Re-read Saturday, Tame you Work Flow Week 7: Chapter 6 – Introduction to Throughput Accounting and Culture

Tame your Work Flow

This week we tackle Chapter 6 of Tame your Work Flow,  Throughput accounting ties a number of threads together for me. The big one is the linkage between getting value from process improvement and the mental models created by cost accounting. 

Having lived through more than a few economic downturns in my career, the author’s comments that cost accounting has a reductionist perspective (reduce expenses at the expense of growth)  at the beginning of this section resonates with my observations. The knee jerk reaction in nearly every crisis is to reduce cost rather than increase revenue (the former is always easier albeit more painful and detrimental in the long run). I am not suggesting being frivolous with the accounts, but rather a focused approach. The idea of focus is at the heart of Section 3, Chapter 6, Introduction to Throughput Accounting and Culture. 

Throughput accounting uses a systems thinking approach that evaluates the time from order to cash cycle using money as the basis of measurement. Everything from getting an order to collecting the cash is fair game to evaluate in order to find the constraint. Without using the words, the authors make a strong case for value stream mapping. As we have discussed, changes anywhere except at the constraint will not improve throughout, and therefore are an exercise in futility.  

The authors use three basic measures to evaluate a change in throughput accounting

Financial Throughput (FT), which is revenue minus totally variable expenses. Investments, which is the cost of the tools, buildings, networks, and the like.Operating expense includes everything else, including most labor.

The hardest part for me in this chapter is the need to decouple the cost accounting mental model I have been trained (and retrained) on as a manager and business owner. For example, the concept of totally variable expenses is difficult. The authors use a very black and white definition. Totally variable expenses will have a perfect correlation coefficient (1) with revenue. In many cases labor is not a total variable expense, therefore, it is an operating expense. Note: the increased use of zero-hour contracts in some parts of the world even in knowledge work makes this less black and white than in the standard corporate model (a mental model).

The authors suggest that when making decisions the process should approach this measurement structure in order. The impact on FT should be the highest priority, which boils down to, does it increase revenue? This is fundamentally at odds with every organization that starts with reducing investments or cutting costs without regard to the constraint. As discussed in Stop Talking About Values and Start Talking About Behaviors, culture and behavior are inextricably linked; what you do is a window into how you think. Refocusing on throughput

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By: tcagley
Title: Re-read Saturday, Tame you Work Flow Week 7: Chapter 6 – Introduction to Throughput Accounting and Culture
Sourced From: tcagley.wordpress.com/2020/07/25/re-read-saturday-tame-you-work-flow-week-7-chapter-6-introduction-to-throughput-accounting-and-culture/
Published Date: Sat, 25 Jul 2020 23:55:11 +0000

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