The Goal - The Main Concepts
I hope that you have enjoyed reading The Goal this Month!
Let us do a short recap of the main lessons ( Part 1);
Initially, Alex’s thinking is distorted by conventional management accounting metrics. This causes him to waste time and energy “improving efficiency” even though it has no impact on the profits of the division. Jonah helps Alex align his organization to the Goal by distinguishing between three operational measurements:
- Throughput: the rate at which the system generates money through sales net of variable costs. This corresponds to the value added by the system. (Profitable growth Through Predictable Results)
- Inventory: “all the money that system has invested in purchasing things which it intends to sell,” This was later expanded to include all investment such as plant, property, equipment etc. (Purchased by used software)
- Operating Expense: “all the money the system spends in order to turn inventory into throughput.” These fixed costs like rent and salaries are incurred whether or not throughput increases or decreases. (Project implementation Costs)
Armed with these definitions, Alex has a sound basis to analyze whether his decisions are helping the plant move towards the Goal (to make money, as characterized by increasing throughput and/or decreasing inventory and operational expense).
Between these three operational measurements, increasing Throughput impacts profitability far more than reducing Inventory or Operating Expense.
I will post a couple more articles from the Goal this week, stay Tuned!
Reference: Theoryof Constraints Institute
Meet me on March 15th for a discussion of the book 'Good to Great' https://www.meetconstance.com/upcoming-events/beverlyhillsbookclub
Make sure to pick up February's book "The Goal" by Eliyahu M. Goldratt and Jeff Cox . Purchase here