Understanding the System

Global Vs Local Optima

This concept emphasizes that:

• Any system is more than the sum of its parts
  • Actions at local level often do not produce the desired results at the global level
  • Focusing on local efficiencies results in jeopardising the performance of the system as a whole
  • Therefore in a team, every member trying to do best in his/her area (local optima) brings no better result at the global level on their own
  • It is only when the process constraint is identified and focused upon that the process improves (Global optima). With this everyone involved in the effort wins as well

Global Operational Measurements

TOC uses a tool to ensure that the actions in our operating procedures are always in line with the global optima of the company. This tool is called Throughput-Inventory-Operating Expenses. These are the three global operational measurements:

• Throughput: This is the rate at which an organization generates money through sales. However, anything that is produced but not sold is not included in the calculation of throughput. Throughput is the actual money earned through sales minus the truly variable cost (cost associated with production of each unit of the product)
• Inventory: This is the money that the system invests in purchasing things that it intends to sell. It includes the money locked in the form of raw materials and finished goods which is held in the warehouses.
• Operating Expenses: This refers to the money the system spends in order to turn inventory into throughput. This definition of operating expenses includes direct labor, as well as all other expenditures associated with producing and selling the products.

Read up more about the Constraint here