Throughput is just the beginning...
The official Constraints Management definition:
Throughput is the rate at which the system
generates money through sales.
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.
How stupid
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?
Call me.
Jeff 'SKI' Kinsey, Jonah
+1 330.SKI.0431
ski@throughput.us
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.
Penny wise and pound foolish?
In business as well as life it is easy to "cost justify" mistakes that rob you (or worse, your business) of important cash... much needed cash. Take something as simple as paper for your printer as an example.
A single ream of suitable general purpose copier paper is like $3.99 each. Which might last 30 or 40 days, maybe more. But a name brand office supply company is running a 50% off sale on cartons of copier paper for $18.99 for 10 reams. Which is the better deal?
If you are a startup with limited cash and limited printing needs, it would be easy to say that not spending the extra $15.00 could not possibly make a difference. So you might be tempted to spend it and get the carton. You will need the paper, right?
Wrong
I have seen this scenario too many times... in numerous businesses in various industries. So, how do we stop wrongheaded thinking? By exposing the core issue: lack of systems thinking. I love the TV series Life about the cop that was framed and served twelve hard years before having the findings reversed. He discovered Zen while doing time, and picked up his life after release without any malice. Thank you Hulu dot com. Check it out, it is a refreshing experience. Both seasons are online for a while longer. But I digress...
We must fight "cost world thinking" (aka local optima) with a Zen like love of exploration for the true ramifications. Like Charlie Crews of Life would. That $15.00 will quickly become ten times that before the week is over and that becomes over $600 a month. Which might make a big dent in some major expense, like rent!
Consider the road trip. My favorite classroom. I have the Kings of Entrepreneurship and Business in the car with me on each and every trip. Right there on my iPod is Les Brown, Guy Kawasaki, and Jim Collins to name just three. Along side Dylan and Clapton, for sure!
You probably know my name because of one such case: the road trip I made in November 2000 when I heard Eli Goldratt speak "live and in person" for the first time. Driving back to Hilton Head Island from Indianapolis into the night, I was tempted to stop and get a motel room for the night. As I recall, I drove up on a Wednesday after a leaving a client's office, driving through the night. Got to Naptown early in the morning and was able to check into my Thursday night room at 7am. I do that a lot. In other words, I did not have a hotel bill for Wednesday night. Attended the Necessary But Not Sufficient roll-out on Thursday and Friday until noon, then hit the road.
Driving back into the night, I had recently purchased a Sony digital recorder, and captured a number of ideas that lead to my launching of TOCreview magazine... which gave way to "this, that and the other" and here we are now. Because I understood that a penny not spent today, was going to be worth two or three dollars tomorrow.
Bottom line: watch the pennies and the dollars have a better chance of rolling in!
Jeff 'SKI' Kinsey, Jonah
www.Throughput.us
+1 330.SKI.0431
ski@throughput.us
©2010 Jeff 'SKI' Kinsey. All rights reserved.