Throughput Economics: Making Good Management Decisions

Throughput Economics challenges the current thinking of how to evaluate cost, risks and rewards of any deal or any other new market opportunity being considered, especially the practice of calculating cost-per-unit. Instead the book offers a process that directly answers the critical question: If we accept the proposed decision would the performance of the organization improve? The process involves the intuition of the key people in the organization, together with the relevant data, to come up with the best available information from which to form a reasonable range of net profit, when the considered decision is added on top of all the other activities undertaken by the organization. The process is explained and demonstrated using a variety of cases where the organization faces a new non-trivial idea, along with a detailed explanation of how it should work, including software support that provides very quick response to many what-if-suggestions. Although there is a wide and growing understanding that cost-per-unit distorts many decisions, especially in manufacturing, the real question is: do we have any better mechanism? It is obvious that managers need an attractive tool to make rational decisions that improve net-profits. Throughput Accounting, developed by the late Dr. Eliyahu M. Goldratt, has a considerable and more reliably positive impact on managing organizations, especially in manufacturing. Still, in practice, Throughput Accounting faces a couple of obstacles when it comes to supporting decisions. For small decisions that do not change the current organizational constraints, Throughput Accounting is easily applied. The first obstacle becomes apparent when bigger decisions are considered. It is then perfectly possible that new capacity constraints will emerge. The second obstacle is how to consider the impact of uncertainty. This book offers a new and well-defined process that applies to every manufacturing organization and many others that consider both financial impacts and capacity limitations, and also includes the impact of uncertainty by providing the range of reasonable results instead of one number, which is always proven wrong in the end. Overall, the book provides a holistic method for simplified decision making in seeming complex or shifting environments using a constraints mindset to facilitate companies’ realization, for the first time, their true potential.