Lean Accounting vs Throughput Accounting
While hashing through the concepts of Lean Accounting and Throughput Accounting, I came across this presentation that seeks to outline the two concepts, compare and contrast them. The presentation is available for free on the web and was prepared by Peter Milroy of Constraints Management Systems Inc. So let's dive into the presentation right away:
Peter summarizes Throughput Accounting the following way:
- Measurement and decision-making tools that align analysis with bottom-line results
- Simple, common-sense financial categories aligned with generating sales (throughput), improving cash flow (investment) and providing capacity (operating expense)
- All measurements and decision-making approaches are based on 'relevant cash flows' - no allocations are used
- The system constraint(s) provide the basis for our understanding of which cash flows are relevant at any time
He then goes on to outline a hypothetical case of TA measurements on a month to month basis:
So how does one make ongoing decisions on the basis of Throughput Accounting?
Since there are only three basic variable outlined above, it follows that changes can be made in three main categories namely delta(Througput), delta(Investment) and delta(Operating Expense). As opposed to traditional cost accounting, the decision are not made on the basis of unit costs. I had made an earlier post that talked about Time as a fourth variable in Throughput Accounting and the role that is played by time is in the calculation of profit rate (which is calculated as Throughput per unit/Time per unit).
The essential difference, according to Peter, between Lean Accounting and Throughput Accounting is captured in the slide below:
And further more,
Very interesting, to say the least.
Categorized as: Throughput Accounting_, Lean_, Theory of Constraints_ Tags: Throughput Accounting, Lean, Lean Accounting, Accounting, Theory of Constraints
What is throughput accounting?
If you're even slightly familiar with "Lean thinking", then you would have heard the phrase - "Lean is all about flow!". There is a good deal of sense in capturing the essence of Lean in that pithy way. (And if you're familiar with linear programming as well) You might also aver that "Lean is about eliminating waste" - the latter phraseology being the dual of the former i.e. maximizing flow does minimize waste. Observations like these are exciting because, Lean thinking and Optimization borrow insights from each other pointing towards a unity that very much doesn't exist in the business planning and optimization of an enterprise but exists very much in the fundamental aspects of both disciplines.
In any case, this post is about throughput accounting. I took some time out to familiarize myself with the Theory of Constraints which is where I came across the term and description of Throughput Accounting. Pascal van Cauwenberghe of Thinking for a Change has posted an article at his site that summarizes the key aspects of Throughput Accounting.
Pascal outlines the three basic variables of throughput accounting:
- Throughput = fresh money coming in from sales.
- Operating Expense = money going out to keep the company going. Once spent, the money is gone (wages, energy, rent…)
- Investment = money that must be put in to be able to generate value.
He also adds that a fourth separate variable 'Time' is also involved in the methodology. I will be looking more into this kind of methodology and try to formalize it for some sort of a product offering in the not so distant future.
Categorized as: Review_, Lean_, Throughput Accounting_ Tags: Lean, Throughput Accounting, Systems Thinking, Accounting
Middle East logistics: high opportunity in a complex region
Logistics Management has a new article that outlines why the Middle East is a booming regiong for logisitics and supply chain services. At least, that is the conclusion of a recent study released by the research firm - Transport Intelligence.
The logistics sector has been benefited as companies invest in upstream and downstream infrastructure projects. And, other opportunities are presenting themselves from investment in construction including tourism (hotels, amenities etc), reconstruction of Iraq, and transportation projects (ports, logistics parks and airports etc). In addition, the importance of consumer markets is increasing as GDP per head soars throughout the region.
That is the key takeaway from the article and I can personally attest to that having visited the Middle East not more than a few months ago on a supply chain consulting engagement. There's a lot of oil money flowing in the region and that is being put to work building up infrastructure of all kinds. In short the area has been booming for a few years and could concievably continue to do so for a little longer. Current events, notwithstanding, this part of the world is pretty critical to the rest of the world and if there is something that a supply chain fits in nicely with - are the critical things that power/drive the rest of the world.
Categorized as: News_, Supply Chain Management_, Logistics_ Tags: Middle East, Logistics Services, Transportation
