One question I get a lot from students is “why do we ignore variable labor costs when we are looking at Throughput Contribution?”  I’ve bumbled through lots of answers but will leave it to someone else to explain this better than I’ve been able to so far:

In many companies direct labor is not really a variable cost. Even though direct labor may not be paid on an hourly basis, many companies have a commitment–sometimes enforced in labor contracts or by law–to guarantee workers a minimum number of paid hours. In TOC companies, there are two additional reasons to consider direct labor to be a fixed cost.

First, direct labor is not usually a constraint. In simplest case constraint is a machine. In more complex cases, the constraint is a policy (such as a poorly designed compensation scheme for sales persons) that prevents the company from using its resources more effectively. If direct labor is not the constraint, there is no reason to increase it. Hiring more direct labor would increase costs without increasing the output of salable products and services.

Second, TOC emphasizes continuous improvement to maintain competitiveness. Without committed and enthusiastic employees, sustained continuous improvement virtually impossible. Since layoffs often have devastating effects on employee morale, managers involved in TOC are extremely reluctant to lay off employees.

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