The TPACC Dictionary defines Throughput Accounting words, abbreviations, acronyms, and terms. It includes Theory Of Constraints and other related terms.
This dictionary, or glossary project, was developed and is maintained to help clarify the meaning of terms used in Throughput Accounting, the Theory Of Constraints, Lean, as well as in general accounting environments. People in these environments sometimes use the terms in the course of their operations, discussions, and even in the board-room, without understanding their true meaning. The original version was contributed to TOCICO in order to help build a dictionary for the TOC community and that official version is available there.
|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.
|ABSORPTION ACCOUNTING AND COSTING
|A procedure which charges fixed as well as variable overheads to cost units.
|ACCOUNTS RECEIVABLE (AR)
|Money owed to a system by its debtors. Accounts receivable is shown in a balance sheet as a current asset, and accounts receivable are legally claimable for payment.
|A series of related tasks undertaken as part of an objective.
|ACTIVITY BASED COSTING (ABC)
|Originally, a method of costing in which activities are the primary cost drivers. By allocating costs in cost pools and then re-allocating from the cost pools to products and services via cost drivers, product and services are identified for their profitability. Newer developments in ABC use time-driven activities that enhance cost control.
|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.
|AGILE SOFTWARE DEVELOPMENT
|Agile software developers adhere to a manifesto which was introduced in 2001 to promote, develop, collaborate, and process adaptability throughout the life-cycle of software development projects. There are many methods and practices employed such as Scrum. The principles adhered to, range from customer satisfaction, to maintaining simplify,
and the Agile philosophy includes Kaizen principles.
|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.
|ALL THE MONEY IN THE SYSTEM
|Investment is referred to as ‘All the money in the system’ which the system invests in assets necessary in order to operate. 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, now and in the future.
|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.
|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 – 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. 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.
|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. A Capacity Constrained Resource (CCR) is any resource that, if its capacity is not carefully managed, compromises the throughput of the organization.
|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.
|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
|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.)
|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).
|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).
|The time buffer in a plant that has an internal constraint such as a CCR and the plant is scheduled accordingly. 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.
|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.
|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’.
|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.
|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.
|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.
|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.
|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.
|A series of events where each event requires, before it can be completed properly, the output of certain preceding event(s).
|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’.
|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.
|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 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.
|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.
|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.
|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.
|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.
|This is gross (total) sales generated by the operating activities of a business for the period under consideration.
|A production environment where all operations are tied together in a single flow line.
|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 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 / IvDD
|The number of dollar days at the point of flush (see Flush).
|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 = T / I
|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. TPACC often refer to 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 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.
|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 manufactures or makes its products for customers according to the orders it receives from them.
|MAKE TO STOCK (MTS)
|A business that makes its products to keep in inventory until they are purchased by customers.
|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 which the system intends to sell whether fixed or current assets.
|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.
|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
|OPERATING EXPENSES (OE)
|All non-totally variable costs excluding financing costs and non operational expenses. Administration, marketing and distribution expenses are all included herein. All money the system spends, except totally variable costs, that turns Inventory (Investment) into Throughput, and does not have a correlation factor of 1.0 with the quantity of product sold.OE = category of cost that does not fit to T or I, and contributes to the conversion of I to T. All the money the organization spends in generating “goal units”. In the Throughput World paradigm of TOC, Operating Expense is a global measure. TA and TOC views operating expenses as those expenses that are relatively constant (such as salaries and wages, insurance, rent, etc.) over a relevant time period. Expenses that vary directly with volume (such as raw material costs, commissions, etc.) are considered to be TVC (Totally Variable Costs), not OE. It excludes financing charges.
|OPERATING PROFIT (OP)
|Operating profit/loss is the profit/loss earned before interest and tax through normal business operations and excludes sundry income, e.g. rent received, interest received, etc.This figure is obtained by subtracting Raw Material costs, Production Wages & Salaries, and Overheads from Net Sales. It is also obtained by subtracting all other income from Profit Before Interest and Tax, and by adding extraordinary expenses and interest on loans, in whatever form, from the director/owner/holding company, etc.Other Income:Other income consists of all other income received such as dividends received, interest received on investments, rent received. Trade discount received is subtracted from raw material costs if it was received on purchases of inventory.
Other extraordinary expenses:
Other expenses consist of all those expenses not normal to the daily operations of the firm, such as loss on sales of assets, foreign exchange losses, interest paid on loans from directors and inter-company loans, etc.
|ORDER LEAD TIME
|Order Lead Time is the time from when a product is sold until an order is placed to replace the product. Order lead time is one of the three components of replenishment time.
|OTHER CURRENT ASSETS
|Other current assets include all those assets not directly used in the operations of the company, e.g. short-term investments, share investments, incentive claims outstanding or provided for, cash etc. These assets are those not included in – current operating assets.
|Other expenses consist of all those expenses not normal to the daily operations of the firm, such as loss on sales of assets, foreign exchange losses, interest paid on loans from directors and inter-company loans, etc.
|Other income consists of all other income received such as dividends received, interest received on investments, rent received. Trade discount received is subtracted from raw material costs if it was received on purchases of inventory.
|Overheads represents total overhead costs and is obtained by adding the following three items together (note: All interest payments, material costs and factory wages and salaries must be excluded here).Factory overheadsFactory overheads includes items such as depreciation of plant and machinery, rent, water, electricity, etc.If work-in-progress and finished products stock increased during the period, the production wages and salaries component of this increase must be subtracted from the production wages and salaries figure. If these stocks decrease, this cost component must be added to increase the production wages and salaries figure.
PLEASE NOTE: Wages for direct labor are not included.
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.
Marketing costs include selling costs, distribution cost and other marketing costs.
Selling costs comprise salaries and commissions of sales representatives and their traveling and accommodation costs, plus all other costs such as commissions to agents, etc. related to the selling activity of the company.
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.
|The cost of packaging the final products to customers. This cost is usually included with the cost of raw material in TVC when it correlates with the variation of goal units by 100%.
|Work expands so as to fill the time available for its completion. It was first articulated by C. Northcote Parkinson in the book Parkinson’s Law: The Pursuit of Progress, (London, John Murray, 1958) based on extensive experience in the British Civil Service.
|POOGI is an acronym which stands for Process Of On-Going Improvement coined by Dr Eli Goldratt. It is bases on goal orientation and consists of the five well known focusing steps:
1. Identify the Constraint
2. Exploit the Constraint
3. Subordinate Everything Else
4. Elevate the Constraint
5. Refocus on the Goal
|A series of linked activities and their respective tasks. A process has a beginning and an end. It uses resources to achieve its end.
|The tangible or intangible item (unit or part) or service a customer buys from an enterprise. This definition, although simple is critical to TA as the laws of dependant and independent variability must fully apply. See also SKU.
|Maximization of T per constraint minute for all products and services.
|An assessment of the product quality using the Throughput rejection rate as in TDD.
|PRODUCTION HOURS WORKED
|This includes the total hours (normal and overtime) worked by the production employees. In the case of salaried employees, normal hours worked should be calculated and added to the clocked wages hours.
|PRODUCTIVITY/ PRODUCTIVITY RATIO (PR)
|Throughput per department or the whole system divided by OE per department or system. Note: The generic definition of Productivity is Output divided by Input. For further information, read ‘The Goal’. TOC and TA’s productivity, ignore inflation, price over and under recovery, and optimized allocation and efficiency of all resources. Productivity is also = Throughput divided by Operating Expenses (T / OE). See also the TA Ratio.
|PROFIT BEFORE INTEREST AND TAX (PBIT)
|Profit before interest and tax is the profit/loss before tax of the company, but the total interest paid on external financing by the company is excluded. Interest paid is the gross interest paid in respect of all loans/foreign capital. Loans by directors to the company should be treated as shareholders funds, i.e. interest costs on these should not be treated as interest but as other expenses.
|PROFIT BEFORE TAX (PBT)
|Profit before tax is the net profit before tax and distribution as shown on the final Income Statement – undistorted and unchanged.
|The action of obtaining the maximum net profit a business can make in the minimum time period given limited resource capacities and capabilities, now and in the future. In this definition, resources include machines, capital (own or borrowed), people, processes, technology, time, materials, markets, etc.
|The action of managing a project. It can involves many activities, from scheduling to communication. Project Management in TOC is outcomes based as opposed to activity based.
|Rental cost is a cost figure already included under overheads. The rental cost should represent the actual (gross) rent paid for the premises used.
|A method of setting targets, monitoring and replenishing inventory within a supply chain based on end consumer demand, often referred to as a “pull” system. Inventory is distributed to locations within the supply chain (plant, distribution centers, retail centers) where it is most likely to help increase service levels and minimize the need for protective buffers. This often results in more inventory being held where the forecasts of demand are more reliable (e.g., at a “plant warehouse” or distribution center) and less inventory being held at the end consumer location. Each link in the supply chain holds the maximum expected demand within the average replenishment time, factored by the level of unreliability in replenishment time from the next link. Each link orders what was sold, with the exception of changes in the buffer size based on buffer management. Order frequency is based on practical considerations (focusing on total impact on Throughput, Investment and Operating Expense, not just focused on minimizing transportation costs). Transfer pricing is not used.
|Replenishment Time is the time it takes from when a product is sold until a replacement is available at the point of sale/use. Replenishment time can have 3 components: order lead time; production lead time; and transportation lead time. If stock is available, replenishment time will consist of order lead time and the time to pick, pack and transport.
|A resource is anything used to generate Throughput. It can be labor, materials, machines, technology, knowledge, capital or people. Often a plant or machine is referred to as ‘a resource’, but it is not limited to this only.
|RETURN ON INVESTMENT (ROI)
|A relative (global) measure of Net Profit divided by Investment times 100 to express it as a percentage. (See Investment definition). The equation ROI = 100(T – OE) / I calculates the result where NP = T – OE.
|This item comprises all external long- and short-term (debt) finance obtained from “outsiders”, e.g. long-term loans, hire purchases and all current liabilities. It also includes excess inventory that is a liability.
|ROAD RUNNER ETHIC
|The work rules in the drum-buffer-rope or CCPM system: if there is work available start it immediately; if there is more than one work-order/task in queue choose the one with the highest system-priority; work at full speed without stopping until the work is completed; produce zero defects and pass the work on immediately; if there is no work available stay idle. The name comes from the popular cartoon character who had only two speeds: full speed, or full stop.
|The actual sales to date less credit notes.
|Selling costs comprise salaries and commissions of sales representatives and their traveling and accommodation costs, plus all other costs such as commissions to agents, etc. related to the selling activity of the company.
|The selling price of a product or service in Throughput Accounting often causes confusion because the definition goes beyond the agreed price arrived at by a willing buyer and willing seller in the market place. The difference lies in the fact that incentives given to customers to buy or buy more are actually a reduction of the Throughput of the ‘system’ and the selling price should thus be reduced by these types of discounts and incentives. Do not confuse these incentives with discounts given to customers for them to settle their outstanding debts to the business. The later are given from a financial perspective which increase Operating Expenses and not an operational perspective. Throughput Accounting is primarily concerned with measuring the performance of operations.
|Equity represents the combined interest of the owners of the company, e.g. share capital, loans from directors, distributable reserves and capital reserves.
|“Six Sigma” is a registered trademark of Motorola Corporation. The ‘bottom-line’ measure of Six Sigma’s benefits, is the quantified monetary value amount of cost savings it has calculated for a business. The savings, which are mainly obtained from defect reduction and quality improvements, can result in huge financial benefits. To achieve a high Six Sigma, a process must not produce more than 3.4 defects per million opportunities. Six Sigma can be used to improve every facet of a business, from procurement, production, human resources, financial management, order entry, technical support, to after sales customer service and more.
|STOCK-KEEPING UNIT (SKU)
|A unit (part or item) of inventory that is carried as a separate identifiable unit. E.g. A box of 100 ball point pens, although containing the same unit, is a different SKU from a single ball point pen. These SKU’s are differentiated by different codes or sub codes in inventory systems. E.g. A bar codes’ main code could be the same, but the sub code is different. Service providers do not have SKU’s, but do however have products (the service definition they provide), and it is critical to the workings of Throughput Accounting and Constraints Accounting. See also Product.
|As Throughput Accounting is a systemic approach viewing an enterprise as a system, with a total input and a total output, a system as usually an entity such as a business in a legal form of a registered company. Sometimes a division of a company where management have autonomous control, is a system. A system can be a manufacturing concern, service provider, “for-profit” or “not-for-profit” organization. An example of a manufacturing system is where activities such as the utilization of raw materials, purchasing of parts, use of a Bill Of Materials, the existence of Work In Progress, and Finished Goods. See also Goldratt’s description of the VAT or VAIT systems in the literature. Note that although we do not attempt to define the “Murphy” phenomenon, we acknowledge its existence.
|A T Plant is a production environment where the production network is characterized by a number of common subassemblies and assemblies combined to make a wide variety of finished products. T plants are characterized by divergent subassembly and final assembly points. The logical network of material flow resembles the letter T because all materials go through similar processing until the final steps which create a relatively large number of different end products.
|THEORY OF CONSTRAINTS
|The Theory of Constraints (TOC) invented by Dr Eli Goldratt, is a holistic set of techniques that achieve a desired goal. TOC identifies: what to change, what to change to, and, how to cause the change. TOC uses the focusing steps, systems thinking, finite scheduling, and other techniques to achieve the change. The change itself becomes the norm and not the exception. From a Throughput Accounting point of view, TOC’s uses the focusing steps where Throughput accounting forms an integral part of achieving the goal, usually to maximize profits. Throughput Accounting and TOC are thus extremely well suited to one another.
|The Thinking Processes (TP) are a structured method for performing system analysis and improvement designed to address the three questions in the change sequence, namely, (1) What to change? (2) To what to change? and (3) How to cause the change? The TP contains a set of logic tools that can be used independently or as a complete integrated process of ongoing improvement. The latter refers to the sequence of steps starting with the development of the current reality tree (using the three cloud approach or with perhaps some clouds), future reality tree (along with some negative branch reservations), prerequisite tree, and, as necessary, some transitional trees. In addition, the TP logic tools can be used to achieve buy-in from various stakeholder groups.
|THROUGHPUT (T) (GENERAL)
|Throughput is the speed at which money (Net Sales less Totally Variable Costs flows through a business. It is calculated as the value that is left after deducting Totally Variable Costs (TVC) from Net Sales (NS) for a specified period of time which can be a second, a minute, an hour etc. Throughput is not Gross Profit (GP) because specific times are used to calculate the speed. The ‘money’ referred to is derived from the units of product converted into cash. Throughput is used in Throughput Accounting and it is like having a speedometer for a business.
|THROUGHPUT (T) (SYSTEM)
|The rate that money is generated by a system. ‘Money’ is Throughput and is Net Sales less Totally Variable Costs (see definitions of Net Sales and Totally Variable Costs).
Throughput (T) = Net Sales (NS) ‑ Totally Variable Costs (TVC)
Money is measured in the local currency of a country as Throughput. Where a system comprises of a group of companies in different countries with its own currency, money is the holding company’s country currency where consolidation occurs, and it is adjusted for exchange rate fluctuations.
A system’s Throughput is also the value that is left after deducting Totally Variable Costs (TVC) from Net Sales for a specified period of time. Generally, a system’s Throughput is referred to as a total value, however Products and Services also have Throughput values as well as Throughput Rates.
|THROUGHPUT ACCOUNTING (TA)
|Throughput Accounting (TA) is: an approach that includes methods and techniques; that provides businesses with operating and strategic knowledge; that focus on continuously improving the weakest link; aimed toward reaching a defined and quantified monetary goal of the business. Simply put, if your business’ goal is to make a $million by 31 December 2004, then TA will provide you with the measures you need to achieve your goal.Throughput Accounting is not simply accounting or bookkeeping. Often incorrectly categorized as a ‘costing system’, Throughput Accounting is a sophisticated business tool that puts specific measures in place that show you why your business is not making money and shows you how to make it. Throughput Accounting identifies the weakest link and is where accounting, marketing and production meet. Throughput Accounting is used in Dr Eli Goldratt’s Theory of Constraints (TOC)*.Examples:
If you want to increase profits or make higher returns, then TA will provide ‘Throughput World’ knowledge to optimize profits
If your business is continuously late on delivery, then TA measures will show you how to increase Throughput
If your Return on Investment (ROI) is too low, then TA will show you how to increase ROI
If your costs are too high, then TA will show you how to reduce Operating Expenses (OE)
Throughput Accounting simplifies management accounting. It is based on the power of one – i.e. the whole is only as strong as its weakest link. By continuously improving the weakest link, the whole will improve. How does Throughput Accounting do it?The Throughput Accounting approach breaks away from the insistence of clinging to cost allocation found in most traditional management accounting approaches – instead, it concentrates on maximizing throughput, minimizing inventory, and minimizing operating expenses. Throughput Accounting is applied by accountants, operations and production people, marketers, business managers, and many others, to enhance their business’s ability of achieving its goal. Its power lies in its speed of providing pertinent information thus enabling its users to make decisions relevant to the whole system and not just parts of the system.Throughput Accounting is a necessary enhancement to your business toolkit and that helps you make the right decisions the first time round. It provides strategic and operational information that enhances the financial results achieved by your GAAP (Generally Accepted Accounting Practice) accounting systems of an enterprise.
*Dr Eli Goldratt is a most notable author and the father of the Theory of Constraints that uses the concepts of Throughput Accounting to turn businesses into profitable businesses.
|A management accounting method that is based on the belief that because every system has a constraint which limits global performance, the most effective way to evaluate the impact that any proposed action will have on the system as a whole is to look at the expected changes in the global measures of throughput, inventory and operating expense. TA is also defined as a management accounting methodology for decision making that is used in the Theory of Constraints and synchronous manufacturing which causes a paradigm shift change in profitability.
|THROUGHPUT ACCOUNTING RATIO (TA RATIO) – SYSTEM
|Throughput divided by Operating Expenses
|THROUGHPUT ACCOUNTING RATIO (TA RATIO) – PRODUCTS & SERVICES
|Throughput per Constraint unit divided by Operating Expense per CCR units.
|THROUGHPUT CAPACITY RATIO
|Throughput Capacity Ratio = Standard minute content of sales per factory capacity of factory.
|THROUGHPUT DOLLAR DAYS (TDD)
|A measure of reliability where the due date performance of an order is measured by assigning, to every late order, a value equal to its selling price multiplied by the number of days the shipment is late. As Throughput dollar days (TDD) is a measure of the reliability of a supply chain, it considers the monetary value of the things a link is committed to deliver but does not, and the number of days by which the link misses the commitment. TDD is the summation of the commitments not delivered on time during the chosen time period. The TDD value of individual missed commitments is calculated by multiplying the dollar value of the end product times the number of days the commitment is/was overdue. The system should strive for zero throughput dollar-days. The unit of measure “dollar-days” is neither monetary nor time based. Attempts to compare dollar-days to other monetary measures are invalid. TDDs can be compared only to other TDD levels. TDD = [late order T] * [days late]
|THROUGHPUT PER CONSTRAINT UNIT
|T/C is Throughput divided by the time a product takes to complete the system constraint. It is a measure applied to the various products made by a company that quantifies the rate at which each product is able to generate contribution dollars (selling price minus TVC – Totally Variable Costs). This measure it particularly useful when a company is unable to produce all the products the market demands and has the opportunity to choose which order(s) would be more (profitable) to accept. It is also helpful for decision making regarding pricing and the introduction of new products. Generally speaking, T/C is calculated by dividing the amount of Throughput dollars generated by the sale of one unit of the product or service divided by the processing time for a unit of the product on the constraint.
|Throughput Speed, abbreviated as ‘T Speed’, is the speed at which Throughput is generated* and is expressed as Throughput (see definition of Throughput) per time unit (e.g. minutes) of constraints (see definition of Constraint).*Generated, although used in the past tense here is not limited to historical Throughput.Examples include: T/Constraint minute, T/Constraint second, T/Constraint day etc.The time unit used in the speed is largely dependent on the industry sector in which the speed is measured but other factors could be included in the measurement e.g. weight in the mining sector where traditionally weight has been used and now the T Speed of certain weights are used. In order to determine the T Speed, Throughput is divided by the time with which a products Throughput is processed by constraints e.g. Capacity Constrained Resources (CCRs). The measure is an indicator that is used for comparing speeds for a variety of business decisions, e.g. product preference.
Even though T Speed is most commonly used to determine the rate of Throughput contributed by products of a business, TPACC use advanced T Speed measures which measure T Mix velocity within supply chains in past, present and future time frames.
|A paradigm, or way of thinking that emphasizes the expansion of Throughput as the means to bottom-line net operating profit improvement. See Cost World. The Throughput World emphasizes the realities of statistical fluctuations and event dependencies present in any production or project management system that has more than one component. The combination of these two factors is what necessitates the elements of the drum-buffer-rope or CCPM solutions for managing these systems.
|TOTALLY VARIABLE COST (TVC)
|All costs that have a correlation coefficient of nothing less than 1.0 with the quantity of products leaving the system. This usually but not always includes raw material that was purchased during the period. Included in raw material costs are the costs of packaging material, freight, landing charges, import duties, transport inwards. Quantity discounts received should reduce the cost.NB! TVC is not calculated in the same manner as conventionally accepted methods indicated in GAAP and other accounting statements (E.g. AC108) and practices where the cost of raw materials utilized in the manufacturing process is calculated as follows:*Value of opening stock
*Plus: Totally Variable costs (usually includes Raw Material purchased during the period)
*Less: value of closing stockPacking materials are treated as raw material consumption and not as distribution costs which are usually included in Operating Expenses.If work-in-progress and finished products stocks increased during the year, the raw materials component of this increase must not be subtracted from the cost of raw materials used. If work-in-progress and finished products stock decreased during the year the raw material component of this decrease must not be added to the cost of raw materials used.
|This item comprises all external long- and short-term (debt) finance obtained from “outsiders”, e.g. long-term loans, hire purchases and all current liabilities.
|UNREFUSABLE OFFER (URO)
|An Unrefusable Offer is a combined marketing and sales initiative that addresses the customer’s core problem and creates a strong win-win for the supplier and customer. It is so called because, if constructed properly, the sales offer is almost too good to be refused by the customer. The URO is sometimes called by the slang term: mafia offer.
|A V Plant is a production environments characterized by a small number of raw material items being converted through a series of diverging operations into a large number of end items. The logical network of material flow resembles the letter V in that it is narrow at the bottom (few raw materials), and diverges at the top (many end products).
|Variable costs are costs that vary with the unit of product or service sold to customers. See TVC for the Throughput Accounting definition. Variable Costs in TA generally include Raw Materials and Packaging as these costs are the only costs that actually vary with the units sold by a system. Variable costs in costing systems, are the costs that are allocated based on a specific method.
|A Viable Vision is an analysis done by Dr Eliyahu M Goldratt personally where he is convinced that a company can make the Net Profit equal to the current value of Total Sales over or within a four year period. There are several Viable Visions being undertaken and to find out more, visit the Goldratt web site. A link is available on our Associates and Alliances page.
|WAGES AND SALARIES (Production)
|This includes the gross wages and salaries of all factory personnel including production management, foremen, production planning, maintenance, prototype and quality control, i.e. the cost of all employees involved in the production process of the factory. It includes both direct and indirect factory labor. Overtime wages are included. All contributions to sick funds, holiday pay, levies, etc. are included. Where the Managing Director (General Manager) himself also acts as a factory manager, a portion of his salary should be included here. Housing subsidies, rental on houses for personnel, repair and maintenance to these houses etc. are also included.
|WALDRON & GALLOWAY MEASURES
|A special mention must be made about these two gentlemen who devised what are the original Throughput Accounting measures. See CIMA’s Management Accounting publications 1989. The following measures were devised and used by them.
*Return per factory hour = [sales price – material cost] / [time on key resource]
*Cost per factory hour = [total factory cost] / [total time available on key resource]
*TA ratio = [return per factory hour] / [cost per factory hour]
*TA ratio = [T per product per constraint minute] / [(OE per constraint capacity minute) * (the minutes the product spends on the identified constraint machine)]
*Weighted average TA ratio = S[(sales volume) * (TA ratio)] / S[sales volumes]
*Quality ratio = [minutes of T achieved] / [total direct available minutes]
*Performance = T / [total factory cost]
*Cost per minute = [total budgeted departmental cost] / [total budgeted direct minutes]
*Departmental T = [standard minutes of T] * [budgeted departmental cost per minute]
*Efficiency = T / [total departmental cost]
*Labor efficiency = T / [direct labor cost]
*Stock efficiency = T / [total stock value]
*Cost per focal-point min = [total facility cost] / [ focal-point capacity (min)]
*Departmental ratio = T / [total facility cost]
|Waste is anything that does not contribute to reaching the goal.
|WEIGHTED TA RATIO
|The TA Ratio weighted by each products sales volume.