Ladies and gentlemen, welcome to The Theory of Constraints, throughput accounting and Lean Accounting. I'm Rashmi, not your facilitator for this course. And I've chosen to combine these topics into one course, because they share a common theme. And that is the flow of work through a business process and improving the flow. So although there are some differences, and it's interesting to sort of contrast these topics, there are also many commonalities. There's a great deal of information to cover in this course, but there's plenty to learn a lot of things to discuss.

So we'll aim to keep it interesting and alive for you. And I'm sure that you will enjoy this course. Okay, so let's look at our agenda then for the course. We're going to cover a large variety of topics, all on the theme of flow accounting, since throughput accounting and Lean Accounting are both examples of flow accounting. So we cover what Is the Theory of Constraints. We cover the Theory of Constraints and how it relates to flow.

We cover what is throughput accounting, and the performance measures of throughput accounting, and we give the throughput accounting example. Next, we look at what is Lean Accounting and the seven aims of Lean Accounting. We look at lean performance measures, we look at Performance Management and decision making in Lean Accounting. We look at what lean thinks of accounting transactions. We discussed the voice of the customer. And lastly, we look at throughput accounting, Lean Accounting, and how they relate to the financial statements.

There's plenty there to cover lots of tools for us to look at numerous examples to have a go at. So we're about to get started. And first, we're going to look at the Theory of Constraints. More than likely you will have heard of the book The goal by Eli goldratt is one of the biggest selling business books of all time. And Theory of Constraints is a management philosophy that Eli goldratt developed in his 1984 novel The goal, and developed in further books as well as you can see on the screen there, Eli goldratt ideas were inspired by work that was published in German in the 1960s and 70s, by Wolfgang muse, and he called his approach bottleneck focused strategy. And his approach focusing on the bottleneck is very similar to that advocated by Eli goldratt and the Theory of Constraints.

And Mr. goldratt defines throughput as the rate at which a business process generates money through sales. And he believes that throughput drives profitability, so that the aim is always to increase the throughput of a business process. However, he also believes that the throughput of every process is limited by at least one constraint The Theory of Constraints therefore, argues for continuous improvement is always seeking to increase the flow of work through the constraint. So that overall throughput can be increased, and therefore profitability. And the focus of the Theory of Constraints, as the name suggests, is the constraints to flow in a process. So, what constraints flow?

Well, the Theory of Constraints argues that every business process will have at least one constraint. And this might be physical resources or equipment. It might be the business policies and procedures of the organization. It might be the people and their skills or lack of them or lack of people as well. It might be market factors and product factors. But the argument is that if we can improve the rate of flow of work at the constraint, we improve the throughput of the entire process that stands to reason and the aim to maximize the rate of flow of work through a process brings us to throughput accounting.

And that is the management accounting method that supports efforts to improve flow. But before we come on to throughput accounting, let's just compare the Theory of Constraints to lean. And in fact, the Theory of Constraints is similar to the lean philosophy. The Theory of Constraints focuses on identifying and removing constraints to the flow of work through a process, as this will increase throughput. The lean philosophy also focuses on flow through business processes, which in lean are called value streams. And I want to bring your attention now to a chap called taiichi Ohno, who wrote the book the Toyota Production System, and was instrumental in developing the Toyota Production System in the Toyota Motor Corporation.

Now, as you may know, the Toyota Production System was the forerunner of the lean philosophy and in his book on the Toyota Production System, taiichi Ohno has this definition of lean, which I like to use as a working definition of lean. And he says, All we're doing is looking at the timeline. From the moment the customer gives us an order to the point when we collect the cash, and we're reducing the timeline by reducing the non value added wastes. This quote, I believe, makes it clear that lean is all about flow through a business process, and removing the impediments to that flow, which are called waste and lean. And that's a very similar concept to that which we've just looked at in the Theory of Constraints. We're going to come on to Lean Accounting in due course, but at this point, I just want to introduce you to the five principles of lean, so that we can relate those to the Theory of Constraints.

And the five principles of lean were first laid out in the book called The machine that changed the world, written by James Womack, Daniel Jones and Daniel Roos, and the fire principles of lean are number one, that we specify value in the eyes of the customer. Second, that we identify the value stream and eliminate waste. Third that we make value flow to the pool of the customer. Fourth that we involve and empower employees and improvement. And fifth that we continuously improve in the pursuit of perfection. And with these five principles, we can see that goldratt concept of throughput also applies with lean, where throughput is the rate at which your business process generates money, or value, we should call it through sales.

If we increase the throughput, we increase profitability, because we are doing more work with the same resources. And that one sentence underlies the whole of the Theory of Constraints throughput accounting and Lean Accounting. The focus is on being able to do more work with the same resources So that we can do more profitable work, and therefore increase the profitability of the process. Let's move on now to the Theory of Constraints and flow. As we've seen, both the Theory of Constraints and lien seek to maximize and continuously improve the rate of flow of work through a business process. Logically, therefore, the concept of flow suggests that a business should be organized by its processes, or value streams as we call them in lean.

The value stream contains the flow of value through the business from order generation to delivery. Now, value streams may be structured in a variety of ways, according to the needs of the business. I've seen them structured by market by product or service, by region, and so on. There's no set definition for how you structure your value streams in your organization. But the argument is from the Theory of Constraints Lean and Lean Accounting is that the organization should be structured by its revenue generating value streams, as we'll see when we come on to that. Just before we finish on the Theory of Constraints, I want to mention the concept of drum buffer rope, which you may have heard of if you've read anything on the Theory of Constraints.

And drum buffer rope or DVR for short, is an element of the Theory of Constraints, which is concerned with optimizing the throughput of the constraint step in the process. The drum is the rate at which the constraint step can work. I its maximum throughput, and the rest of the process must follow the beat of the drum. The process cannot produce any faster than the constraining step. Obviously, the buffer protects the drum. It's a holding point of inventory in front of the drum.

To ensure that the drum never runs out of work and continue to work at its drumbeat, pace. There may also be buffers to protect process steps that feed the drum. The rope is the rate at which work is released into the process. And this is related to the size of the buffer that is needed to protect the drum work should not be released any faster than this as it will clog up the system without adding any value. I'm no expert on drum buffer rope so I can't really say but if you read around this topic, you'll see that some authors argue that other techniques, such as those used in lean are more effective than drum buffer rope managing and improving the constraint