throughput accounting

Throughput accounting applies critical chain thinking todecision making and value creation. It was originated by Elihu Goldratt. It may be important to sustainability.

It focuses on the feedback loop that always applies between improvement of work processes, and doing the work itself. If you do the work better, it takes a bit longer at first, but over time you eliminate the need to do whole kinds of work. If you hurry however to get more done in less time, you work hard not smart, and make mistakes.

treatment of energy and materials

While activity-based costing, full cost accounting and even Natural Capitalism approaches can all encourage time, energy or materials savings in the small, they will reduce the time available for "labour" (more hands-on workers) to improve its proceses while improving the rewards or time available for "managers" (those more involved in decision making and less in actual work. Most quality management methodologies, e.g. those of William H. Deming, advise exactly the opposite approach - not to focus on "labor efficiencies" in any given area in isolation from overall results.

To achieve overall process-wide time, energy, material and attention savings, it is the energy and materials inputs of the whole process that must be considered. For instance in any industrial ecology regime, treating waste as a resource is one way to simplify feedback loops and reduce liability. To focus on reducing the waste at each stage in the process rather than on finding processes willing to consume and use the overall waste as an industrial input, would be sub-optimal. Any process that saves labour and increases waste is also sub-optimal, since labour can find creative ways to save materials, make design breakthroughs, etc., and the saved materials can't.

treatment of time

Time is treated as a competitive factor only in terms of overall time to market. Human labour time is not, although free time may be ultimately freed by not focusing on labour costs - see treatment of creativity.

It also improves on activity-based costing as labour is assumed to perform risk management - a model very compatible with workplace democracy. The feedback loops between work and decisions are assumed to be very tight. This is advised by modern total quality management methods.

treatment of creativity

Throughput accounting improves on full cost accounting by considering the cost of management or creative design to be a form of labour - rather than treating it as "special" or "meta". The continuous improvement of all processes using the creative component - individual capital - is the major source of reductions in the total cost of operations.

This is similar to the Development as Freedom approach in welfare economics and human development theory. It also may help address the Ingenuity Gap Dixon observes.

measures of income and expense:

"Throughput (T) is the money the system receives for products that are sold. Throughput replaces output, a variable that can be manipulated to make financial accounting statements more attractive to investors." In the strict service economy model proposed in Natural Capitalism, throughput would be the money received for services, not products or commodities; Product or commodity sales would have to include warranties or inspections or certifications as services sold with the product.

"Output that is delivered to a warehouse rather than a customer does not count." Internal services also don't count.

"Inventory (I) is the money the system has invested in things it intends to sell, money which it cannot use for another purpose until then. In addition to conventional fixed costs like buildings and machinery, electricity, labor, adhesives, lubricants, and many other items that usually count as variable costs are part of Inventory." This reduces every capital asset to a current value in financial capital only. In general this must be measured as replacement or resale, not "book" value, which is an accounting fiction. See Capital Cost Allowance for more on the manipulations possible here.

"Operating Expense (OE) is the money the system spends to convert inventory into throughput. OE is variable cost in the strictest sense; raw materials and components that go into a product is the best example." An activity-based costing and total cost of operations domain analysis is probably required to determine the full cost accounting on services.

"Organizations that wish to increase their attainment of the goal should therefore require managers to test proposed decisions against three questions. Will the proposed change:

1. Increase Throughput (money coming in)? How?

2. Reduce Inventory (money that cannot be used)? How?

3. Reduce Operating Expense (money going out)? How?"

For instance, a federal political party might ask 1. how to increase fundraising 2. how to reduce capital assets it owns and replace them with what it merely borrows or lets others own, e.g. teleworkers who provide their own gear, and 3. how to do the same job with few or no fultime staff.

"The answers to these questions determine the effect of proposed changes on system wide measurements:

4. Net Profit (NP) = Throughput - Operating Expense = T-OE,

5. Return on Investment (ROI) = Net Profit / Inventory = NP/I,

6. Productivity (P) = Net Profit / Operating Expense = NP/OE, and

7. Inventory Turns (IT) = Throughput / Inventory = T/I"

service throughput

In a service business, the concept of a turn is generalized to include every type of inventory that is subject to any change at all. For instance, in network infrastructure it includes the equipment's useful lifecycle (say 4-8 years) to a very short term boot turn (say 4-8 weeks) in which all PC boot images will be upgraded to include operating system patches, new applications, anti-virus software, and other changes.

Accordingly, one can determine how much throughput one gets not only for each computer, but for each snapshot boot image of each computer. This might help identify for instance when it was simply not worth it to conduct an interim upgrade - activity-based costing can be carried down into very routine processes, perhaps potentially into each end user action itself. Rather than focusing on the user's activity however the focus is on the interruptions in the user's activity. The intent is to fix the flow not to simply accelerate the activity until flow breaks.

A full domain analysis of service throughput and flow regrets would be required before any performance audit could find out whether this focus on lack of interuption paid off.


Throughput accounting may help achieve sustainability: The method focuses on ratios of throughput to inventory, trying to reduce the latter while increasing the former. By using a broad definition of inventory that includes all capital assets, it likewise tends to reduce reliance on natural capital or infrastructural capital and so undo the tendency in most accounting to overfocus on labour savings - as do methods like Natural Capitalism.

This may be a useful first step to a form of biomimicry - very sustainable models of service throughput based on models of nature's services, which tend to be extremely efficient in energy and material use, but also tend to take time, and are often labour-intensive for the living things involved.

nonprofit throughput

"Throughput accounting applies to not-for-profit organizations too, but they have to develop a goal that makes sense" in their organizational context. It is not enough to maximize the financial capital throughput or even capital asset values in general. An educational institution might be able to think in terms of maximizing human capital value to the sociey, an advocacy organization in terms of maximizing social capital alone. A Green Party may need to subordinate these to some more difficult goals: increasing value of life or conserving natural capital or increasing the overall biodiversity or reducing violence done to the living things by nonliving things.

There are many difficult research issues in applying any form of accounting to Green Party operations, however. It is not necessarily the case that throughput accounting andgreen economics converge, though it seems inevitable that a Natural Capitalism and full cost accounting model must ultimately deal with the cost of trained labour, creativity and the ingenuity gap that results when labour is undervalued.

This is a refer link. The basic material comes from the GFDL corpus article throughput accounting with additional material by Craig Hubley.