Theory of Constraints - History - Key Assumption

Key Assumption

The underlying premise of theory of constraints is that organizations can be measured and controlled by variations on three measures: throughput, operational expense, and inventory. Throughput is the rate at which the system generates money through sales. Inventory is all the money that the system has invested in purchasing things which it intends to sell. Operational expense is all the money the system spends in order to turn inventory into throughput.

Before the goal itself can be reached, necessary conditions must first be met. This typically includes safety, quality, legal obligations, etc. For most businesses, the goal itself is to make money. However, for many organizations and non-profit businesses, making money is a necessary condition for pursuing the goal. Whether it is the goal or a necessary condition, understanding how to make sound financial decisions based on throughput, inventory, and operating expense is a critical requirement.

Read more about this topic:  Theory Of Constraints, History

Famous quotes containing the words assumption and/or key:

    We now have a whole culture based on the assumption that people know nothing and so anything can be said to them.
    Stephen Vizinczey (b. 1933)

    All meanings, we know, depend on the key of interpretation.
    George Eliot [Mary Ann (or Marian)