Academic journal article Management Accounting Quarterly

Throughput Metrics Meet Six Sigma

Academic journal article Management Accounting Quarterly

Throughput Metrics Meet Six Sigma

Article excerpt

Six Sigma and the Theory of Constraints (TOC) are arguably the two most significant methodologies affecting operation management and process improvement initiatives over the past three decades. For those of you who have forgotten the concept behind it, TOC is a simple, yet brilliant management theory introduced by Eliyahu M. Goldratt in his 1984 book, The Goal. This unusual book, written in the form of a hard-to-put-down novel about a plant manager named Alex Rogo, depicted how TOC can be used to increase productivity and operating income in a manufacturing setting by stepping away from practices suggested by traditional cost accounting and variance reporting systems.

Six Sigma approaches some of the same TOC issues, but from a different angle. The focus of Six Sigma is to address issues related to the Cost of Poor Quality (COPQ). Looking at it from a traditional quality theory point of view, Six Sigma aims at decreasing internal and external failure costs in an enterprise, thereby contributing directly to increased customer satisfaction. Having spent several years studying Six Sigma and some of its implications for management accounting and internal auditing, I began to contemplate the benefits of incorporating TOC accounting metrics within the control phase of Six Sigma.

As such, the purpose of this article is to provide management accountants with a dual conceptual framework--merging elements from Goldratt's Theory of Constraints with Six Sigma's DMAIC methodology and tools--that can be used to tackle organizational system constraints. Specifically, I will aim to:

* Provide you with an overview of Six Sigma, as well as the fundamentals of TOC and Throughput Accounting (TA);

* Propose a Six Sigma/TOC dual framework that allows a system constraint to be broken up quickly (TOC effect) while the Six Sigma approach studies the issue in more depth to also address effects related to COPQ. In other words, while TOC can target the resource constraint (tactical objective), the Six Sigma methodology aims to increase the level of quality and remove extra nonvalue-added processes, thereby freeing up additional system resources.

* Explain why the use of TA metrics within the proposed framework presented in this article can help address several shortcomings associated with other cost accounting systems, such as traditional cost accounting (CA), as well as the more relevant activity-based costing (ABC).


Six Sigma is a quality-driven, scientific methodology that aims at improving a current standard to a future, ideal standard of 99.9997% accuracy. This translates to about 3.4 defects per one million opportunities. Six Sigma is based on the DMAIC (Define, Measure, Analyze, Improve, Control) methodology. The main strength of Six Sigma is that it is data driven: The DMAIC process contains an arsenal of more than 400 process improvement and analysis tools--many of which have been used for more than a half century. The roots of Six Sigma can be traced back to the Plan-Do-Check-Act cycle developed by W. Edwards Deming in the 1950s to help Japanese businesses rebuild their infrastructure after World War II.

Even though a detailed discussion of Six Sigma is outside the scope of this article, management accountants interested in becoming more familiar with the Six Sigma methodology are encouraged to add the following two books to their office shelves. The first, The Six Sigma Handbook by Thomas Pyzdek, is used in many Six Sigma certification courses and provides the novice and intermediate Six Sigma practitioner with a comprehensive, detailed overview of the DMAIC methodology. The other, The Lean Six Sigma Pocket Toolbook, can be used best as a Six Sigma dictionary and quick reference guide in choosing appropriate tools to tackle a certain task. I also encourage you--especially if you are an internal audit professional--to read a previous article of mine, "A Six Sigma Approach to Internal Audits," which appeared in the February 2009 issue of Strategic Finance, in order to gain an overall understanding of how the DMAIC methodology may be used to better orchestrate an operational internal audit. …

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