What is 'Throughput'
Throughput is the amount of a product or service a company can produce and deliver to a client in a specific period of time. Businesses with high throughput levels can take market share away from lower throughput firms, because they can produce that product or service more efficiently than their competitors.
BREAKING DOWN 'Throughput'The idea of throughput is part of the theory of constraints in business management. The guiding ideology of the theory of constraints is that a chain is only as strong as its weakest link. Advocates of the theory attempt to minimize how weak links affect a company's performance.
How Capacity Impacts Throughput
A firm’s level of production capacity is closely related to throughput, and management can make several types of assumptions about capacity. If the firm assumes that production will operate continually without any interruptions, management is using theoretical capacity, but this level of capacity is not reachable. No production process can produce the maximum output forever, because machines need to be repaired and maintained, and because employees take vacation days. It's more realistic for businesses to use practical capacity, which accounts for machine repairs, wait times and holidays.
Factoring in Supply Chain Management
A company’s throughput also depends on how well the firm manages a supply chain, which is the interaction between the company and its suppliers. Assume, for example, that ABC Cycles manufactures bicycles. The firm has procedures in place to maintain equipment used to make bikes, and it plans production capacity based on scheduled machine maintenance and employee staffing plans. However, ABC also needs to communicate with its suppliers for metal bike frames and seats, because the suppliers need to deliver components parts when ABC needs them for production. If the parts don't arrive when ABC Cycles needs them, ABC's throughput will be lower.
The Differences Between Joint Costs and Separable Costs
In many cases, two products may start in production using the same process, which means that the joint costs are allocated between each product. When production reaches the split-off point, however, the products continue being produced using separate processes. This situation makes it more difficult to maintain a high level of throughput. Assume that ABC Cycles starts production of mountain bikes and road bikes using a joint production process, and both bikes use the same bike frame and seat. Later on, the production process separates, because each bike model uses different tires, brakes and suspensions. This makes production harder to manage, since ABC must consider production capacity in both joint and separate production processes.