Theory of constraints and outsourcing decisions
by Olli-Pekka Hilmola
International Journal of Manufacturing Technology and Management (IJMTM), Vol. 3, No. 6, 2001

Abstract: A new management philosophy, named the theory of constraints (TOC), has changed thinking about production and operations management. According to this philosophy the particular company's goal is ''to make money now and in the future''. At the very top level financial analysis, measures like profits, profitability and cash flow could be used to conclude if the organisation has moved closer to its goal. However, at the other levels of organisation, TOC uses three different performance measures to ensure its goal: 1) throughput 2) investment and 3) operating expense. Applications of these three different performance measures are called throughput accounting, which has been seen in most instances as opposite to conventional and more developed management accounting approaches (e.g. activity based costing). In this paper, we firstly demonstrate the product mix decision based on conventional management approaches and TOC. This hypothetical example is later enlarged to consider outsourcing also. Both of these examples reveal the same conclusions a conventional management approach will give inadequate results, if profit is the measure of success.

Online publication date: Thu, 03-Jul-2003

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