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Free «Sunk Costs and Goldratt’s Theory of Constraints» Essay Sample

Sunk costs refer to those costs that are irrecoverable once they have been incurred by the organization. This implies that once a particular project is scrapped within the organization, such costs would not be recovered.  According to Jawahar-Lal (2009), these costs are never relevant to the process of making decisions within the organization because they are irrecoverable. Making decisions using sunk costs would not give a rational impression of the merits desired from a particular project because the Company does not have the ability to recover them once it incurs them. The irrecoverable nature of sunk costs makes them irrelevant in the decision-making process because they do not dictate the efficiency and profitability level with which the organization wants to operate. Therefore, most business individuals and economies perceive such costs irrelevant because of the lack of any return in case of any event.

Opportunity costs refer to the value of the potential benefit of the next best-forgone alternative in the process of making decisions. This implies that opportunity costs arise in a case where there are competing alternatives and one has to select only one alternative that he perceives to be the best.  Jawahar-Lal (2009) asserts that these costs are considered relevant in the process of making decisions because of the fact that they involve future benefits for the organization. It is vital to note that every business operates with the objective of making profits and earning maximum revenues. Opportunity costs are always significant because they ensure that there is some level of benefit to the Company due to the selection of a particular course of action. The selection of the course of action that is considered the best increases the overall benefits available to the Company hence making these costs relevant in the process of decision-making.

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The Goldratt’s Theory of Constraints is governed by the assumption that “A chain is no stronger than its weakest link.” This implies that both organizations and the key processes taking place within organizations are vulnerable because any weakest person has the potential to break down all operations hence negating the effectiveness of the Company.  Dettmer (1997) reiterates that this theory received so much press by the business community because of its applicability in all sections within the Company. It is vital to note that the theory can be applied in the operations department, the finance department, logistics department, project management, and the sales department. This wider applicability of the theory attracted most of the individuals in the business community to pay attention to it because of the fact that it could benefit them in discovering the key constraints in the different areas and making the required changes. Most individuals in the business community followed the events of the theory keenly because they wanted to discover new methods that they could use to improve the weaker areas in the respective departments within their organizations.

In addition, the Goldratt’s Theory of Constraints received so much press because of its clear identification and clear differentiation of different plants that are use in the completion of different activities. It identified plants such as the I-plant, the A-plant, the V-plant, and the T-plant. Most business individuals concentrated on the theory as it would help them to identify their plants effectively and categorize them accordingly. Effective categorization would ensure that there is easier identification of any constraints leading to the destruction of effective flow of activities. Notably, most individuals in the business world wanted to discover the manner of identifying any constraints and dealing with them effectively as they come along the processes of the plants in the organization. Therefore, the theory of constraints was significant to the entire business community due to its informative nature.

   

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