Throughput is just the beginning...
The official Constraints Management definition:
Throughput is the rate at which the systemgenerates money through sales.—from The Goal
Notice the emphasis on "sales" and not production. To further explain, we do not count labor. Only the truly variable costs. Yes, I know... this takes some getting "use" to... but when you get your mind around the three simple measurements required to make money now (and even more money in the future), you will thank me. Honest.
Consider the hotel that has 76 rooms to rent each night. Forget RevPAR (the measurement that most organizations in hotel management want you to maximize)! Throughput is key.
Say that you are running about 70% occupancy week in and week out. If I were to mentor you as an owner of a hotel, I would ask you to determine the amount of money it takes to get just one room ready to rent after it has been rented the night before.
Your bank notes require the same exact payment each month, regardless the number of rooms rented. Same with housekeeping: you will not add any additional personnel if you rented just one more room last night. You probably will find that it costs about $7.00 to "restore" a room in a chain like a Days Inn for rent tonight, if that room was rented last night.
Yep, seven bucks!
Do you understand the ramifications? I doubt it. Why? In college they most often teach two kinds of accounting: cost accounting and managerial (yes, this is grossly oversimplified... isn't that refreshing?).
If you get an Associate degree from most American institutions of higher learning, you probably won't get any exposure to managerial accounting. How sad. But I digress...
Forget "cost accounting" if you are trying to make money. Leave the concept to your CPA. Please! Ask her if you could please use "cash method" vs. the "accrual method" to run your business. That would be a giant leap towards understanding throughput. But I digress...
Bottom line: if it costs you just $7.00 to prepare a room for rent, why did you refuse to accept a discount at 11:27pm last night? Better yet, why do you refuse to "match" the online price offered by priceline dot com when you have empty rooms?
Do you know how many times I have cost you real money? When traveling, I look up the price for a room online then call the facility directly and offer the same money. In eight years, no one has ever accepted. So, I go back online and book the room.
Now, you get to pay the central reservation a fee for my room on top of the $7.00.
You can make excuses or you can make money. The two are most often mutually exclusive.
Need help uncovering how throughput works in your business?
Jeff 'SKI' Kinsey, Jonah
P.S. Throughput is the first of three metrics for making money... stay tuned for the other two.
©2010 Jeff 'SKI' Kinsey. All rights reserved.