Integrating ABM/TOC approaches for performance improvement: A framework and application

Abstract

During the last 20 years, new philosophies such as the Theory of Constraints (TOC) and Activity-Based Management (ABM) have emerged as viable, distinct alternatives for measuring and improving the performance of world-class manufacturing companies. In the early phase of their evolution, these philosophies differed fundamentally in their approaches; but there is increasing evidence that both philosophies have now evolved to a stage where an integrated framework can be developed for enhancing cross-functional coordination, thereby improving organizational performance. In this paper, a general framework is presented that integrates the basic concepts, as well as recent advances of TOC and ABM philosophies, into a cohesive framework that can be used to guide performance improvement initiatives . A successful implementation in a world-class manufacturing company is described to validate the framework and to demonstrate that these philosophies can indeed work together in positive ways. Insights are provided into the reasons for implementing such an integrative framework, e.g. identifying the most profitable mix of products, allocating scarce resources optimally, establishing priorities for process improvements, analysing the strategic investment (or expansion) alternatives, and exploiting new market segments.