Throughput Accounting: Capital Budgeting (#45)

In this podcast episode, we cover the flaws in a traditional capital budgeting system, and how to improve the situation by incorporating constraint analysis concepts. Key points made are:

  • The traditional capital budgeting approach is designed to optimize local production rather than the system as a whole, and may be based on cash flow projections that are incorrect. The end result is frequently no change in overall throughput, despite the additional invested funds, resulting in an overall decline in return on investment.

  • Should only make capital investments that have an impact on bottleneck capacity.

  • May be better to invest in several lower-capacity machines rather than one massive device, since a breakdown of just one of these smaller machines allows the others to keep functioning.

  • Focus on buying lower-complexity equipment in order to reduce equipment down-time.

  • Buy more sprint capacity in upstream locations; just buy enough to protect the inventory buffer in front of the bottleneck.

  • Engage in a more detailed analysis when a capital budgeting request does not directly impact the bottleneck.

  • Invest whenever needed, rather than once a year.

  • The analysis of capital requests should be by a process analyst, rather than a financial analyst, since the key point is to review the impact on the bottleneck operation.

  • Revise the capital budgeting application form to focus on throughput impact.

  • The end result of these changes could be an overall decline in the amount of invested funds.

Related Courses

Constraint Management
Inventory Management