Throughput Accounting in a Crisis

Having a think about Throughput Accounting and maybe how that would look in a crisis like we have today induced by the COVID pandemic but perhaps to some underlying concerns that COVID brought out.

Right now, Operational Expense reduction is the main concern of companies particularly when demand collapses and expenses outweigh incoming cash. That may well be correct for those companies who chose not to have an appropriate financial buffer in place.

It could also go too far. OE is fixed. Right now there will be a lot of excess capacity.

Something to turn into an advantage when you think in TA terms (and broadly TOC as well).

Many ideas come to mind.

What do you all think? Where is that capacity best applied? Constraint still exists, backlogs still exist, failure demand still exists, UDEs are still there.

When T and I are exhausted as avenues first, then OE. Maybe Disney and the theme parks down here knew that already.

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Crisis or not, TA will beat CA any day. :slight_smile:

And it gives you a tool to know where to cut your losses without affecting your capability: stream line any “excess” capacity without affecting your “protective” capacity. Companies that cut with the same criteria they improve - i.e. everywhere indiscriminately - will also cut off the branch on which they are sitting.

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I am not sure how this might be represented in Throughput Accounting, but it seems that it is beneficial to organizations to have a significant cash buffer. This is one area that seems to violate the usual just-in-time advice I would give.

Other accounting methods, however, seem to gravitate towards having a near zero cash buffer during normal times or even seem to advocate having a negative buffer, i.e., a heavy debt load.

I am not certain how to resolve what I see is a conflict between a just-in-time approach and having a prudent financial buffer, so I am throwing open this observation to others.

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Good points, @WayneMack.

In presence of a Constraint, you need to have Protective Capacity. Ergo, if the you have a Cash Constraint, you need a “protective cash capacity.”

Clearly, when stuff happens that was not reasonably foreseeable, then there’s no amount of protection that can match the exponential growth in demand. Even so, when trying to recover and regain stability, having a way to focus on the Constraint will give you an edge over others that don’t.

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