## Common Sense ThroughputTM –
A Manufacturing Management Strategy

### Scott Rich

Lilly Software Associates, Inc.
500 Lafayette Rd.
Hampton, NH 03842
Phone: 603-926-9696
Fax: 603-926-9698
E-mail: srich@visualmfg.com

Common sense, oddly, is not all that common. This is precisely why it is valued. We call it common, for when we see it for what it is, we are always surprised that we hadn’t thought of it sooner.

Such is the case with manufacturing throughput. People think of throughput in different ways, but in point of fact, it is the most critical turnstile for determining profitability. Of course, balance sheet profit-and-loss calculations routinely have other associated elements tethered to them. But at the end of the day, it is throughput that sums things quicker on the bottom line than anything else under your control.

Working to order, if you made more today than you did yesterday – without any discernible increase in operating costs – you’ve advanced your game. If not, you’ve started a trend that ought to light a fire in the company, a fire with such intensity that a remedy is everyone’s concern.

That’s common sense.

But how common is it in our organizations today? Have we become so complex, so sophisticated in what we do that we can’t see this? Or worse, don’t find merit in it any longer?

A Matter of Focus

Do you and your key production management team meet daily to assess the throughput of operations from the previous day? Do you daily determine the reasons why the figures change? Do you strategize on what your people can do to boost the numbers?

It’s common sense

.

But why is it so uncommon?

Let’s break it down. Let’s look at the simple elements that comprise throughput as a factor of production -- but more importantly, as a leading indicator of the profitability of your company.

The real significance of throughput is often blurred or obscured. It loses some of its sharpness as a measurement of general health of operations when coupled with other measurements, typically those employed in a "balance sheet" approach to calculating revenues vs. operating expenses. Cost of materials and outside services are commonly rolled into that equation. And as a result, the potential leverage of using throughput as a point of focus for boosting profitability is minimized.

Throughput with an Edge

The value of throughput is best determined by subtracting the materials and outside services from the selling price. Additionally, it should be calculated using only those finished goods that went against shipment of a specific customer order.

At first glance, the common sense of this might be hard to reckon. What about labor? What about overhead? What about inventoried finished goods?

Good questions. But think about it. Where is the leverage in labor and overhead and unsold finished goods? In a sense, they’re sunk costs – or worse, with the added freight of potential write-off always attached to unsold finished goods.

Applying the Leverage of Throughput

If you can increase the throughput of goods sold without increasing your labor or overhead, you have effectively boosted not only throughput, but more importantly, profitability. You’ve wrung more juice from the fruit at no additional cost – and it all goes to the bottom line.

By stripping out labor and overhead, you are forced to focus on what you can effectively control to increase profitability. It enables you to focus on those things which inhibit -- or more strategically, accelerate -- throughput.

Make more goods in the same amount of time without increasing costs and the result is all profit. It’s common sense.

Controlling the Bottleneck

In manufacturing, that which impacts throughput is termed a constraint. When the influence is negative, it is called a bottleneck. Eliminate or reduce the bottleneck and you boost throughput. With the caveat, of course, that everything else remains equal.

But as anyone who has worked in production management well knows, bottlenecks may not remain stationary. As you tweak and gain efficiency in one area, you may witness the emergence of new bottleneck somewhere else.

That being the case, knowing where your bottlenecks are – and where they are likely to move to – is a powerful bit of intelligence in effectively managing production to boost throughput. And profits.

It’s common sense.

But how common is it?

How many CEOs meet with key floor supervisors on a daily basis to scrutinize the behavior of yesterday’s bottleneck? To explore what they are going to do to manage it better today, or to manage the resultant new bottlenecks? To identify where bottlenecks are most likely to appear over the next two to three weeks, and what they’re going to do about that new set of problems?

If you are interested in boosting profits, doesn’t it make sense to focus on these issues?

Consider the following example:

Current Company Sales = | $5,000,000
Gross Profit = | 10% or $500,000
Material and Outside Services = | 30% of sales or $1,500,000

When you increase sales by just 5% or $250,000 without increasing operating expenses:

Throughput increases by | $175,000
Profit Increases by | $175,000
Profit increases by | 30%

The Question "How"

So the question becomes: how can we best identify our bottlenecks in production? And with enough responsiveness to proactively effect a positive impact?

Lilly Software Associates brings a unique combination of people, products and services to bear on this problem. Our people’s manufacturing experience and expertise are the bedrock upon which our manufacturing software has been designed and built. And we have a solid track record in the industry that unequivocally attests to our success in helping manufacturers to significantly boost both throughput and profitability.

It is simple enough for us to show you how you, too, can boost your throughput and profitability. It’s as simple as calling us. It’s common sense.

The Common Sense Throughput Methodology

Common Sense Throughput is a methodology simply based on the notion that the CEO commits to spending fifteen each day analyzing their organization’s bottlenecks with two key manufacturing staff members. The purpose of the meeting is to discuss the current state the bottlenecks and take action on them in order to prevent a negative impact on profitability. The two key staff members should arrive to the meeting prepared to discuss the following:

- Where was the bottleneck yesterday and how was this resource used?
- What was the production plan for this resource?
- What was its actual use?
- Why was it different?

- What resource is the bottleneck today?
- What is the production plan for this resource?
- Can the production plan be improved?
- Can the bottleneck be upgraded?
- How much of the output at this resource is for actual customer orders?

- What resources are expected to be bottlenecks over the next three weeks?
- Is there more than one, and are the bottlenecks expected to wander?
- How do we achieve the greatest utilization?
- Are there any expected problems with the bottleneck(s) over the next three weeks?