46
1st QUARTER 2014
The Throughput Formula
To maximize throughput (aka variable
gross-margin dollars), the decision as to the
amounts of each product to be made and
eventually sold is dependent upon their re-
spective dollar values of
throughput per unit
of time
through the constrained resource,
even though such products may show
a
lower per-unit throughput
. The product with
the greater dollar value of throughput per
unit of time through the constrained
re-
source
is inherently the more profitable. This
formulation is fundamental to Throughput
Accounting.
In companies with many SKUs, calculat-
ing throughput per unit of time through the
constrained resource for numerous SKUs
was correctly thought to be arduous and
therefore inhibited the use of Throughput
Accounting.
Recently, as recognition of the value of
Throughput Accounting has gained currency,
software has been developed to perform its
calculations.
Managing Capacity
Accounting and management textbooks and
the students (now grown up to be executives)
who read them consistently stress breakeven
analysis to “make the money.”The concept
is usually expressed only in formulas and
charts dealing in variable gross margin and
fixed costs. In modern manufacturing, the
enterprise is, in fact, a service company that
happens to have some variable costs, making
capacity
the
significant resource to be man-
aged. When capacity is idle, it is a wasting
asset. So, keeping the focus on capacity
utilization requires more than just reporting
throughput against operating expense. It bears
understanding the unit of measure of capacity,
the total capacity owned, the amount of that
capacity used in each reporting period, and
constant reporting of the amount and percent-
age of it utilized. Ancillary reporting on such
phenomena as scheduled machine uptime and
setup time, which drive efficiency of utiliza-
tion, are useful to keep the focus on manufac-
turing improvement of capacity utilization.
Most importantly, selling the capacity
means changing the business paradigm and
requires rethinking the company’s strategy to
one that accepts interim volume at less than
desired throughput rates while still seeking out
the more traditional and profitable business.
Regardless of the approach taken, the strategy
has to incorporate the idea that we “keep the
mills running” to make the money.
C
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