Businesses regularly undertake improvement activities, but we don’t often stop to ask:
“Will these activities improve the business’ return on investment (ROI)?”
To answer this question it is important to know that there are only three ways to improve ROI. These are well summarised by the ‘Theory of Constraints’1 :
1) Increase Throughput
Throughput refers to the dollar value of goods or services produced and sold in a given period of time.
2) Reduce Inventories
Inventories refer to the dollar value of raw materials, work-in-progress and finished goods.
3) Reduce Operating Expense
Operating expense relates to the direct expenses incurred in running the business and producing the product or service that is sold.
So, when looking to grow the bottom line, business activities must have a positive impact one or more of these critical factors
1Goldratt, E, M. (1990), What is this thing called Theory of Constraints and how should it be implemented? Great Barrington, MA: The North River Press Publishing Corporation.