Meaning of Throughput
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 it measures the number of units a company can produce in a specified time. The throughput is mainly concerned with identifying and removing bottlenecks to maximize the profits of a business. These bottlenecks are the limiting factors in the production that hinders the whole process.
Throughput is a crucial metric for determining the efficiency of the operation 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.
How to Boost Throughput?
The only way to increase throughput is to identify the bottleneck operations. Let us look at some of the points to boost throughput.
Improving Technical Issues
A company can increase the throughput by improving the production process. For instance, hiring more staff can ensure technical issues in the production process and resolve quickly. But again, 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 then hiring additional staff will be a waste.
Providing Proper Training
Explaining the flow of the whole production process to the laborers also helps in boosting throughput. Thus, arranging proper training programs helps in eliminating the waste of time and other resources that could accelerate the speed of production.
Replacing Bottleneck Equipment
Let us understand this with the help of an example. Suppose producing an article requires 4 machines A, B, C, and D. The production capacity of all the machines are 500 units, 520 units, 450 units, and 500 units respectively. Therefore, the bottleneck, in this case, is machine C. Because even if machine A would produce 500 units, machine C would not allow more than 450 units. Hence, throughput accounting helps in identifying the bottleneck areas and improving them.
Managing Supply Chain
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 Accounting (TA)
Throughput accounting 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 toward getting better performance from 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 the ‘bottleneck’. To boost efficiency, all the focus is diverted to improving 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 focuses on the what are limiting factors in the whole process and what steps can help to eliminate 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:
- Identify 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.
A Financial Perspective
Along with 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. 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 form a part of the 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.