Throughput rather than output plays an fundamental role system performance.
The key difference is that throughput is based on what is actually billed and delivered, while output is something produced and sitting in inventory providing zero value to the organization. Fundamentally throughput relates to cash flow, productivity and profitability; the key elements of any success factor of an organization.
Generally most KPI are a waste of time and effort. Most are ‘so what’ KPI. They are isolated KPI that do not contribute to real business benefits. Some are mainly output related rather than throughput related; Example case is inventory versus throughput.
Having throughput as a KPI measure provides the ability for any organization to achieve its goal; the goal of being profitable and ability to grow. The rest have no relevance.
Throughput also directly influence productivity, net-profit; all those fundamental elements that are critical to any organization but strangely never really measured correctly.
Measuring throughput on its own provides limited value without linkages to the organizational elements resources, markets, teams and process which are all part of the system. Throughput is the outcome of a system. System Thinking considerations:
• A system is greater than the sum of its parts
• A system is not the sum of its elements/parts – its performance depends on the efficacy system element interactions. IT on its own is a sub-systems which interacts with other producing elements sub-systems (Procurement, production, quality ..) . In order to maximize manufacturing, the objective is not output but rather throughput (what is made and sold). The parts that interact can be the following:
- Manufacturing Resources, Tooling
- Skilled resources
- Manufacturing execution system
- Manufacturing planning and control system
- Management structure
The performance of the system depends on how well the parts fit together and how constraints effectively managed.
Therefore, to maximize throughput it is important to optimize the interaction between the various elements of the system.
Introducing multi-dimensional throughput KPI measurement will ensure the visibility of direct contribution of related elements that have an impact on throughput:
- Manufacturing Plants
- Throughput for actual manufacturing site
- Productivity for actual manufacturing site
- Manufacturing equipment / System
- Throughput for actual key constraining resources
- Geographical area
- Product Brands
- Customer groups
- Organizational Teams
- Information Technology
- Supply Chain
- Business Transformation projects sometimes fail because apart from change management there is no clear indication how transformation contributes to real benefits; how will it contribute to increasing throughput.Concepts:
Throughput (T) is the rate at which the system produces “goal units.” When the goal units are money (in for-profit businesses), throughput is net sales (S) less totally variable cost (TVC), generally the cost of the raw materials (T = S – TVC). Note that T only exists when there is a sale of the product or service. Producing materials that sit in a warehouse does not form part of throughput but rather investment. (“Throughput” is sometimes referred to as “throughput contribution” and has similarities to the concept of “contribution” in marginal costing which is sales revenues less “variable” costs – “variable” being defined according to the marginal costing philosophy.)
Investment (I) is the money tied up in the system. This is money associated with inventory, machinery, buildings, and other assets and liabilities. In earlier Theory of Constraints (TOC) documentation, the “I” was interchanged between “inventory” and “investment.” The preferred term is now only “investment.” Note that TOC recommends inventory be valued strictly on totally variable cost associated with creating the inventory, not with additional cost allocations from overhead.
Operating expense (OE) is the money the system spends in generating “goal units.” For physical products, OE is all expenses except the cost of the raw materials. OE includes maintenance, utilities, rent, taxes and payroll.
Organizations that wish to increase their profitability should consider the following:
- Increase throughput? How to increase, and in what areas?
- Reduce investment (inventory) (money that cannot be used)? How?
- Reduce operating expense? How?
The answers to these questions will determine the impact of proposed changes on system wide measurements:
1. Net profit (NP) = throughput – operating expense = T-OE
2. Return on investment (ROI) = net profit / investment = NP/I
3. TA Productivity = throughput / operating expense = T/OE
4. Investment turns (IT) = throughput / investment = T/I