Throughput is the number of units of output a company produces and sells over a period of time. Furthermore, only units sold count towards throughput. Do not count units produced but not sold during the time period as throughput. The goal of a profit-seeking organization is to maximize throughput while minimizing inventory and operating expenses.
For example, let’s take a company that makes guitars. At the beginning of the fiscal period, the company has no guitars in inventory. But over the course of the fiscal period, the company makes 500 guitars. During that same period, they sell 300 guitars. So this company’s throughput for the period would be the 300 guitars produced and sold that period.
There is a formula for calculating throughput. Three variables or three components make up the formula. The three variables include the following:
- Productive capacity
- Productive processing time
- Process yield
Productive capacity refers to the total number of units of output that can be produced in a given time period. Whereas, productive processing time refers to the value-added time in the production process. Then value-added time in the production process is time spent increasing the value of the end-product to the consumer. Process yield refers to the percentage of units of output that are of good quality. For example, if a guitar shop produces 100 guitars but three of them are misshapen and unusable, then the process yield for the guitar shop is 97%.
Calculate productive capacity as the total number of units the process can produce divided by the processing time. Then calculate productive processing time as processing time divided by total time available. And calculate process yield as good units produced divided by total units produced.
Throughput = Productive Capacity x Productive Processing Time x Process Yield Throughput = Total Units x Processing Time x Good Units Processing Time Total Time Total Units
You can enhance throughput by either increasing productive capacity, decreasing the processing time per unit, and/or increasing the process yield.
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Theory of Constraints
Supply Chain and Logistics
Total Quality Management
Work in Progress
Barfield, Jesse T., Michael R. Kinney, Cecily A. Raiborn. “Cost Accounting Traditions and Innovations,” West Publishing Company, St. Paul, MN, 1994.