Page 112 - The Handbook for Quality Management a Complete Guide to Operational Excellence

98 I n t e g r a t e d P l a n n i n g S t r a t e g i c P l a n n i n g 99

Dilemma: System or Process?
The measurement issue harks back to the earlier discussion about sys-
tems versus processes and the fallacy of assuming that the sum of local
efficiencies is the system optimum. Traditional rationale maintains that
achieving the highest possible productivity in every discrete function of
the system equates to good management. Productivity is typically repre-
sented as the ratio of out puts to inputs. These inputs and outputs are
sometimes expressed in financial terms. Managers often spend inordinate
time chasing higher productivity for their own departments, without
much concern for whether the whole system benefits or not. This under-
scores the heart of the problem: How can we be sure that the decisions
we make day-to-day truly benefit the system as a whole. In other words,
how can local decisions be related to the global performance of the
company?
This is not necessarily an easy question to answer. Consider yourself
a pro duction manager for a moment. A sales manager comes to you and
asks you to interrupt your current production run (that is, break a setup)
to process a small but urgent order for a customer. How will doing what
the sales manag er wants affect the company’s bottom line? What will it
cost to break the setup (both financially and to the production manager’s
productivity figures)? How much will it benefit the company? Or the
production department? These are not easy questions to answer, yet
throughout many companies people are called upon to make such deci-
sions daily.

New Financial Measures
Assuming that a company’s goal is to make more money, Goldratt con-
ceived of three simple financial measures to ensure that local decisions
line up effectively with this goal. These measures are easy to apply by
anyone at vir tually any level of a company: Throughput, Inventory or
Investment, and Operating Expense (Goldratt, 1990, pp. 19–51).
Throughput (T) is defined as the rate at which a system generates
money through sales (Goldratt, 1990, p. 19). Another way to think about it
is the marginal contribution of sales to profit. Throughput can be assessed
for the entire company over some period of time, or it can be broken out
by product line, or even by individual unit of product sold. Mathemati-
cally, Throughput equates to sales revenue minus variable cost.

T = SR - VC

Inventory (I) is defined as all the money the system invests in purchas-
ing things it intends to sell (presumably after adding some value to them)
(Goldratt, 1990, p. 23). Because Goldratt’s concept of Inventory includes
fixed assets, such as equipment, facilities, and real estate, the term “I” has
come to represent “investment” as well, rather than just “inventory” alone.

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