What is Throughput?
Throughput (also known as the flow rate) is a measure of the business process flow rate. Essentially, it measures the movements of inputs and outputs within the production process. It is an important metric in the operations management of a company.
This variable primarily indicates the efficiency of operations that are vital to the overall success of a business. The maximization of throughput levels can be the key driver in maximizing a company’s revenue.
The concept of throughput is essential to companies in various industries, even if they are not involved in the production of goods. For example, it can be applied to assess how fast the company provides services to its customers.
The formula can be derived from the following equation of calculating inventory:
I – the inventory. This is the number of units that are currently contained in a business process. Inventory is measured in number of units. Note that the concept of inventory in operations management is different from the accounting definition of inventory. In accounting, inventory includes products that are waiting to be sold. In operations management, the inventory comes with a broader meaning and it includes all the units of the products within the operations system.
R – the flow rate (throughput). It is the rate at which the number of units goes through the process per unit time. The rate is measured in units/per time (e.g., unit/minute).
T – the flow time. It is the time that the units spend in the business process from the beginning to the end.
If we rearrange the formula above, we can find throughput using the following equation:
R = I / T
Example of Throughput
Consider a company called ABC Corp. that manufactures chairs. The company’s management wants to increase its profits by improving the operations process. Therefore, the management decides to find out the company’s current throughput.
Currently, the company holds 100 chairs in inventory. The average time that a chair is contained in the business process from its production to selling is ten days. Using the above information, we can find the throughput:
R = 100 chairs / 10 days
R = 10 chairs/day
The company’s throughput is 10 chairs per day. Alternatively, you could state that the daily throughput is 10 chairs.
Thank you for reading CFI’s explanation of throughput. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below: