Saturday, March 08, 2003

Throughput Accounting, Illustrated

After a long winter with the second highest snowfall on record, we had a break here today with 55 degree sunshine in central Indiana on a Saturday. In a commentary on your host's hopeless fascination with business and Lean systems, I learned something about how one can make business decisions while out running errands in a marvelously lovely late winter's day.

The Oil Change

My first errand was for basic service on my car. Anticipating delays since all my fellow citizens were also breaking out of hibernation, I grabbed a book and headed forJiffy Lube.

Their three bays were full and three cars were waiting outside when I pulled up. Dwayne, the manager, came outside, greeted me warmly (I'm a regular) and wrote up my order. I asked him how he was doing on a busy Saturday. "Hey, we're clicking today! I have a full staff and we're moving well. We'll have you in pretty quickly."

He was right. In about 12 minutes, my car was in the bay. In another 12 minutes or so, it was done. I paid, was thanked warmly by Dwayne and two others on his team, the last one closing my door for me as I drove off. I only got four pages read in my book.

The Car Wash

I left Jiffy Lube and headed for a nearby car wash I have frequented for years. Not surprisingly, they were jammed with cars at 1pm on a sunny Saturday wanting to wash off the accumulated salt and road grime of a long Indiana winter.

I was surprised, however, to note that two of their seven manual wash bays were closed off and two of their three automatic wash bays were also not operating. It was a perfect day to make big money in the car wash business, one of only two or three that might be so perfect in a full year. Why on earth were those bays down?

The lines were so long. I drove on and washed my car at another establishment.

What is the cost of the non-working carwash bay?

As I drove, I got thinking. The following are all my own estimates, based on my own observations.

The carwash manual lanes charge $1.75 and run one car through in five minutes. That works out to $21.00 per hour. For the two bays to be down for the 9 hours today that they would have been fully used had they been available, the car wash lost about $375 in revenue.

The auto lanes were even worse to have down. At $4.00 for a four minute cycle, they each generate $60 per hour. Having both lanes down on a busy day cost $1,080 in lost revenue.

In round numbers, the carwash forfeited nearly $1,500 in revenue in one day. Assuming that the true variable costs for water and soap are small, say 10% of the total cost, the firm could have had another $1,350 towards their fixed expenses had the lanes been operating.

So what's the point, Joe?

This is a very basic treatment of throughput accounting. It affects how one thinks about costs when we view capacity and the pace of revenue rather than point costs.

Say you are the owner of the car wash. One of the automatic lanes quits working. Should you fix it now? Throughput accounting does the calculations above. Clearly, repairs that cost less than $1,080 will be recovered in a single sunny Saturday's operation. Those repairs add capacity and throughput when the demand is there, as it was today.

What did Jiffy Lube do differently?

Either directly or indirectly, Dwayne knew about his throughput.

Based on what I paid and observed, I estimated that each of the three bays in his shop could generate about $220 per hour based on the 12 minute cycle time I experienced today. That's $660/hour for the three bays.

For all practical purposes, Jiffy Lube did not have the option of expanding capacity by adding a fourth bay. Way too expensive. But what was the impact of Dwayne's planning to have the team fully staffed for a busy day? Consider this.

If their cycle time had been 14 minutes per car rather than 12 minutes, the revenue flow would drop from $660/hour to $566/hour. Nearly $100 each hour of lost revenue!! Revenue which would never be recovered!!! So, to bring in one more associate at, say $10/hour, is a very, very smart move. It adds capacity, when measured by throughput accounting, even through it also added one more person to the payroll.

And this is what I observed. One associate popped out into the driveway from time to time to wash windows of a car that was waiting. This was an operation that did not have to happen in the bay and improved the throughput. Way to go Dwayne.

A Througput viewpoint affects how we think

Each of us has some throughput for our activities. It can be estimated either in dollar terms or unit terms. It can be viewed for an entire plant or one individual. I'm convinced understanding it leads to better decisions. Lean Systems are most correctly driven by looking at the costs of flow.

I encourage you to think about throughput in your world today. Try to calculate what the flow per hour or day might be. What limits it? What might increase it? It can radically modify your decisions. I hope this is helpful, even though it is a lot longer than normal. Thanks for listening, as I try to learn this myself.

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