Competitive factors and performance measurement: Applying the theory of constraints to meet customer needs

Abstract

This article presents an analysis describing how the selection of proper competitive factors and modification to a firm's performance measurement system provide the means to control, coordinate and communicate product flow, from order receipt to customer shipment, through the production process. The article also discusses how modifications to the traditional manufacturing planning and control model to reflect the principles of the Theory of Constraints (TOC), along with the selection of proper competitive factors provide a means of synchronizing the production process to an ever-more demanding market. A performance measurement system that directs management's attention to the needs of the customers rather than to the internal concerns traditionally measured is advanced. A case study is included that characterizes the operation of an engineer-to-order manufacturing organization. This firm changed its competitive focus and its performance measurement system in response to a erratic sales pattern brought about by an inability to respond to customers requirements in terms of lead time and delivery promises. Using the principles advocated by TOC the organization was able to reduce lead time and improve delivery performance to a point where the operation became a preferred manufacturing location in the corporation. The cost measurement system was changed from a traditional standard cost system to a system utilizing TOC principles. A cost measurement system that measures global costs rather than individual component cost can also be a decisive factor in coordinating sales and manufacturing efforts within an organization. The relationship between these various factors is explored in the case study.