Throughput is a term made popular in the manufacturing industry. It measures how effective your resources are at generating revenue. Its helped managers shift decision making from "how much does this cost?" to "what net gain does this decision have on the company?".
Throughput is based on a few simple assumptions:
- That materials, rentals/other, and subcontractors are simple to increase - and do not have significant associated costs along with them. Since vendors manage these costs, they are called Totally Variable Costs.
- That labor, equipment, and overhead - although you can increase these costs too - cost far more to add. These too are costs, and they can be variable, but these costs are more expensive to increase than total variable costs.
The goal of Throughput is to measure how effective your company's expensive resources (labor, equipment, and overhead) are at generating revenue for the company.
The formula is simple. Throughput is the revenue remaining after you pay totally variable costs.
Throughput = Revenue minus Total Variable Costs (material costs, subcontract costs, other costs)
Throughput simply measures how much revenue your company keeps after your vendors are paid. The higher the throughput on a job, the more revenue its generating for your company.
We can also take throughput one step further. Labor hours are the most expensive, and difficult, cost to increase. You can add longer work weeks (OT) and even work weekends to a point, but eventually, to increase labor, you'll need to add more crews. Adding a crew costs far more than just the costs of payroll. You're going to need:
- A truck
- A trailer, equipment and tools (which also requires more fuel and repairs
- Cell phone, uniforms and other admin-related HR costs
- Eventually - increasing crews need more yard space, more supervision (overhead staff), more people selling work (sales staff), and more...
Because labor the most difficult cost to add/manage, we want to maximize throughput per hour - this measures how much revenue is retained by the company per hour worked.
Throughput Per Hour = Throughput divided by Field Labor Hours
To measure a job's throughput per hour, you'd do the following:
- Find the job's throughput: Job Price minus (Job Material Costs + Job Subcontractor Costs + Job Other Costs)
- Find the job's throughput per hour: Take the Throughput calculated in Step 1 and divide that number by the number of labor hours on the job
By maximizing throughput per hour on jobs, you're identifying the jobs that generate the most (retained) revenue for your company in the least amount of labor hours.