Throughput Generation | Operational Excellence Quick Hits
Quick Hits share weekly tips and techniques on topics related to Operational Excellence. This week’s theme relates to Organizational Performance Part 5: Profitable Growth Opportunities. We hope you enjoy the information presented!
Speaker 1: (00:06)
In the last session we were talking about the flow based performance metrics. Now we’re going to talk about making profitable product decisions. So if you’re looking to grow the company, where do we look for opportunities to grow the company and strengthen the chain? So remember in the chain, in order to strengthen it, we must make the chain stronger. We must increase the capacity of the weakest link. We can do that by increasing the utilization of that weakest link or increase the throughput or the rate that we generate value added to that weakest link.
Speaker 1: (00:43)
So in this case, we want to look at this weakest link and decide what’s the throughput value of each product that flows through that. So of course, we want to look at all the different flows in the organization. So using value stream mapping, we can look at the different flows in the organization.
Speaker 1: (01:01)
And each of these unique flows could be a value stream. I try to keep the value streams to no more than five value streams. So for each value stream, we can have a capacity constraint resource that dictates the flow of that value stream. So if we know what that resource is, then we can determine the flow rate of the whole system or that value stream from that product that flows through that value stream.
Speaker 1: (01:30)
So, when we make product decisions what we want to do is determine the throughput of the product we must produce. And we do that by taking the totally variable costs away from the selling price.
Speaker 1: (01:40)
So if we know what the selling price is, we know what the totally variable cost is. So we can determine the value editor throughput. Then we look at that which value stream that product flows through and say, “Okay, if we multiply the throughput by the run rate of that capacity constraint resource, then we can calculate how much throughput per constraint unit is being produced.”
Speaker 1: (02:03)
So what we want to do is we want to look at different products and we can compare those throughput rates for different products that flow through different value streams to maximize our profitability. And to satisfy the market we want to pick the products that have the highest throughput value per constraint unit for our organization.
Speaker 1: (02:26)
This will help us identify in the future, what products are good for the company and which ones aren’t so good for the company and what actions need to be taken to increase the overall performance of the company.