Cost Model vs. Constraint Model
The cost accounting model—the norm in most organisations—is a financial model that was never designed to run the business. The cost model focuses on price per unit, while the constraint model focuses on price per unit of time spent at the constraint, a measure known as ‘product octane’. Both the cost and constraint accounting models are necessary, but many organisations use the cost model for both purposes.
As the constraint in any business operation limits the flow of throughput, maximising the octane is the goal of constraint accounting. The throughput model yields a dramatically different view of the relative profitability of different products. This provides a new perspective regarding the appropriate product mix and target markets.
Adopting a ‘constraints’ approach to profit maximisation can easily lead to a 25% increase in operating profits, with significant additional cash flow benefits. Moreover, you’ll reduce inventories and work-in-progress, and make smarter—and less costly—sales and marketing decisions.
“Within 1 year of working with Ensemble, inventory volumes had been reduced by 40%. Profit exceeded 25% ROI. We went from running a four-day week to running 24/5 and looking for more capacity. A year-on-year Throughput improvement of 171%.”
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