This website covers topics on knowledge management, personal effectiveness, theory of constraints, amongst other topics. Opinions expressed here are strictly those of the owner, Jack Vinson, and those of the commenters.

Why does TOC focus on Throughput?

Focus of AttentionI came across this short piece by Joy Goltz in the NY Times, Why Cash Is NOT King.  And I couldn't help think of the connection to one of the core tenets of Theory of Constraints thinking and consulting practice.

“Cash is king” is a well-worn phrase that has been used quite a bit over the last few years. I hate to burst the bubble, but it is not true. Cash can be king for a day, a month or maybe even a year, but eventually it will be unseated by the real king: profit.

Hidden under the Five Focusing Steps and some of the other interesting pieces of TOC is an important understanding.  All of the improvement efforts are connected to the goal of the organization.  And that goal is usually connected to maintaining the business as a going venture.  In the for-profit world that means making money both today and tomorrow.  (Non-profits have to bring in money and then use it effectively in the pursuit of their larger goals - the funding bodies don't look kindly on perceived ineffective use of their funds.)

Theory of Constraints terminology talks about creating and improving Throughput = Sales - Totally Variable Cost.  It's not simply manufacturing more stuff that sits in the warehouse, as I have seen some people describe TOC.  Nor is it simply running projects because they can be run.  Throughput is cash generated by sales.  Throughput has to pay salaries, keep the lights on and all other operating expenses.  Throughput also has to fund long term investments.  And, of course, without throughput, there are no profits. 

There is another fun thing about Throughput - there are no real upper bounds on Throughput, while there are lower bounds on cutting operating expenses and investment.  This is why TOC focuses on Throughput, as opposed to cost cutting or many other valid improvement opportunities.

[Photo: "Focus of Attention" by h. koppdelaney]

CACM: Business Impact of Web 2.0 Technologies

Stress and strain in improvement projects