Goal, (Goldratt and Cox, 1986) Alex Rogo

¶ … Goal, (Goldratt and Cox, 1986) Alex Rogo manages a troubled manufacturing plant. When his district manager informs Alex that profits must increase or the plant will be shut down, he turns to Jonah, a former professor. With Jonah's help, Alex turns the plant around while at the same time abandoning traditional management principles in favor of Jonah's Theory of Constraints and Throughput Accounting practices.

The Goal introduces the Theory of Constraints (TOC) as a new philosophy for improving production throughput. TOC views any company as a system with either non-bottle neck or bottleneck resources (pp. 137-138). These categories are simply defined as:

Bottleneck: Any resource whose capacity is equal to or less than the demand placed upon it.

Non-Bottleneck: Any resource whose capacity is greater than the demand placed on it.

Goldratt and Cox assert that in any process things can only have a throughput as fast as the weakest constraints will allow. Therefore, the only way to improve the strength of a process is to strengthen the weakest length. According to Goldratt and Cox, strengthening any other link before strengthening the weakest link would merely be a waste of time and resources because it is the weakest link that is determining the maximum performance of the entire production chain. The correct solution is to make the flow through the bottleneck on par with market demand in order to maximize profits (p. 138).

In defining the goal for an organization and how to measure achievement of the goal, Goldratt and Cox embrace the concept of throughput.accounting. Keeping with tradition, Goldratt and Cox conclude that the goal of a company must be take make money because if it doesn't it will cease to function (p. 41). However, Goldratt and Cox limit the company's goal to making money rather than allowing for a laundry list of operational agendas (p. 37). Goldratt and Cox also abandon conventional measures used to express the goal such as return on investment and cash flow because they believe that these measures do not lend themselves very well to the daily operations of the manufacturing organization. Instead, Goldratt and Cox turn to three different operational rules to optimize for running the plant efficiently (pp. 41-42). These include:

Throughput: The rate at which the system generates money through sales

Inventory: All the money that the system has invested in purchasing things which it intends to sell.

Operational expense: All the money the system spends in order to turn inventory into throughput.

It's important to note the differences between Goldratt's and Cox's definitions and traditional meanings. Throughput, for example, is now concerned with sales and not production because the authors believe that if you produce something, but don't sell it, it's not throughput. And, in their definition of inventory, they do not take the value added into account because they believe doing so leads to confusion over whether a dollar spent is in an investment or an expense (pp. 41-42).

TOC's focus is to maximize throughput which can, in principle, be increased without limit. Therefore, unlike traditional accounting systems such as activity-based costing, job order costing and process costing, TOC does not allocate operating expenses to products. Instead, TOC uses throughput per constraint unit as a major performance measure. TOC views calculating the cost of products as unnecessary and artificial. To Goldratt and Cox, cost allocation and adding overhead into stocks as goods are produced, regardless of whether they gave been sold, encourages inefficient behavior such as cutting one cost pool even though it has negative implications for another cost pool or negative repercussions for production quality.

Throughout The Goal, minimizing cost is considered to be a questionable objective. The authors explain that when a company does nothing, the cost is zero. Only after adding an output measure such as throughput to achieve a goal is there something to work with. Under the TOC approach, products processed and placed in inventory do not count as throughput. Thus, the TOC philosophy attempts to make sure that capacity is not wasted on overproduction simply to be efficient or achieve an economic lot size to increase total output per unit of time.

In TOC, all costs apart from direct materials are fixed. In contrast, activity-based costing is a resource consumption model in which short run changes in consumption do not translate to changes in spending.

In other words, activity-based costing is more appropriate for long-term decision making than is TOC. In recent years, fixed costs have increased faster than volume related costs because of the growth in operations and product diversity (MacArthur, 1993). Many of the costs for these activities are committed costs, resulting in problems with both over capacity, over spending and limited capacity and bottlenecks.