Essay on Managing Operational Expenses

Introduction

The theory of constraints is a management approach that seeks to understand management systems based on the problems that the management faces to achieve its goals. The success of business management depends on the ability to identify the constraint and to exploit the constraint by improving the constraint until it becomes not a threat anymore. However, more important in a problem-solving approach is critical thinking which involves the objective analysis of the issue to create a judgment on the problem (Tibben-Lembke, 2006). Managing the operating expenses is always a problem identified by Goldratt's "the goal" and every business strive to minimize expenses and maximize their efforts as identified by Goldratt as the desired outcomes by any business. However, managing operating expenses is a significant challenge that all businesses experience. Using the theory of constraint Goldratt establishes an approach through which business managers can be able to increase the total outputs by managing the constraints that make it difficult to manage the expenses (Tibben-Lembke, 2006). This paper will assess how system thinking is used in the Goldratt's theory to manage operating expenses which is a major constraint experienced by many business managers.

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In the Theory of Constraints five-step process, the identification of the constraint and understanding how to exploit the constraint require system thinking. A constraint like managing expenses is caused by not a single problem but multiple co-acting problems within an organization that should be assessed and understood before an organization can be able to manage the problem (Tibben-Lembke, 2006). In the case of Bearing Plant noted in the fictional story "the goal" the manager can only be able to manage the expenses by using a system thinking approach which helps understand the relationships between expenses and other organizational outcomes and decisions (Meadows, 2008). In this case, the optimization of the operating expenses requires a business to understand the interactions between Return on Investment for Bearington plant, its inventory, throughput and operating expenses. Using the system thinking approach in Bearington plant to manage the operating expenses all the decisions regarding throughput, investment and operating expenses should be analyzed and understood to establish their relationship. The challenge that Bearington is facing is the ability to manage expenses which can help the organization to achieve other goals such as market share, product quality, production efficiency, quality products and increasing stockholder value. In this case, understanding the challenge based on system thinking can help the organization establish the opportunities available and exploit them to achieve other business goals. Diagram: System Diagram of Measures Relation to Decisions

Bearington plant operating expenses depends on the measures used to understand the plant operations. In this case, measures such as the net profit, return on investments and cash flow can be used to measure the goal which is managing the expenses. In the above system diagram, the relationship between decisions and measures can be understood which can help Bearington plant to manage its expenses, increase productivity and also identify other opportunities in the decision chain that can be used to increase the plant's operational efficiency. From the system diagram, it is apparent that all the measures are related to each other, and a decision on one measure affects the whole system. However, it is apparent that net profit is equal to the throughput minus the operational expenses, the return on investment is net profit divided by the inventory and the cash flow is determined by the cumulative income plus the initial cost which should be equal to the cumulative costs. From this chain of events and relationships, it can be identified that Bearington plant can successfully manage expenses if any decision increases the throughput, decreases the inventory and decreases the operating expenses simultaneously. Therefore, by reducing the operating expense, the organization can increase its market share by using aggressive market pricing but the most important goal to achieve all the other goals is to reduce operating expenses.

References

Meadows, D. H. (2008). Thinking in systems: A primer. Chelsea Green Publishing.

Tibben-Lembke, R. S. (2006). Constraint Management at UniCo: Analyzing "The Goal" as Fictional Case Study.