23.04.28 19:20 Ma (7) Theory of Constraints: “Throughput Accounting” Givas Company Their First Proflable Year Since 2008! | Linkedin 2 9 # Messgig Notfetone Mew Theory of Constraints: “Throughput Accounting” Gives Company Their First Profitable Year Since 2008! sv Hakont November 28, 2016 Changes to Decisions About “Customer Pruning” Quickly Yield a Turn-Around The founder and owner of this specialty foods company, created the company in her kitchen in 1984, out of her passion for great tastes and the seafood traditions of Virginia's Chesapeake Bay region. In 2007, she had a challenging, but profitable $2.5 M retail, wholesale anc internet sales business, when the Great Recession of 2008 hit. Over the next five years, she operated at a slight annual loss, keeping the business afloat through bank loans and personal credit cards to buy supplies and make payroll. hitps:lwwu linkedin com/pulseltneory-constaints-success-story-throughput-gives-company holeomb 11823.04.28 19:20 (7) Theory of Constraints: “Throughput Accounting” Givas Company Their First Proflable Year Since 2008! | Linkedin ‘The Problem: In 2014, the owner of this company asked Steve Holcomb, a local performance excellence consultant, if there was a way to return to profitability, without “spending a fortune’. In recent years she had tied applying “Lean’ techniques to her order fulfillment operations. It improved organization and safety, but failed to restore profitability During the period beginning in ‘08, she and her Sales ane Finance leaders made several important operational decisions, based on traditional GAAP accounting analysis, to try to return to profitability. Those decisions included “pruning® two wholesale distribution channels that GAAP cost-benefit analysis found to be high-cost, low-profit. Five years later, by mid-2013, profitability still eluded them, cane What they needed was an effective way to judge the impact of operational decisions on profitability (e.g, decisions about purchasing, inventory, pricing, staffing, production methods, promotions, sales channels, etc), and then a way to monitor the actual daly effect of those decisions using available operations data ‘The Solution: Steve introduced company leaders to a little known operational accounting method{1]. "Throughput Accounting’ (TA) helps leaders evaluate impact of operational decisions on profitability before they are made. TA then helps leaders monitor actual impact of each decision on profitability, so adjustments can be made. TA uses three key metrics to evaluate each decision, calculated from existing data: Throughput (1), Investment (I) and Operating Expense (OE), as shown in the following figure. From these, it’s possible to estimate other traditiona financial metrics for day-to-day decision-support. TA is not intended to replace GAAP accounting, required for audit, and tax purposes. It is simply a way to help leaders make the best daily operational decisions for greatest business performance hitps:lwwu linkedin com/pulseltneory-constaints-success-story-throughput-gives-company holcomb!23.04.28 19:20 (7) Theory of Constraints: “Throughput Accounting” Givas Company Their First Proflable Year Since 2008! | Linkedin PE ue ic) rcs THROUGHPUT (7) GAAP (Generally Accepted Accounting Principles) Steve taught TA to the company leaders from the book ‘Throughput Accounting|2). Other excellent references include those by Du Plooyi3], Casparil4] and others. After training, Steve helped company leaders build a simple TA Excel file to analyze the effect of possible decisions on Throughput, ROI and Net Profit, using existing data about their ~100 product SKU's. The Sales, Marketing and Finance leaders then identified and evaluated several possible operational decisions for return to profitability * Offer tiered freight discounts for wholesale distributors # Restore two distribution channels “pruned” under GAAP * * Negotiate better terms with a prospective wholesaler * «Raise prices selectively on some items with low "T* # Aggressively resolve delinquent accounts, to quickly generate "T” * Implement capabilities for self-packing of several key products * Change the way products are sold through the internet ‘The Results This TA analysis encouraged the company leaders to quickly implementing four low-cost decisions, out of nine considered (* shown above, and four of the yellow boxes shown on the “2013 & 2014 THROUGHPUT / WEEK (actual)" scorecard at the top of this article). Two of implemented changes were to reverse past decisions te “prune” two important distribution channels. GAAP analysis had shown these to be high-cost, low-profit, but TA analysis confirmed them to be highly profitable. The scorecard (top figure) shows a comparison of the results in 2013 and ‘14 hips: lnkedin com/pulsetheory-constrains-success-story hroughput-gves-compary’holcomb23.04.28 19:20 (7) Theory of Constraints: “Throughput Accounting” Givas Company Their First Proflable Year Since 2008! | Linkedin Perhaps the greatest change was a shift in thinking that affected every aspect of the business. A shift away from focus on Revenue, to focus on the Throughput “margin* contributed by Revenue to “overcome the enemy" of Operating Expense. The Sales & Marketing VP characterizec this as a shift from “Its all about Revenue!” to “It's all about Throughput’ Eli Goldratt, inventor of TA, expressed this idea in another way; "... doing work and profiting from that work are two very different things.” [1] Theory of Constraints Throughput Accounting (TOC TA) [2] Thomas Corbett, North River Press, 1998 [3] Throughput Accounting Techniques Etienne Du Plooy, General Media Press, 2016 (4]Management Dynamics: Merging Constraints ‘Accounting to Drive Improvement John & Pamela Caspari, Wiley, 2004 Other References: Dr. Lisa Lang also offers helpful TOCTA resources and training on her "Science of Business’ website, including this ~1 minute silent video titled "The Top Financial Metric for Job Shops” © June 11 2015, Science of Business, Inc. This work is reproduced and distributed with the permission of Science of Business, Inc. Want to learn more about Velocity Scheduling System for custom job shops and machine shop? Visit www-ScienceofBusiness.com. hitps:lwwu linkedin com/pulseltneory-constaints-success-story-throughput-gives-company holeomb23.04.28 19:20 (7) Theory of Constraints: “Throughput Accounting" Givas Company Their Fit Profable Yaar Since 2008! | Linkadln ‘Another excellent resource is the chapter on "Evaluating Change” on Dt. Kelvyn Youngman’s excellent website at www.dbrmfg.co.nz (linked to the picture below). Report this Published by Steve Holeomé articles GF Project Manage at ened Throughput Accounting, Theory Const, Opratons Acounting tke Deomment—-} share 17837 corne Reactions secooeses 37 Comments Most raat a comment eu Bob Sproul LS Master BB TOC Jonah «3+ onm \Wiowerand One tos and Lege Conan re are vd tart yc srg ob Sl he 1] ma Cayce ye Teen 9 Steve Holeomb 3c se Lead more comments b Steve Holcomb roject Manager at GENEDG: hitps:lwwu linkedin com/pulseltneory-constaints-success-story-throughput-gives-company holeomb23.04.28 19:20 (7) Theory of Constraints: “Throughput Accounting” Givas Company Their First Proflable Year Since 2008! | Linkedin GF Feltow Gt Follow 7 More from Steve Holcomb —— = Comparison ef Two Buffer Patter Recognition & Management Methods in Prediction Made Simple TOC Critical Chain Project. Holcomb on tnkede eve Holcomb on Linked SUCCESS STORY; Viginia Technology Company Achieves a Ath Quarter. Holcomb on Linker ‘See all 2 articles hitps:lwwu linkedin com/pulseltneory-constaints-success-story-throughput-gives-company holeomb