@ Supply Chain Management

Ladies and Gentlemen, I give you evidence #1 that it is well nigh impossible to eat your free lunch. Now, I’m of the opinion that there is only 1 free lunch in the world : “Learning from the mistakes of others.” But just because there is such a free lunch, please don’t assume that you can even eat it.

Why did we outsource/offshore everything to China? Labor cost? Heck, the chinese think that the true cost of labor is still too expensive. By true cost, I mean not just the hourly pay. From the article: Robots lift China’s factories to new heights,

From car plants to microchip foundries, China’s industrial sector increasingly runs by machine.

According to Nomura, 28 percent of factory machines in China use numerical controls – one measure of automation. That may be far lower than Japan’s 83 percent, but China is growing far faster than Japan did at a comparable stage of development, says Ge Wenjie, a machinery analyst with Nomura.

The supposed reason is quite stunning as well,

"You don’t have to be an expert see the (quality) gap between Chinese cars and those made by companies like Audi and Volkswagen," said Li Shaohui, who oversees automatic control engineering for the company. "To beat those competitors we have no choice but to use a higher level of equipment and technology."

But you do sir, you do have to be an expert to know that the quality gap is not just the lack of high tech robots.

However, the whole game of international trade is coming full circle now – stunning in the sense that it took only about 15 odd years to rapidly industrialize (the benefit of the free lunch) to start feeling the need for advanced machinery and consultants from developed nations.

However, the lingering question is going to be whether they will just buy the robot because of its supposed supra-human like qualities or pause to chew on the mistakes of their forebears when they went the route of the robotic revolution.

Process, People, Process – Robots should go to management and join the other robots there…

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

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:

1. Throughput = fresh money coming in from sales.
2. Operating Expense = money going out to keep the company going. Once spent, the money is gone (wages, energy, rent
   

Randy Littleson of Response Management had a few comments regarding my initial post on Response Management. As I learn more about Response Managment, I offered this comment at his site regarding Response Management and Quick Response Methodology (QRM):
In your comments, you have referred to “breakthrough” in responsiveness that can be achieved by empowering the many stakeholders involved in making course corrections due to unexpected events in the day. From my reading of Response Management (albeit a cursory one at this time), it seems to be a software backed tactical level planning, weigh the options and impacts, decision making (and probably prioritizing) system i.e. consisting of a DSS (Decision Support System) side as well as certain processes that use this DSS. This probably fills a gap that has existed with Supply Chain Planning tools (that remain at a more strategic and long term horizon level) in that they cannot really get down to the nitty gritty of operations. ERP tools have recorded information at all levels of the firm but they do little more than that. I hope that I have captured the gist of the Response Management approach.
Of course, any tool that does some if not all of the above piques my interest greatly.
What QRM does is something quite similar in that it also gets down into the nitty gritty of operations – however it is very much from the planning point of view. With its attendant DSS, QRM plans the structure of the manufacturing system for those very situations wherein Response Management has been highlighted above.
So in a sense, they’re competing ways to solve the tactical issues of daily operations at a level not addressed effectively by SCM/Simulation/ERP systems.