When you’re in business, the time it takes to get from beginning to end is essential. Whether it’s a long-term project, a daily task or the manufacturing process, knowledge is power. The more you understand how your processes work, the easier it is to identify areas of waste. Manufacturers use a throughput efficiency formula to come up with the throughput time, which is also known as cycle time.
Throughput time is the measure of a specific process’s rate from start to finish. It is often used in production, where professionals monitor how long it takes to manufacture an item from a specific start point to its designated end. These benchmarks can vary from one organization to the next since each business has its own processes. In manufacturing, throughput is usually applied to the number of units that are produced and sold within a designated timeframe. If a unit is produced but not sold, it isn’t counted.
In information systems, throughput is the measure of the number of units of information that can be processed in a designated amount of time. Traditionally, this measure has been applied to batch jobs, but today’s throughput time is applied in a variety of ways in technology fields. A database, for instance, can be measured based on the transactions per second that flow through it, and webmasters may measure throughput by the number of page views a site gets per minute.
There are three major elements involved in the formula used to calculate throughput time. One of those is inventory, which is assigned a basic number based on the units you have in stock. In a service-based business, the customer would serve as your inventory, where you’d be calculating the throughput time using the number of customers served within the timeframe. If you’re a technologist, the inventory might be the number of transactions, visits or batches.
The second element is time. It refers to the total amount of time that you measure from start to finish. If you’re trying to determine the throughput of manufacturing units from the time production begins to the time the item is sold, time could be weeks rather than hours. But a measure of a technology transaction could be seconds or minutes.
The third element is your throughput, which is what you’re trying to determine. This is the rate at which your inventory, or units, move through the process. This rate presents as units per time, so if it’s your technology process, it would be the number of units moving through your system per minute or second. If it’s manufacturing inventory, it would be a measure of units produced and sold per day, week, month or year.
The throughput efficiency formula can be calculated more than one way, but the general formula is I = R * T. In other words, Inventory = Rate multiplied by Time, where “rate” is the throughput. But if you solve for R, you would get R = I / T, or Rate = Inventory divided by Time. Using the formula, you can determine the time it takes to fully process a product or service.
Putting this example to use, say your business manufactures spatulas. You calculate that you’re manufacturing 10,000 spatulas a day, with your equipment running 16 hours per day. To determine how many spatulas you’re manufacturing per hour, you could use the formula to break down the throughput rate. This would be R = 10,000 / 16, which would be 625 spatulas each hour.
The first step in analyzing your throughput rates is using the throughput efficiency formula to determine exactly what your numbers are. But that information will be useless if you don’t analyze it to help improve your processes. The information you gain can be used to evaluate the investment you’re making into your business. To even get started as a company, you need supplies, employees and building space, as well as the supplies you need for your production process unless you’re a service-based business. However, one complication of throughput analysis is that your daily expenses are there whether you produce 10,000 spatulas per day or not. Unless you have on-call staff, you’ll still pay wages and equipment will remain in place regardless of production demand.
For that reason, a separate throughput calculation formula has been proposed, called the system approach. You’ll be able to use these calculations to determine whether investing more cash into production is a wise idea. This approach uses throughput, which is sales minus your variable expenses. Variable expenses refer to the cost of fluctuating necessities like materials. You’ll also include those operating expenses that aren’t variable. Lastly, you’ll include the amount of money you would invest to increase production. The three formulas are as follows:
- Revenue – the total of variable expenses = throughput
- Throughput – operating expenses = net profit
- Net profit / investment = investment
One snag you may not build into calculating your throughput time involves coming up short on your production capabilities. Once you’re familiar with the time each of your processes takes, you will more accurately be able to determine the capacity of your current setup. If you need to ramp up for a large order or the upcoming holiday season, for instance, you can use this information to add more equipment, workers or shifts to handle the uptick.
Here's another way the throughput calculation formula is helpful: Using your formula, you’ll know you can only do 10,000 spatulas a day for 16 hours per day. If you suddenly need to produce 10,000 more, you won’t be able to squeeze 16 more hours out of a day. So you can change your inventory to 20,000 and divide it by 24 hours per day to arrive at 833 spatulas per hour. That’s 833 = 20,000 / 24 where 833 is rate, 20,000 is inventory and 24 is time. To produce 833 spatulas rather than 625, you would need to increase the resources necessary to handle the extra production in addition to running 24 hours per day rather than 16. Otherwise, you’ll soon find you have a backlog.
Another thing the throughput calculation formula can help with is predicting backlog. With backlog, you take on the order for extra spatulas, perhaps because you hadn’t properly analyzed your throughput rates before accepting. If you’re only handling 625 an hour, but you need to be able to handle 833 per hour, at the end of the first day you’ll have a backlog. If you plan to work the same number of hours, you’ll know right off the bat that you’ll have a backlog on day one of 10,000, which will double to 20,000 by the end of the second day and 30,000 by the end of the third. Companies often measure backlog in terms of dollars, which can help when it comes to determining whether it’s worth it to increase staffing or purchase more equipment. If each spatula sells for $1, that means the company would have a $10,000 per day backlog.
Backlogs can also occur due to sudden staffing shortages or unexpected equipment breakdowns. So that typical 10,000 per day could be cut down to 8,000 per day because you’ve lost some of your resources. That backlog of 2,000 per day can help you calculate the cost of an employee absence or equipment loss, which is $2,000 per day. That can help when you’re justifying the extra cost to hire temporary workers as needed or schedule routine maintenance on your equipment.