Throughput Accounting: Basics (#43)

In this podcast, we cover the basic concepts of constraint management, including the bottleneck, inventory buffer, sprint capacity, and throughput. Key points made are:

  • This is based on the theory of constraints, where the focus is on bottleneck operations.

  • You need to make your bottleneck’s operations as efficient as possible to maximize its output.

  • General efficiency improvement campaigns do not work; they have to be focused on just the bottleneck.

  • Improving the efficiency of upstream operations only increases the backlog in front of the bottleneck, which increases the investment in inventory.

  • This can be a major concern in the sales department, depending on the process flow within it.

  • There needs to be a buffer in front of the bottleneck, to ensure that the bottleneck is always running. This means that a pile of inventory in front of the bottleneck is a good thing.

  • Only release inventory into the production operation in sufficient quantities to maintain the inventory buffer and maximize the workload at the bottleneck.

  • Having some sprint capacity in upstream operations is needed to rebuild the buffer quickly, in case it is ever depleted. Otherwise, the bottleneck may be short of work.

  • Throughput is the margin remaining after all totally variable costs are subtracted from sales.

  • Focus on maximizing the throughput per minute passing through the bottleneck. This maximizes profits for the business.

Related Courses

Constraint Management
Inventory Management