I ask Charlene Spoede Budd, a Professor Emeritus from Baylor University, that question in a past podcast. Dr. Budd taught management accounting and project management classes for a number of years and has co-authored two accounting textbooks with her most recent book, A Practical Guide to Earned Value Project Management.
Joe: What makes throughput accounting special though? What’s the advantage I would have to investigate the time in learning it?
Transcription and Related Podcast: Throughput Accounting
Charlene: It supports Theory of Constraints. I’ve done a lot of studying over the years on various improvement initiatives. I started with Deming. I even went back and picked up Mary Foster Follet. She was a writer in the 1920s that Deming took a lot of his ideas. Deming ensured in all of the quality guides all the way through everything that has come down the pipe since then. I even wrote what they call a portfolio or Bureau of National Affairs called Internal Reporting and Improvement Initiatives. I looked at every one of the improvement initiatives. By the time I got through looking at all of them, it wasn’t just Quality, Just in Time, Lean, ABC, ABC management; I also looked at Demand Flow and Theory of Constraints.
When I got through looking at all of them, the one that had something that the others didn’t, they’re all blending together now, by the way. I mean, everybody is stealing the best of what everybody else has to offer. In looking at the whole thing, I became confirmed in my belief that Theory of Constraints offered one thing that they did not and that is focus.
Theory of constraints tells you what to do first, what to do second, what to do third. The others say do this, make these changes, but they don’t tell you where. They just say do it everywhere. Put all your production operations in the value stream.
Well that takes time. The latest book I looked at said, just like they used to say with quality initiatives, you can’t get results immediately. Lean transformations take about two years. Well, two years is a long time. Some companies, you know, if they had to wait two years, might not be around for the two years when the time was up.
Theory of constraints tells you, OK, it’s not going to be perfect but this is what you do first and you can get some results in two or three months. I think that’s a tremendous advantage.
You still use quality concepts. You still use the idea of just in time and Lean. The Lean part worries me just a little bit. The one thing I worry about with Lean is that they are so focused on cutting non?value added costs that I fear that they will cut into protective capacity or surge capacity. If they do that, then their delivery to customers will suffer. I mean, they will not be able to deliver on time if they get even a slight increase in orders.
So, there has to be some protective capacity at all times everywhere you can. You can’t do that everywhere. That’s where the Theory of Constraints says where you have the least capacity; it may not be a true constraint because the market may be your constraint. But it allows you a focus point to schedule all of your operations depending on the performance of that one department or piece of equipment or area or product or whatever you’ve chosen to actually coordinate everything.
Coordination is a big thing in manufacturing and in service. I mean; you want things to flow. Lean is talking about flow. Deming talked about flow.
Transcription and Related Podcast: Throughput Accounting
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