What is the effect on the monthly Profit and Loss statement from this?
Because cost accounting (and GAAP) requires that inventory absorb allocated costs, the effect is that all of the cost allocations from prior months that are attached to the inventory will be recognized in the month of the inventory reduction, causing a significant “loss” from this change in inventory.
If your management is aware of this, it may block the implementation of DBR in order to avoid the perceived negative impact. If no one blocks the implementation of DBR, the result will be recognized when the P&L is compiled. At that time, management will be “surprised”. So will be the bank and any other outside entity that has interest in your company’s financials.
Efficiency measurements typically evaluate the effectiveness of labor and equipment utilization. The goal is to strive for as high of efficiency as possible for all resources. However, DBR strives to have high utilization on only one resource: the system’s constraint. As a result, all other labor and equipment resources will have lower efficiencies. Again, if management perceives this as a negative outcome, it may block the implementation. Or, if DBR is implemented, when the efficiency reports are generated, management will be “surprised” by the lower efficiencies on most resources. So will anyone else that has interest in your company’s efficiencies.
…to be continued.
Here’s to maximizing YOUR profits!
Dr Lisa Lang
About the authors:
Brad Stillahn is a business owner that has successfully implemented Eliyahu M Goldratt’s Theory of Constraints (TOC) methods in his own business and is now helping other business owners do the same. His consulting company, TOC Professionals engages in long-term relationships with companies implementing TOC. His business and personal partner is Dr. Lisa Lang. Brad can be reached at Brad@ScienceofBusiness.com or 303-886-9939.
“Dr. Lisa” Lang is President of the Science of Business. Her speech “Maximizing Profitability” is popular with Vistage groups and as a keynote speech. Recently Dr. Goldratt’s Global Marketing Director, she offers the “Mafia Offer Boot Camp” for companies wanting to develop and implement a Mafia Offer. She can be reached at DrLisa@ScienceofBusiness.com or 303-909-3343.
By Dr Lisa Lang