Throughput Accounting: Controls (#47)
/In this podcast episode, we cover the reasons for controls associated with a bottleneck operation, and where they should be placed. Key points made are noted below.
The only topic we haven’t covered yet is controls. Now, in a normal accounting system, you only place controls where you think there’s a risk of loss. That means you have extra controls over things like materials purchases or payroll or cash or fixed assets, because these are places where you can potentially lose a fair amount of money.
Controls Over Throughput
But in a throughput environment, the main places to have controls are, of course, somewhere else. The main control point is the bottleneck operation, and the only goal is to raise a big red flag when it’s not 100% utilized. You do that with a daily report that shows the utilization percentage on a trend line. In fact, don’t even print a report. Just use a dry eraser marker, and post the information on a white board right next to the bottleneck operation. That’s the best way for everyone to see it.
You can also measure the proportion of downtime that’s used by maintenance. This is one of the few valid reasons for downtime, so the other side of the measurement is to show the remaining amount of downtime that’s caused by everything else. That can include material or labor shortages, quality problems, machine downtime – things like that.
You should also track the bottleneck production to make sure that it only produces exactly what it’s supposed to produce.
Detection of Long Production Runs
There are still production managers out there who think they should have extra long production runs in order to look more efficient. This is never a good idea, and especially at the bottleneck, because doing an extra-long production run just means that you’re sticking some extra inventory into the warehouse, instead of producing something that could’ve been sold right now. To detect it, compare actual production run volumes to the authorized volumes. If the run volumes are consistently high, then it’s time for a chat with the production manager.
Scrap Tracking
Another control is to track anything that gets scrapped downstream from the bottleneck. This is important because you just wasted some valuable bottleneck time to build something, and now you’re chucking it out – and that is lost throughput. This one doesn’t have to be reported continuously, but it doesn’t hurt to issue a report on it about once a week. That’s usually a fast enough feedback loop for managers to figure out what happened.
Inventory Buffer Tracking
Another place where you need a control is at the inventory buffer that feeds the bottleneck. If this buffer drops to zero, then the bottleneck runs out of work, and you lose throughput. Now, for this control, it’s not good enough to just say that the buffer dropped to zero at such and such a time. The real value of this control is to figure out what upstream problem caused the inventory to drop to zero, so that someone can fix it.
This is a major control. The care and feeding of the bottleneck is really what drives company profits, so if you have a limited amount of time to spend on throughput controls, this is a good one to focus on.
Sprint Capacity Tracking
Now, speaking of upstream workstations, another control is to monitor their sprint capacity. You need to create a running utilization percentage for every upstream workstation. Whenever utilization levels go too high, then sprint capacity is reduced, and that increases the risk of a shortage at the bottleneck. So, you use this control to figure out when to increase capacity levels.
Production Scheduling Tracking
Throughput controls can also address production scheduling. If too many jobs have been scheduled into the production area, then there’s going to be a logjam somewhere that may keep inventory from reaching the bottleneck. If so, consider installing a report that simply shows how many production jobs have been released into the system.
This number can obviously vary a lot, depending on the size of the orders, but it’ll be really obvious when there are simply too many jobs in the system. Again, use a trend line for this, and report it once a day.
Controls Over Work in Process
In addition, don’t just set up controls for inventory that’s in process. Throughput can be totally hosed if inventory never arrives on time from a supplier, too. To keep an eye on it, create a report that’s limited to only those materials that can shut down the bottleneck, and track the number of days supply on hand. Or, report any key materials that are late in arriving. Whatever works for your situation.
The Need for Accounting Controls
After all of this talk about new controls, you might wonder if there’s still a need for all of the accounting controls that you already have. Yes, of course there is. In fact, if you’re with a public company, you’ll have a mighty tough time passing a Sarbanes-Oxley controls review if you don’t keep those controls.
Parting Thoughts
The main difference between traditional controls and throughput controls is that traditional ones focus on not incurring unnecessary expenses, while throughput controls focus on increasing throughput. In other words, traditional controls focus on expenses, and throughput controls focus on revenue. Two entirely different types of controls.
And that’s all I have for throughput accounting. I think this is a great topic, because until you figure where your bottleneck is located, you really have no control over your profitability. And as I’ve mentioned several times in the last few episodes, this isn’t just for a manufacturing company. It can be anywhere. Where I work now, the bottleneck is undoubtedly in the sales department, and I’ve seen it elsewhere in the engineering department. So, throughput concepts work pretty much anywhere.