How's my Luck now?

Reflections, views and descriptions during my stay at IIM Lucknow from July 2004 to March 2006

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Location: India

Monday, February 07, 2005

'Critical Chain' - III

The book introduces some fundamental assumptions and tools of TOC:

1. How would you define a 'problem'? A superb practical definition given in the book: "a problem is not precisely defined until it can be presented as a conflict between two necessary conditions."
Also, "one of the foundations of TOC is that whenever we witness a conflict, it is a clear indication that someone has made a faulty assumption which can be corrected, thereby removing the conflict." It does not seek a compromise between those two conflicting conditions.

2. Realize that: "Real-life systems have one, maximum two, constraints."

3. The Current-Reality Tree:
This is a powerful tool to help you assess the ultimate impact of the current assumptions and practices followed in an organization (or division, project, etc.). It starts with the main assumptions or facts, combines them logically, and gets another fact. This goes on, facts and deductions being combined at each level, until we reach one final fact which is the real impact of all the facts in the tree together.

4. Is NPV conceptually wrong?
This statement really stunned me. The concept of net present value or NPV is so widely accepted to be a true measure of viability of a particular capital expenditure project, that to think that it is conceptually wrong is disturbing.
The argument of TOC is this: when capital availability is limited (which is true in most real-life cases) relative to the number of capital expenditure options available to a firm, any investment done has to be measured in terms of money-days. The simple payback method takes only time into consideration, not the amount of initial expenditure, and similarly NPV takes only money into consideration, not time. I haven't yet got the hang of this argument, and will have to think much more to grasp it.

8 Comments:

Anonymous Anonymous said...

Yep. I have read about the money-days concept too somewhere. I remember it impressed me as being very logical. The entire concept of considering BOTH parameters rather than just one made total sense. Nice posts. Guess, I don't need to read the book now :D.

8:04 AM  
Blogger ASHOK VAISHNAV said...

Money-days, as a measure and methodology, is certainly new for me too. We have, more often,looked at (either/and)NPV/Payback period, more from other angles. e.g.when you are thinking of an investment for a very specific improvement,payback is more appropriate, because here time of investment getting paid back is of more value.
On a similie,profit to sales (%profit) X sales turnover of assets(sales to assets) would give ROCE. But look at the meaning each one can shed differently to various aspects.

9:47 AM  
Anonymous Anonymous said...

Congratulations topper.......

3:46 AM  
Blogger Tadatmya Vaishnav said...

Anon, please.... I don't consider myself a topper, for all practical purposes...it's just the luck of the draw :(

5:00 AM  
Blogger Darth Midnightmare said...

Topper? Luck of the draw? Am I missing something? You sure seem like a topper in every aspect...what am I missing????

12:28 PM  
Blogger Tadatmya Vaishnav said...

I assumed that Anonymous was talking about last term's grades, where I had all the luck going my way...

10:00 AM  
Blogger Darth Midnightmare said...

What else does one base the "topper" tag on? I am puzzled....and how can grades be by luck? For a topper, that is. For a D or F, luck may count. But for toppers, luck???

11:05 PM  
Anonymous Anonymous said...

"It's Not Luck"
Since you're a Goldratt fan, this is the title of his sequel to "The Goal" with the same hero.

8:58 PM  

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