Theory of Constraints | Supply Chain | Systems Thinking

Difference between Cost accounting and Throughput accounting

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Before jumping into the parlance of cost accounting and throughput accounting, let’s first understand the difference between financial accounting and management accounting:

Financial Accounting is the process of compiling and presenting activities carried out by an organization in a defined accounting period.

Financial accounting deals with the preparation and presentation of financial statements such as balance sheets, Profit and Loss statements, and cash flow statements.

Management Accounting deals with both quantitative and qualitative aspects of the business.. …

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DryFlowers( Gained timeless beauty from disorder)

Like most industries, the automotive industry is hard hit by the vagaries of the economy. And, just like the economy, the automotive business goes through cycles of highs and lows. During a boom, sales go up and during a downturn, the sales plummet. Curiously, the former is always accompanied by stock-outs, and the latter by a pile-up of excess inventory. The dealers are hit the hardest. Ancillary small vendors are pushed out of business. (The current slowdown has dealt a blow to the automotive industry. Automobile: Firmly in the grip of a slowdown, Why is India’s car industry in breakdown mode?). The last one came after the financial meltdown of 2008–2009. These periods are the roughest on companies already on the verge of bankruptcy. …

Can you think about what organisations and the story of ‘the blind men and elephant’ could have in common?

Theory of Constraints (TOC) application prescribes systemic thinking — observing and studying a business as one system and not as multiple, independent parts. The approach helps managers see the deeper, underlying causal relationship between the different elements of the system. It also helps them understand how actions taken to improve one part can impact other parts of the system.

The ancient Indian parable of blind men and an elephant is a perfect example of what happens when one observes only a limited part of the system. …

When news of COVID-19 affecting the whole world came out early this year, the stock market of all major economies reacted sharply, most of them tanked by 25–30% in a matter of just 2–3 weeks. The S&P 500 index, one of the most followed index in the world, tanked more than 32% in just 18 days. The crash of March 2020 was one of the most severe crashes, in the history of stock markets. Ironically, the meltdown felt quite obvious, as the governments across the world were putting unprecedented restrictions to curtail the spread of the disease. And it was going to impact all businesses alike. …

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Uncertainty Ahead

Yesterday, I watched a recorded session(a webinar) on the ‘Supply chains in COVID-19 Era’. There were many business leaders and industry experts who expressed their views on the subject. The panel discussion got mainly focused upon on ‘what kind of supply chain they wanted’ and I somehow felt that ‘how to make it happen’ was (sadly) missing in that discussion (maybe it was by design, but still I felt uncomfortable).

I have observed that most of the time whenever we listen to the top management about their expectation from the supply chain. We mostly get that they want company’s supply chain to be proactive, agile, and should be in a position to react to the varying market demand. …

Our beliefs

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‘Our life is shaped by our mind; we become what we think’

— Buddha

In the above quote, Buddha meant to say that we make our life based upon what we think(or believe) as actions are guided by our thinking.

Beliefs formations:

Many researchers have pointed out that most of our beliefs (mental structures) are formed during the formative years of brain development (age up to 7–9 years). During that period, we observe patterns in the environment and the people around us.

We incorporate such patterns in our mental structure from our surroundings without much filtering in place.

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The four pillars or beliefs of Theory of Constraints (TOC) Management Philosophy are Inherent simplicity, inherent harmony, the inherent goodness of people and inherent potential.

Before we move ahead, let’s address the question which might be bothering you- why do we need a belief system?

A belief or value system is a structure, which gives support when it is needed the most i.e when the situation seems difficult and we feel stuck.

When we are critically examining the system, there are chances that we can slip in our thinking process and might tend to give up by either — assuming things are complex, or assuming nothing can be done about the conflict or assuming some person is the reason for the issues or assuming the system no longer has headroom for improvement.

Despite its origins as a manufacturing approach (Goldratt & Cox, The Goal: A process of Ongoing Improvement, 1992), Goldratt’s Theory of Constraints (TOC) methodology is now regarded as a systems methodology with strong foundations in the hard sciences (Mabin, 1999). Through its tools for convergent thinking and synthesis, the “Thinking processes”, which underpin the entire TOC methodology, help identify and manage constraints and guide continuous improvement and change in organizations (Dettmer H. , 1998).

The process of change requires the identification and acceptance of core issues; the goal and the means to the goal. The “TOC Thinking Processes” as they were called, were introduced by Dr. Goldratt in a business novel, It’s Not Luck (Goldratt, Its not Luck, 1994) and when used enable the process of ongoing improvement in any organization. …

In some distribution companies, the sales are very high in the last week as compared to the other weeks of the month and usually comprise 40–50% of the total month’s sales. The usual sales pattern for such companies is 10:20:30:40 over the four weeks of the month. This sales pattern is popularly described as the “Hockey Stick” sales syndrome, wherein the sales are not distributed proportionally among the weeks and are lopsided towards the last week of the month. On the other hand, if one observes the real sales i.e when an end customer buys, then one would never find such a pattern. …


Push strategy: When an organization manufactures the product and then moves it down in the supply chain(warehouses, depots, distributors, etc) based upon some assumed sales (i.e forecast for a period) or expected order booking in the period.

Pull Strategy: When an organization manufactures the product as per the consumption in the market or based upon the firm orders from the market.

Fundamental difference:

The push strategy is based upon the forecast. Forecasting for unknown future might lead to a mismatch in stock on hand and the incoming orders, as reality at times might differ from the forecast. …

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