Throughput Analysis

Instead of the Cash flow analyses for each individual project in relation to the capital budgeting, Throughput analysis focuses on the quantum of the throughput that is generated in relation to the organization. What is throughput? It is actually the excess of the revenues after deduction of the variable costs. In management accounting, it is referred to as the contribution margin.

Primary requisite in relation to enhancing the threshold of the throughput is to somehow increase the capacity with regard to the bottleneck process or operation of the company. Let’s pour some light on what is bottleneck operation?

What is bottleneck operation?

Bottleneck operation is any such operation that consumes considerable time for its completion and thereby has its significant influence on other operations in relation to the business and delays their execution as well. Henceforth, the bottleneck is such operation that appeals considerable attention on the part of management and is a core part of the operational strategy of the organization.

If throughput is not increased, would Project be rejected?

It is a very important question in relation to the throughput analysis of the capital budgeting. No, it is not mandatory to reject the proposal in such circumstances. Throughput analysis requires management to look and observe the following metrics in relation to the proposed capital investment. The project:

•   Assists the organization in the mitigation of the day to day operational expenses.
•   Assists the organization in the compliance of certain legal requirements.
•   Assists the organization in the overall mitigation of the risk involved in relation to operations.
•   Enhances the effectiveness of the workstation and assists in the quick production of the goods, reduce the lead time involved and produce an adequate level of bugger stock keeping in consideration the bottleneck.

Course of Action in case the project does not assist in aforementioned Performance metrics

Observing the above metrics in relation to the proposed capital investment project is immediate preceding step before the final decision under throughput analysis. If the project still not yields the expected value addition in terms of aforementioned metrics, it is an indicator that the project would not be as value addition asset for the company and should be rejected.

Direct Investment in the Bottleneck

Investment in relation to the bottleneck operation is not a small or minor investment decision. It may be quite huge in terms of cost. What is important to consider here, long-term demand and sheer observation of the changing market dynamics. If there is no demand, the investment would result in the significantly decreased profitability as well as sustainability.

Conclusion

Instead of the Cash flow analyses for each individual project in relation to the capital budgeting, Throughput analysis focuses on the quantum of the throughput that is generated in relation to the organization. Primary requisite in relation to enhancing the threshold of the throughput is to somehow increase the capacity with regard to the bottleneck process or operation of the company. In case the throughput analysis does not yield significant efficiency with regard to the bottleneck operation, then before rejecting the proposal, it is imperative to look for the effects of the proposal on other strategic operations of the organization which may prove the long-term utility of the investment.