefusable' market offer.
EXTERNAL
CONSTRAINT
A constraint that
is outside the system. See 'system' for definition. For example,
government policy or the market, can contain constraints that
are external to the system.
FACTORY COST PER
FACTORY MINUTE
Total expenses
excluding totally variable costs and financing costs divided by
available capacity in minutes.
FIXED OPERATING
ASSETS (FOA)
Fixed operating
assets are the book values of the assets. Included under this
item are plant and machinery, motor vehicles, office equipment,
etc. According to GAAP, leased items must be capitalized when
they are material. If the
company owns the land and buildings, then these should be
excluded from operating assets and treated as other fixed
assets unless they use them for e.g. mining. Long-term loans and investments
are treated as
other fixed assets and not be included in operating assets.
FACTORY OVERHEADS
Factory overheads
includes items such as depreciation of plant and machinery,
rent, water, electricity, etc.
FLUSH, POINT OF
The point where
Investment Dollar Days (see IDD) is equal to zero.
FOCUSING STEPS
The Focusing Steps
are the Theory Of Constraints process of on-going improvement
and comprise of:
1. Identify the
system's constraint
2. Decide how to
exploit it
3. Subordinate
everything else to the above decision.
4. Elevate the
system's constraint, and
5. If the
constraint is broken in the above steps, go back to Step 1, but
do not allow inertia to cause a system constraint.
FOR PROFIT
ORGANIZATIONS
Any business, firm or
enterprise that has the profit motive as part of its
constitution. See Not For Profit Organizations.
FREE PRODUCT
A product that
does not have any parts/components that pass through the
constraint. It is
referred to as
"free" because it does not place a load on the constraint.
GLOBAL MEASURES
Those measurements
used to measure the performance of the system as a whole. In
the throughput
world paradigm of the theory of constraints, Throughput (T),
Inventory or investment (I), and Operating Expense (OE) are
global measures.
GOAL
A goal is a
journey, not destination and includes obstacles that must be
overcome in order to achieve it. A goal is the purpose for which
the system was created as determined by the owners of the
system. The rate at which the system generates goal units is
called Throughput. Note: most systems have additional necessary
conditions that must be met or the system will not be able to
continue to generate goal units now and in the future.
GROSS SALES
This is gross (total)
sales generated by the operating activities of a business for
the period under consideration.
I PLANT
A production
environment where all operations are tied together in a single
flow line.
INTERNAL
CONSTRAINT
A constraint that
is internal to the system. See 'system' for definition. For
example, a resource that is included in Inventory (see
'inventory' definition) such as the CCR, is an internal
constraint. An intangible (not included in Inventory) example of
an internal constraint is the thinking process of managers.
INVESTMENT
Investment
consists of all the money in the system. It includes Inventory
of raw material, work-in-progress and finished goods valued at
TVC. Conversion costs which are part of OE are not included. All
tangible and non tangible assets are included. The total is used
in the calculation of Throughput Accounting's ROI (Return On
Investment). In the Throughput World paradigm of TOC, Investment
is a global measure. Generally, investment refers to the
equipment, fixtures, buildings, etc. that the system owns. NOTE:
In common TOC usage, the term investment also includes inventory
in the forms of raw materials, work in progress, and finished
goods.
INVESTMENT DOLLAR
DAYS / IDD
The number of
dollar days at the point of flush (see Flush).
INVENTORY
The money
currently tied up inside the system. In the Throughput world
paradigm of the Theory Of Constraints, Inventory is one of the
global measures. Generally Inventory is tracked in three stages
– raw materials, work in progress, and finished goods.
Throughput Accounting values all three stages of inventory at
TVC costs. NOTE: In common TOC usage, the term inventory also
includes "investments" such as buildings, fixtures, and
equipment owned by the organization.
INVENTORY DOLLAR
DAYS (IDD)
If a business
needs to hold finished goods inventory, it has to cover the
expected demand in the interval equal to the Sales Price x
(Product Lead Time minus the Customer Tolerance Time). Any
inventory in excess of this is a deviation from the plan is
measured in Inventory Dollar Days. IDD is a measure of the
effectiveness of a supply chain – i.e., did it do things that it
shouldn't have done and as a result the supply chain is holding
inventory of products the customer doesn't want? IDD accounts
for the time until in-stock inventory is actually needed by a
customer and the monetary value of the inventory being held. IDD
is calculated by multiplying the monetary value of each
inventory unit on hand by the number of days since that
inventory entered the responsibility of that link. The system
should strive for the minimum IDDs necessary to reliability
maintain zero Throughput Dollar Days.
NOTE: The
resulting unit of measure is "dollar-days". It is neither
monetary nor time based. Attempts to compare dollar-days to
other monetary measures are invalid. IDDs can be compared only
to other IDD levels. See Articles for a calculation example.
INVENTORY TURNS
Inventory turns = T /
I
LABOR COST
The cost of employing
all employees employed in the firm for the financial period
under review. This includes all casual, weekly, monthly and
otherwise remunerated employees at all levels. Company contributions and rations are also
included. In TA these costs are included in TA Operating Expenses.
In other costing techniques these costs are divided between
variable and fixed costs.
LAYERS OF
RESISTANCE
An extremely
important part of Throughput Accounting and often overlooked.
The layers of resistance are a stratification of what is
commonly called "resistance to change". Properly
understood, what
is thought of as resistance actually becomes the greatest force
for leading change. Some authors refer to 7 layers or more, but
TPACC only use the Cohen & Lepore clarification of the 6 layers
of resistance, as expressed by the person resisting change:
1. You don't
understand what the problem is - disagreement about the problem.
2. I/we don't
agree on the direction of the solution - disagreement about the
direction of the solution
3. Your solution
can't possibly deliver the level of success you claim - lack of
faith in the completeness of the solution
4. Your solution
will cause bad side effects (that may be worse than the present
problem) - fear of negative consequences generated by the
solution
5. Even if I/we
wanted to do this, there are obstacles that block us from
implementing the solution - too many obstacles along the road
that lead to the change
6. Un-verbalized
fear - not knowing what to do
With so-called
'Buy-In' which is a rigorous 6-step process of leading a group
to full consensus on a solution. The steps are based on the
process that most people go through when evaluating whether or
not to accept a change:
1. Getting
agreement on the problem.
2. Getting
agreement on the direction on the solution.
3. Getting
agreement that the proposed solution will indeed produce the
desired positive effects.
4. Getting
agreement that significant negative side effects can be
effectively eliminated.
5. Getting
agreement that the foreseeable obstacles can be overcome or
circumvented.
6. Overcoming any
unforeseen inertia and taking the necessary action(s).
LEAD TIME -
PRODUCTION
Production Lead
Time is the total time from when an order is received until the
order is ready for shipment. This time is made up of 3 elements:
order processing time, the time the order sits in queue, and the
processing time.
LEAN THINKING
Lean Thinking has
its origins in 1950's at the Japanese Toyota Motor Corporation
and is a term coined in English to describe the Japanese
production philosophy of the continuous effort to increase
productivity and eliminate 'muda' (waste). The Toyota Production
System (TPS) is the framework and philosophy organizing the
manufacturing facilities at Toyota, and their interaction with
its suppliers and customers. See Articles.
LITTLE'S LAW
The average number
of customers in a stable system (over some time interval) is
equal to their average arrival rate, multiplied by their average
time in the system.
[Customers
(average number) = Customer (average arrive rate) X Customer
(time)] stable system
John Little first
proved his law in 1961. The result applies to any stable system,
and particularly, it applies to systems within systems. So in a
grocery store/supermarket, the queue might be one subsystem, and
each of the tellers another subsystem, and Little's result could
be applied to each one, as well as the whole system. The only
requirement is that the system is stable. It can't be in some
transition state such as just starting up or just shutting down.
Even though the law looks intuitively reasonable, it's a quite
remarkable result, as it implies that this behavior is entirely
independent of any of the detailed probability distributions
involved, and hence requires no assumptions about the schedule
according to which customers arrive or are serviced, or whether
they are served in the order in which they arrive. See Customer
Tolerance Time.
MAKE TO ORDER (MTO)
A business that
makes its product based on the orders it receives.
MAKE TO STOCK (MTS)
A business that
makes its products to keep in inventory until they are purchased
by customers.
MARKETING COSTS
Marketing costs
include selling costs, distribution cost and other marketing
costs.
MONEY IN THE SYSTEM
'Money in the
System' is Investment. It includes Inventory of raw material,
work-in-progress, finished goods all valued at TVC, and tangible
and intangible assets. It represents all the money the system
invests in purchasing items it intends to sell whether fixed or
current assets.
NECESSARY
CONDITION
A Necessary
Condition is a requirement which must previously or
simultaneously exist in order to achieve the goal, an
intermediate objective, or a specified effect.
E.g. The goal of
most for-profit companies is to make money now and in the
future. In order to reach that goal it is absolutely necessary
that the company simultaneously satisfy its customers and
provide a secure and satisfying environment for its employees.
Necessary conditions are found on prerequisite trees and
evaporating clouds.
NET PROFIT (NP)
Net Profit is an
absolute measure of Throughput less Operating Expenses, and its
acronym is represented by the equation NP = T - OE.
NET SALES
Gross sales generated
by the operating activities of a business less trade
discounts. Trade discounts allowed should be netted against the
sales figure. Settlement discounts allowed should be included
with overheads.
NOT FOR
PROFIT ORGANIZATIONS
Organizations
that are not businesses e.g. welfare and charitable
organizations, governmental departments and bodies that receive
funding from taxes, community associations and clubs. Note that
certain government initiatives to raise non tax funds may may be
classified as 'for
profit organization' projects even though they fall within
a 'not for profit organization'. This can cause conflicting
objectives and should be clearly understood. See For Profit
Organizations
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