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Lean Accounting vs Throughput Accounting

(Chris) Jacob Abraham — Fri, 21 Jul 2006 19:26:12 +0000

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

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What is throughput accounting?

(Chris) Jacob Abraham — Thu, 20 Jul 2006 17:39:18 +0000

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

Related posts:
Thinking Lean, Acting Lean = Being Lean… Says Bruce Tompkins in …Lean Thinking for the Supply Chain...

Follow up on Response Management

(Chris) Jacob Abraham — Fri, 30 Jun 2006 21:22:53 +0000

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.

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