Essay-Exam3-throughput-TOC-LP

Essay-Exam3-throughput-TOC-LP - Essay Three BA642 Quality...

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Essay Three BA642 Quality and Operations Management Essay One, Exam 2 December 15, 2010 Definition of throughput, inventory, and operating expense under TOC Theory of constraints (TOC) is a management approach that emphasizes the importance of managing constraints. A constraint or bottleneck is anything that prevents an organization from achieving the goal. Throughput is the rate at which a company generates money through sales. There is an emphasis that money is generated through sales, not production. The produced products are to be sold but not for inventory. It is only when the products are sold that money is generated. But throughput dollars do not usually equal sales dollars because all money which has not been generated by the company should be deducted from it. The amount of money to be deducted could include some components that have been purchased from vendors, subcontracting costs, commissions paid to salespeople, customs duties, and transportation. The other fact in TOC is that direct manufacturing labor costs are not deducted from sales in calculating throughput because it is considered as fixed cost, especially in companies which employ skilled laborers who cannot easily be laid off in periods of low demand and subsequently rehired when demand increases. Inventory is defined as the sum of all money that the system invests. This investment includes all things that is purchased with the intention of selling them. This includes parts, raw materials, other required things in the production process and it could even include buildings and machineries which were traditionally considered as assets. In general, under TOC, inventory includes all things that put burden of liability on the company sue to associated costs like storage space, scrap, obsolescence, material handling, and rework. The value of inventory includes only amounts paid for the components purchased from outside vendors but not direct manufacturing labor and manufacturing overhead costs. Operating expense is the amount of money the system spends in turning inventory into throughput. This includes all these people are charged with turning inventory into throughput:
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