Page 114 - The Handbook for Quality Management a Complete Guide to Operational Excellence

100 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 101

For daily management decisions, which we’d like to be able to relate to
the system’s goal, T, I, and OE are much more useful than the traditional
organi zational success measures of net profit (NP), return on investment
(ROI), and cash flow (CF). Yet there has to be a connection between the two
types of financial measures. And here it is:

NP = T - OE
ROI = (T - OE)/I
CF = T - OE ± DI

Net profit is the difference between Throughput and Operating
Expense. Return on investment is net profit (Throughput minus Operat-
ing Expense) divided by Inventory/Investment. And cash flow is net
profit (Throughput minus Operating Expense) plus-or-minus the change
in Inventory.
If Throughput is increased, net profit increases, even if Operating
Expense remains the same. If Operating Expense is reduced, net profit
also increases (as long as Throughput at least remains constant). If Inven-
tory is reduced, ROI increases, even if there are no changes to Throughput
or Operating Expense. These measures relate to operational management
decisions much better than net profit and return on investment, keeping
daily decisions more in line with the system’s goal than abstract effi-
ciency measures such as machine utilization, units produced per day/
week, etc.
For example, here’s how a manager might use T, I, and OE to evaluate
a decision he or she is contemplating (Dettmer, 1998, p. 33):
• Will the decision result in a better use of the worst­constrained
resource (i.e., more units of product available to sell in the same or
less time)?
• Will it make full use of the worst­constrained resource?
• Will total sales revenue increase because of the decision?
• Will it speed up delivery to customers?
• Will it provide a characteristic of product or service that our
competitors don’t have (e.g., speed of delivery)?
• Will it win repeat or new business for us?
• Will it reduce scrap or rework?
• Will it reduce warranty or replacement costs?
• Will we be able to divert some people to do other work (work we
couldn’t do before) that we can charge customers for? If so, the
decision will improve Throughput.

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