Who Wins in a Dynamic World: Theory of Constraints Vs. Activity-Based Costing?

North American Assoc. for Computational Social and Organizational Science (NAACSOS) Conference, June 2007

6 Pages Posted: 9 Feb 2007 Last revised: 21 Jan 2008

See all articles by Robin Cooper

Robin Cooper

Emory University - Goizueta Business School

David A. Bray

Institute for Defense Analyses; Harvard University; Emory University - Goizueta Business School; National Defense University; Forbes Ignite; University of Oxford

Michael I. Parzen

Emory University - Goizueta Business School

Date Written: January 2007

Abstract

Two system-based views exist regarding managerial value chain analysis: Theory of Constraints (TOC) and Activity-Based Costing (ABC). There has been considerable debate whether TOC or ABC is the more optimal approach for strategic planning. This study seeks to compare TOC and ABC, while keeping constant the level of environmental turbulence each of the approaches encounter. With regard to organizational systems, literature regarding complex adaptive systems supports the idea that bottom-up approaches are more resilient to volatility. Consequently, this study hypothesizes that the bottom-up ABC approach will prove more agile and less limiting than the top-down TOC approach. This study then performs two computational experiments. The first experiment reveals that the ABC approach generated more PROFIT than the TOC approach, while the TOC produced a larger amount of REVENUE, for all instances of the simulation. The second experiment reveals that a hybrid TOC+ABC approach is the most optimal in the midst of environmental turbulence out of four possibilities. This hybrid TOC+ABC selects a first cut of orders that will generate the highest REVENUES per the TOC approach, and then selects a second cut of orders that will have the lowest COSTS and thus the highest PROFIT per the ABC approach. These results challenge the established literature espousing the TOC approach alone.

Keywords: Theory of Constraints (TOC), Activity-Based Costing (ABC), value chain analysis, strategic planning, bottom-up approaches, environmental turbulence

JEL Classification: D23, D21, D81

Suggested Citation

Cooper, Robin and Bray, David A. and Parzen, Michael I., Who Wins in a Dynamic World: Theory of Constraints Vs. Activity-Based Costing? (January 2007). North American Assoc. for Computational Social and Organizational Science (NAACSOS) Conference, June 2007, Available at SSRN: https://ssrn.com/abstract=962270 or http://dx.doi.org/10.2139/ssrn.962270

Robin Cooper (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

David A. Bray

Institute for Defense Analyses ( email )

4850 Mark Center Dr
Alexandria, VA 22311
United States

HOME PAGE: http://bens.org/people/dr-david-bray/

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

HOME PAGE: http://www.stimson.org/ppl/david-bray/

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

HOME PAGE: http://napawash.org/fellow/305629

National Defense University ( email )

Marshall Hall
300 5th Avenue
Washington, DC 20319-5066
United States

HOME PAGE: http://www.ducoexperts.com/users/david-bray

Forbes Ignite

New York, NY
United States

HOME PAGE: http://vimeo.com/leaddoadapt/albums

University of Oxford

Oxford
United Kingdom

HOME PAGE: http://www.linkedin.com/in/dbray

Michael I. Parzen

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-6110 (Phone)
404-727-2053 (Fax)

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