Measurements from the Theory of Constraints
The Theory of Constraints allows us to further simplify our management efforts by providing the fundamental set of measurements (Throughput Accounting) that allows us to understand how our system as a whole is performing:
Throughput (T) is the rate at which the system produces units of the goal (through sales, in For-Profit organizations). Throughput equals the sales revenues (S) minus the totally variable cost (TVC) of what it pays (often out to suppliers) to produce the goods or services sold (T = S − TVC).
Inventory (I) is the money tied up in the system to be transformed later into sales. This money is, in most part, in the form of what is generally understood as raw material. Inventory ...