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We hope you enjoy our Theory of Constraints videos. We are TOCICO Certified Theory of Constraints Consultants specializing in highly custom job shops and machine shops. We have online coaching programs and offer RESULTS based consulting. This Channel hosts free training on Eliyahu Goldratt's Theory of Constraints (TOC) including: - Mafia Offers, Theory of Constraints Sales and Marketing, Competitive Advantage, Unique Selling Propositions - Throughput Accounting (TA) - Drum Buffer Rope (DBR) and Simplified Drum Buffer Rope (SDBR) - Critical Chain Project Management (CCPM) - Theory of Constraints Thinking Processes - Theory of Constraints Replenishment - The Goal book by Eliyahu Goldratt - It's Not Luck book by Eliyahu Goldratt
Really great stuff! Would you say that Throughput Accounting is applicable in a non-profit organization, where revenue isn't the goal of the organization?
@@TonyBill-iw5rb Throughput Accounting would still apply to the $. As far defining your goal in terms of what T is for you, that would be essential for you to figure out.
Try to figure out what would be considered “truly or totally variable” for each unit of service or product you provide. What cost is directly a 1 to 1 basis with each “unit” you provide to your customers?
#USAMfgHour A1> Multiple times. I've read all of Goldratt's books. A2> The goal for my business is to generate money. I'm retired so for me the money I earn helps us afford nice vacations, and let's my wife pull forward the date she can retire too. A3> Health Restrictions / Time. There's a finite number of hours I can spend per day on my business. I need a lot of rest and to keep low stress. Additionally the meds I take can create brain fog. My "Business" is closer to a side-hustle that earns extra cash for the family. A4> Of course. A5> I think efficiency should be measured at the constraint as it impacts total output. A6> I was a Software Engineering Manager at Amazon. My team had one senior engineer who had a full workload. His individdual output was about twice that of of the other 7 engineers on the team. The issue is that the mid-level and junior engineers would often want his input so they were idle while they wait on him to be available. Our team more than tripled the amount of work we could do each month when we asked him to only do individual work 4 hours per day and spend the other 4 hours helping the other engineers. We also had him allocate time to design review before any lines of coded which mostly eliminated the times that we'd discover a solution wouldn't work forcing rework or redesign. Finally, thanks for hosting this. Look forward to hearing from other people in the chat.
I loved "The Goal", and I've read all of Goldratt's books. What I've learned from him literally changed my professional life. Just dropped you a follow at Twitter. I have the same username there. :)
Does this mean that valuations of companies are greatly distorted? That stock prices really represent distortion, and the higher the distortion the greater the stock price... please do reply.
Hi Mohit, Unless we unwind the allocations buried inside companies’ financial statements I contend that an accurate valuation cannot be produced. Now, as to whether or not any single company is over/under or appropriately valued at this time would depend on the unwinding of the allocations in their specific financials. It’s also my position that cost accounting so distorts financials as to not allow comparability between companies in the same industry. In essence, cost accounting causes the financials to act like a “black box” into which investors have little to no insight about. This, in addition to incenting management (when compensation is tied to the stock price) to take actions which negatively affect the company yet report “positive” financial results. Excellent question.
Dear Dr. Lisa / Beau, I have gone through presentation . I have a doubt which I could not get clarified though have given deep thought. Please see segment of video at 34:12 minutes and explain me where from (200,000),(200,000) and (400,000), (500.000) arrived? In both the companies how it is different? Your explanation shall be a great help to me.
Anil, Please listen to my explanation at 35:09 for additional information on your question; it is answered there. The companies both had total Operating Expenses of $400,000 and $500,000 in Years 1 and 2, respectively. That’s where the (400,000) and (500,000) come from on TA, Inc.’s books because it is using Throughput Accounting and reporting the complete Operating Expense (i.e. no allocations); it’s simply the sum total of payroll, rent, utilities, insurance, etc. necessary to operate the business. The reason that the company, Inventories-R-Us, shows a different amount is that it has done allocations of the Operating Expense. In Year 1, Inventories-R-Us allocated $50,000 to the Cost of Sales and $150,000 to the balance sheet. So, it’s $200,000 of SG&A plus the $50,000 in Cost of Sales and the $150,000 allocated to inventory on the balance sheet adds up to the same $400,000 that is the actual operating expense of the company (this is what Throughput Accounting actually shows, as reported by TA, Inc.). Use the same process to identify the where the costs from Year 2 were placed on Inventories-R-Us’ books. Thus the (200,000) and (200,000) you are inquiring about come from the actual Operating Expense of the company ($400,000 in Year 1, $500,000 in Year 2) affected by the cost allocation process. In the example, it reduced the reported SG&A of Inventories-R-Us as it is growing its inventories, thus pulling more and more costs onto the balance sheet each year. To you second question, how is it different? Well, one set of statements (those for TA, Inc.) show you 1) the actual performance of the company (i.e. Net Profit), 2) the actual breakeven point of the company, and 3) the true financial position of the company via the balance sheet. The other reports are distorted and do not accurately reflect the performance, nor the financial position of Inventories-R-Us. The TA is right, the GAAP/IFRS/cost accounting methodology used by Inventories-R-Us provided distorted figures (incorrect in my view). Thanks, Beau
Where can I find the 101 series you created? I am seeking to understand and learn more about the applicability of throughput accounting and value it creates by eliminating distortions.
www.scienceofbusiness.com/throughput-accounting/ and you also may be interested in some of our online throughput accounting courses www.theoryofconstraintscpe.com/pages/throughput-accounting
Hi Beau and Lisa, Great job on the presentation! I had a question that I was trying to work out though. In the Buy vs Make slide (around 57 minute mark) how is the Labor accounted for in the Make scenario? I think the immediate pushback that I would get is that the Buy calculation is incorporating the Labor costs and the Make calculation seems to totally ignore it, so it wouldn't be a fair comparison. I'm sure I am missing something obvious. But I'd like to be able to counter that argument since I am a proponent of TA and see the benefits. Any feedback would be appreciated, Thank you!
Hi Pat, In Throughput Accounting, labor is accounted for in Operating Expense. In the Make Scenario, to produce the item it’s not necessary to hire another worker, thus Operating Expense is the same (and thus shows no change on the slide). We utilize what we call, “The Number”, which has built into it all the Operating Expense a company needs to earn. That would be where and how we ensure that we’re generating enough Throughput-margin to ensure we’re profitable. Thanks!
@@TOCexpert Ah, yes I think I see it now. The slide was showing the COGS under the cost accounting method for 'Make' which allocated a portion of labor. By moving that labor cost down to Opex, you can get a true feel for the variable cost and impact on Throughput for each incremental unit. Does that sound about right? Thanks again
@@patf4274 Yes, that is correct. Throughput-margin, as we call it, is a “clean” number with no distortions. It also creates clarity because there are no allocations to argue about. Everything is relatively straightforward and can be agreed to a vendor invoice or a contact (e.g. sales commissions, royalties, etc.). Thanks!
If you are a manager, try to build this evaporating cloud (conflict resolution diagram) first on your own. Next when you invite the person you try to solve this conflict with. I suggest to have first agreement on A (don’t show your diagram), once agreed , verbalize the other party’s want and say sth like ‘If I understand your correctly you want to do D’because you rightfully want to ensure ‘C’ is fulfilled? Let the other person validate or you adjust the wordings first (use the other party’s wording, like Lisa mentioned. After that ask the question whether your need is valid (B) to accomplish your common goal. Next, ask them which action to take...since you realise your action seems to be in conflict with their D’...
I have been using these tools many times in a big variety of sectors and companies. They are so powerful and have more side benefits than earning more today as well as in the future. Here are a few of the benefits I have noticed implementing this together with people from the different companies: - We finally understand each-other across functions - Finally we are happy campers again, true cooperation between departments, haven’t seen that for decades - Never realised why ‘the others’ were insisting so much on their ‘wants’, now I understand their need, and we found a common action to satisfy both our needs - We kept on fighting symptoms, until we realised the deeper lying conflict of wants tight to the needs - Finally no more ‘fire fighting’ - ...
A good video explaining how balancing capacity seems like such a good idea but creates problems because of statistical fluctuations across dependent operations.. Shame the sound is a bit muffled.
I have a couple of questions. the Slide at 57:14 shows Delta OE to be 0 for Make and Buy. That is simplistic right? If I am only buying vs Making the Delta OE should be Negative for Buying right? Another unrelated question: When the product is produced and it is to shipped to a Warehouse in a truck, should the shipment cost be considered OE or Direct Cost and if Direct how should the apportionment happen across products in that Truck? Same with say Power Cost, should it be considered as Variable or OE, if Variable then how should the apportionment happen?
If I am only buying vs Making the Delta OE should be Negative for Buying right? No, if you're buying then OE would be 0 but TVCs would increase due the purchased part.
When the product is produced and it is to shipped to a Warehouse in a truck, should the shipment cost be considered OE or Direct Cost? It depends on the situation but given your description most likely it would be a OE. For detailed information check our Throughput Accounting courses at www.theoryofconstraintscpe.com/.
Hello, very good video. One question though: around 6:50 in the video you say that the average output of the produktion chain is only 10, when the variation of each step is plus or minus 3. But isn't that 20 plus-minus 3? So the least one step can process, no matter what, is 17? So in this example we actually have an exces capacity the second we get to 17 units. If not, i'm not entirely sure i could explain it to someone else :)
You may have missed where that was explained in the video. The plus or minus 3 applies to what was passed even though each step has a theoretical capacity of 20.
Great stuff. I am an HVAC contractor and we starting the road to learning and implementing TOC about 18 months ago starting with "Critical Chain", then backed up into "The Goal". Full implementation is a challenge. I have told our folks If I was grading us in implementation I'd give us a D at best. However, the results have been doubling sales and a 350% increase in net profit. Everyone should be on this juice!
It's interesting how we reach the same result in the UK in a different way Here, you first establish 'What is the USP of my business' That USP includes a unique guarantee or pledge - which Dr Lang terms a 'Mafia Offer' Once that is established and implemented, you then look at your sales copy-writing That revolves around 'What is the USP of my product' - which Dr Lang calls the 'Customer Value Proposition' Same result. Different route to reach it. Best wishes William Kingskerswell goo.gl/qCgHiN
Love your definitions Lisa Lang- - and I totally agree, that identifying your USP-Unique Selling Proposition- is one of your greatest business strengths and marketing strategies. It is my pleasure to share a complimentary workbook on how to create your USP-Elevator Pitch right from my site: Unique Elevator Pitch.com Warmest regards, Nomiki
I Really Like The Video From Your This short video on sustainable competitive advantage includes the definition and factors to consider in developing or creating a competitive advantage.