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In the business management theory of constraints, throughput is the rate at which a system achieves its goal. Oftentimes, this is monetary revenue and is in contrast to output, which is inventory that may be sold or stored in a warehouse. In this case, throughput is measured by revenue received (or not) at the point of sale—exactly the right time. Output that becomes part of the inventory in a warehouse may mislead investors or others about the organizations condition by inflating the apparent value of its assets. The theory of constraints and throughput accounting explicitly avoid that trap.
Throughput can be best described as the rate at which a system generates its products or services per unit of time. Businesses often measure their throughput using a mathematical equation known as Little's law, which is related to inventories and process time: time to fully process a single product.
Using Little's Law, one can calculate throughput with the equation:
- I is the number of units contained within the system, inventory;
- T is the time it takes for all the inventory to go through the process, flow time;
- R is the rate at which the process is delivering throughput, flow rate or throughput.
If you solve for R, you will get:
- Goldratt, Eliyahu and Jeff Cox. The Goal. Croton-on-Hudson: North River Press, 2004.
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