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 the rivals. Further, maximizing this key metric could help a company to maximize the revenues as well.
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, rather the problem is with key input, then hiring the additional staff will be a waste.
Along with the internal process, the throughput also depends on the supply chain. You might have heard reports of Apple facing supply chain issues with iPhone components. So, all such issues also impact the efficiency of a company. If any component does not arrive on time, there is a delay in the manufacture of the whole product.
A financial perspective
Along with the operations management, throughput has a financial perspective as well. Under this, it is the revenues earned from a production process, less all variable expenses related to that process. Variable expenses are mostly direct materials and sales commissions. So, in most cases, the throughput comes pretty high, except in businesses where margins are razor thin.
Under financial perceptive, one can improve throughput by focusing on products with higher returns. A company must produce more of a product that has the highest throughput per minute of time at the limited resource. Moreover, a company could also outsource a product that is lowering 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, which is 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.
ToC suggests a five-step process to remove the constraint or ‘bottleneck:
- Identity the constraint
- Make a plan to exploit the constraint
- Give more focus on the constraint
- Subordinate non-constraints
- 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.