Redline Advisors Inc.

One of the most difficult challenges facing companies in the business world today is the need to quickly and effectively translate their strategy into action. Most leaders recognize this imperative and have put increasing emphasis on strategy development and efforts to accelerate change in response to competitive challenges.

What has received less attention is the issue of how to make these strategic initiatives a reality in our companies. As two recent Towers Perrin studies indicate, employers tend to do a better job of communicating the macro view of their organizations than the micro view. In other words, at the strategic level what is needed is generally well understood and articulated, but when it comes to converting that strategy into action at the local levels of the company, things are much more muddled. Obviously, if it is not clear to local levels how their actions contribute and impact corporate strategy, global objectives will not be achieved. According to Towers Perrin, the critical step to business alignment is translating strategy into well defined responsibilities and objectives for every individual in the organization; and keeping those connections alive day-to-day.

Developing strategy is all about finding new ways to increase the Throughput of an enterprise – about increasing the rate at which the company generates money through sales. In organizations where Throughput is not easily expressed in terms of money, it can be defined in terms of a rate at which some other goal unit is generated (e.g. units of service delivered to a customer). For centuries, we have based managerial decision making on the financial measures provided by cost based accounting. But most cost based accounting approaches fail to provide any meaningful feedback on Throughput. Nearly all financial tools focus on costs, placing expense at the center of the decision-making and performance measurement process. Although cost control is important, no top executive will tell you that it is the most important factor in achieving corporate sales and earnings growth.

Shifting to a Throughput paradigm allows companies to align all of their systems, particularly their financial systems, with the Throughput focus of their strategy. Also, because of its relative simplicity, the Throughput model is effective in communicating strategy throughout the organization, thereby engaging managers and employees in strategy implementation.

The Throughput thinking model creates a very simple relationship for determining the effect that any local action has on the progress towards the system’s goal. Every action is assessed by its affect on three system level dimensions:

These three dimensions are interdependent in the sense that a change in one will automatically result in a change in one or more of the other two. If you increase Throughput by increasing sales, Investment and Operating Expense will also likely increase because you need more investment to support sales and you’re likely to spend more, in variable costs, to produce more. You can also make more money without increasing sales if you can produce the same sales revenues with less Investment and spend less on Operating Expense. It is here that we have the key to relating local decisions to the performance of the entire system. As you decide what action to take, ask these questions:

If the answer to these questions is yes, go ahead with your decision, confident that the overall system will benefit from it. The bottom line to decision making is that if it doesn’t result in increased Throughput you’re wasting the valuable resources of time, money and energy.

Throughput Accounting uses three global measures to assess the impact of any decision:

These three variables are combined into a return on investment (ROI) calculation where, ROI = (Delta T - Delta OE)/Delta I). This formula can be applied to make better decisions in five areas:

Throughput centered thinking offers a way to understand, analyze and focus performance improvement efforts based on their impact on both cost and Throughput. Companies seeking to drive Throughput based improvement should see the logic of using a similarly capable accounting/decision model to accomplish their aims. Without such an approach, efforts will continue to be scattered, misaligned and ineffective. Recognizing this need is not sufficient in itself. Changing accounting models means altering the fundamental mechanism driving behavior in organizations. It requires people to understand and adopt a new mindset, with new tools, and ways of making decisions – no small task for an individual, much less an organization. But, the gain is well worth the pain.

Fortunately, most people possess an inherent intuition for how to operate in a Throughput paradigm. With most organizations misaligned due to faulty, cost-based information, any steps towards engaging this third determinant – the shift from Cost to Throughput Paradigm - will produce dramatic results in the quality of decision making and the organizations ability to engage its strategy at all levels of the organization.

Throughput Paradigm: Questions For Further Discovery

What would you say is the vision or major goal for your organization? And how do you measure performance toward that goal? Have you considered Throughput Accounting?
What is the biggest leverage point, organization wide, for improvement (e.g. increase throughput, improve ROI, or reduce operating expenses)?
Would, or does, the senior executive buy this and support it?
Do you have an early warning system that will alert you to problems?
Does each department drive its own improvement efforts (silo approach)?

Redline’s services and deliverables for throughput thinking

Throughput definition
Throughput accounting
Throughput decision-making

View a summary of determinants, questions and Redline services (PDF format)