Throughput – Helps You To Remove Bottleneck And Maximize Profit

Throughput is the amount of product or service that passes through a production process during a period of time. It is also called the flow rate and measures the number of units a company can produce in a specified time. Throughput is a crucial metric for determining the efficiency of operations management of a company.

A company with a higher throughput level is more efficient. These companies can produce a product or service more efficiently than their rivals. Further, maximizing this key metric could also help a company maximize its revenues.

How to Boost Throughput?

A company can increase the throughput by improving the production process. For instance, more staff can be hired to ensure the technical issues in the production process are quickly resolved. However, the throughput would only increase if the focus is on resolving the bottleneck operation. In the above example, if technical issues are not the bottleneck, the problem is with the key input, then hiring the additional staff will be a waste.

The throughput also depends on the supply chain along with the internal process. You might have heard the reports of Apple Inc. facing supply chain issues with iPhone components. So, all such issues may also impact the efficiency of a company. The late arrival of any component will result in a delay in the whole manufacturing process.

Throughput

A Financial Perspective

Along with the operations management, throughput has a financial perspective as well. Under this, the “revenues earned from a production process less all variable expenses related to that process.” Variable expenses are mostly direct materials and sales commissions. But, a point to note is that it does not consider direct wages as a variable cost—the reason being the retention of workers. The company has to pay a fixed charge to retain its worker, and hence wages does not for a part of variable cost under throughput. So, in most cases, the throughput comes pretty high, except in businesses where margins are razor-thin.

From a financial perceptive, one can improve throughput by focusing on products with higher returns. A company must produce more of a product with the highest throughput per minute of time at the limited resource. Moreover, a company could also outsource a product that lowers the overall throughput.

Throughput Accounting (TA)

TA is different from the traditional accounting system as we treat only the direct material as variable costs. We treat all other costs as fixed costs. Based on this approach, the only way to boost profit is to lower the fixed overheads. Thus, we direct all our attention towards getting better performance from the scarce resources.

So, TA is a simplified accounting system based on the ToC (Theory of Constraints) principles. According to this theory, the company can manufacture as fast as the slowest department will allow. The slowest department is called ‘bottleneck.’ To boost efficiency, all the focus is diverted to improve the slowest department as it’s the only way to maximize the profit.

Implementing throughput is the main reason for eliminating or reducing bottlenecks or constraints. One should have a parallel knowledge of the theory of constraint (ToC) while dealing with throughput.

Theory of Constraints (TOC)

ToC is focused on the what is limiting factors in the whole process and what can be done to eliminate this or reduce this. The current constraint is the priority of the theory of constraints.

ToC suggests a five-step process to remove the constraint or ‘bottleneck:

  1. Identify the constraint
  2. Make a plan to exploit the constraint
  3. Give more focus on the constraint
  4. Subordinate non-constraints
  5. Repeat the process

The above steps will help the organization to improve the production process based on the identified constraints continuously. TA helps in measuring the weak link. So, TA makes management’s decision-making simpler and understandable even to a person with no accounting knowledge.

For more details on these steps, you can also read Throughput Accounting.



Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

1 thought on “Throughput – Helps You To Remove Bottleneck And Maximize Profit”

  1. Is Throughput Accounting a very helpful tool for Job order manufacturing? Wherein your product is specifically designed based on customers need. And you have to comply on customers delivery date requirement?

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