By: Rob Loughridge, Principal, Synchronous Solutions
There is no better measure than throughput to create control and visibility in business. This measure will help reduce chaos, optimize flow, ensure excellence in customer service and increase profits. Period!
Throughput is also known as $T (“Tee” dollars or Throughput dollars). It is a measure of the value added to raw information and/or materials that are earned through processing. The formula for calculating $T is simple:
$T = Sales Price – TVE (Truly Variable Expense/Materials)
A project that requires 50 hours of work will sell for much more than a project that requires 10 hours of work and will therefore carry a much greater $T value. There is more value being added so the throughput is higher.
A common misconception is that $T is a direct measure of time. One might assume that a project that carries $T10,000 will take five times longer than a project that carries $T2,000. This is not the case because every system has a constraint. The constraint is the weakest link of the chain. The constraint’s capacity is the capacity of the entire business. The system is limited by how much $T can flow through the constraint/s, and therefore the system. $T is also directly tied to the profits of a business.
The formula for net profit is:
NP (Net Profit) = $T – OE (Operating Expense)
If we take the monthly OE of a business and divide it by the working days in the month, we know our daily OE. To make a profit, we must produce more $T than what we spend every day. And, to maintain control of the system, we can’t schedule more than the constraint’s maximum flow rate. When we schedule enough $T to overcome OE to make the desired profit and not exceed the capacity of the constraint, we have scheduled the ideal flow rate of the system.
This is the reason why every other measure for scheduling is inferior to $T. No other measure takes the flow rate into consideration. Long lead-times, missed fulfillment dates, angry customers, chaos, unhappy employees and not meeting the financial goals of the organization all ensue when scheduling with the wrong metrics.
Each day, there is a mix of products with different $T values flowing through a system. The sum of the $T values scheduled must match or be somewhat close to the ideal flow rate. Let’s use a hypothetical example to illustrate how scheduling by the wrong metric can cause trouble.
Our hypothetical steel company started measuring their output in $T with a daily goal of $T10,000 per day to meet desired profits and to match the flow rate of their constraint. Operations have become much smoother, and profits are up, but change is hard. There remains a legacy goal in the minds of some managers’ heads of 10,000 lbs. per day of output. “That’s how much we used to do!” they say.
On one particular day, there are only two products scheduled to be completed. One order will have a completed weight of 3,000 lbs. and carry a throughput value of $T6,000. The other product will weigh 2,000 lbs. and carries a $T value of $T4,000. The daily $T goal has been met, therefore satisfying the ideal flow rate. The day’s work will have a total weight of 5,000 lbs. But then a certain manager, who has yet to fully embrace the Throughput Scheduling concept, sees this and exclaims, “Only 5,000 lbs.??? Over my dead body! What happened to this place? We used to put out 10,000 lbs. a day! This is unacceptable! Schedule another 5,000 lbs., NOW!!!”
What do you think will happen to production?
If you guessed it’ll throw the system into chaos, you’re right. The system won’t be able to produce what has been scheduled on time. Even worse, the completion dates of everything else in the system will be put in jeopardy. The constraint won’t have the capacity to do the work because its flow rate was already absorbed by the two originally scheduled jobs. Everything will back up in front of the constraint. This single mis-scheduled day will create a ripple effect that will last for days or possibly weeks before the flow can be normalized again.
Scheduling by pounds, number produced, gallons, square feet or any other metric just doesn’t work compared to the results realized by scheduling with throughput. Scheduling with throughput is the only measure that gives you control over flow and profits.
Questions about throughput scheduling? Regardless of your industry, we can help reduce chaos and create predictable cash flow using the science of business! In the past, we have worked in countertop fabrication, manufacturing, automotive, pharmaceuticals, printing, and many more! If your business deals with people, information, or materials, this can work. We’re excited to answer any questions you have!
