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Throughput Accounting And The Theory Of Constraints

2161 words - 9 pages

THROUGHPUT ACCOUNTING AND THE THEORY OF CONSTRAINTSA Summary of Goldratt's ArgumentDuring the 1970's Eli Goldratt developed a new approach to production management which he called Optimised Production Technology (OPT). This approach provided a logical analysis of manufacturing issues and argued that in order to increase the throughput (defined as sales less material costs) of a plant, production managers needed to identify and focus attention upon the ultimate constraint of a plant's output. This is often described as a bottleneck. This bottleneck resource must be distinguished from non-bottleneck resources with an aim to identify and remove it.Goldratt viewed the rhythm of production in a factory as to work to the beat of a drum using a drum-buffer-rope theory to explain how production should be organised. The rhythm of production flow is dictated by the bottleneck which is usually a machine whose capacity limits the throughput of the whole production process. If the removal of the bottleneck is not possible the bottleneck must be utilised at all times to ensure the bottleneck never slows plant's output. A time margin or 'buffer' of parts in front of the bottleneck allows checking before parts reach it so that rejects do not take up constraint time. Alternative routes for some parts can be investigated so that parts are not processed on the bottleneck unnecessarily. A schedule for releasing raw materials to the floor is required with the 'rope' derived according to the drum and buffers. Its mission is to ensure the proper subordination of the non-constraints with the results providing a smooth and continuous flow of materials through the plant with minimum disruptions.The management and idle time of non-bottlenecks is not detrimental to the efficiency of the organisation as they have excess capacity and if they were utilised at all times they would increase inventory with no increase in throughput for the organisation. Instead they should be scheduled to serve the bottleneck, and material should be released to them on this basis.By the early 1980's experience with the embedding of OPT software had led to a revised Throughput World approach with the non-bottleneck production being represented as a reduction in overhead recovery with a consequent drop in reported profits. Goldratt was forced to look at issues outside the field of production scheduling and into the goal of organisations. He took the view that they wish to make money now and in the future. Thus the 'Throughput World' perspective to maximise throughput, minimise inventory and minimise operating expense was born.The theory of constraints attacked the traditional Cost World accounting system, defined because it operates on the assumption that product cost is the primary way to understand value and make business decisions by arguing that the performance of the whole organisation is determined by the throughput at a constraint. Traditional cost accounting emphasises that efficiency and...

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