We are continuing our series based on The Goal by Eliyahu M Goldratt and the Theory of Constraints. {This series was co-written with Brad Stillahn.}

If we can compute the impact of any action using T, I, and OE, which are global measures (and part of Throughput Accounting), then we can compute the bottom line financial impact quite easily:
· Throughput minus Operating Expense equals Net Profit (T-OE=NP).
· Throughput divided by Operating Expense is Productivity (T/OE=Productivity).
· Net Profit divided by Inventory is Return on Investment (NP/I=ROI).

We recommend measuring frequently enough to continuously improve. To improve, the causes of the effects must be managed:
· Sales Dollar Days and Inventory Dollar Days should be measured daily.
· Sales, Throughput, Operating Expense, Productivity, and Return on Investment each should be measured daily, weekly, and cumulatively month-to-date and year-to-date. It’s also helpful to track each with a 13 week and/or 12 month trailing average graphically.

For additional reading on measurements, reread “The Goal” and “The Haystack Syndrome” by Dr. Goldratt. And feel free to contact us if you have questions about measurements in your organization.

We’ll discuss why incentive systems don’t work as well as measurements in an upcoming post.

…to be continued.

Here’s to maximizing YOUR profits!
By Dr Lisa Lang

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