1. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 6-1 Theory of Constraints n The Concept n The Process n The Measures

2. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 6-2 The Concept n Presented in Eliyahu Goldratt’s The Goal n The goal of a business is to make money…consistent with customer satisfaction n Continuous flow n Avoid the “herbies” n Eliminate the bottlenecks first

3. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 6-3 The Process n Identify the constraints n Exploit the constraints (reduce the bottlenecks) n Subordinate everything else n Elevate the constraints (remove the bottlenecks) n Reiterate the process

4. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 6-4 The Measures n Throughput-Net income n Inventory-ROI n Ops. Expenses-Cash Flow

5. STRATEGIC COST MANAGEMENT - BA122B - Fall 2006Slide 6-5 Lou’s Moral Dilemma n What caused it? n How did he handle it? n How would you handle it?