Now we have a throughput accounting example. And this example is adapted from the book throughput accounting by Thomas core, but you're a shirt manufacturer with a very simple process, cut and sew. So look at the data on the screen, and which do you believe is the most profitable product line, the women's shirts and men's shirts, there's demand for 120 units of each in the market. Women shirts sell for slightly higher price 105 euros compared to 100 euros for men's shirts. The material cost of the women's shirts is slightly lower at 45 euros apiece, compared to 50 euros apiece for men shares. That data on its own would tend to suggest that the women's shirts are more profitable, certainly by unit.

The cutting time for the women's shirts is two minutes per shirt, whereas for men's shirts, it's 10 minutes per shirt. The sewing time is 15 minutes per shirt for women's shirts and 10 minutes per shirt for men shares, meaning that the total processing time for a woman's shirt is 17 minutes and for a man shirt is 20 minutes. Now Okay, so far, we're thinking that the women's shirts and the most profitable ones to produce But what happens if we focus on the product cost and emphasize the production of women's shirts at the cutting machine, we have 2400 minutes available per week. And on the sewing machines, we also have 2400 minutes available per week. So we're going to emphasize women's shirts because they have the higher product profitability, we think we produce the full 120 units that the market will sell of women's shirts that generates a revenue of 12,600 euros with a material cost of 5400 euro We have space left on the machines for 60 men shirts, that generates an additional revenue of 6000 euros with material cost of 3000 euros.

The throughput therefore, is 10,200 euros. But the operating expenses for this process are 10,500 euros per week. And that means that overall, we have a loss of 300 euros per week from our shirt manufacturing process, not a very happy state of affairs. Perhaps we should take the advice of the Theory of Constraints and focus on the constraints. As I said we have 2400 minutes available per week on both steps in the process cutting and sewing. So let's look at what the shirts require.

While women's shirts have a total cutting time to meet the demand of 120 units of 240 minutes per week. mentioned require a total of 1200 minutes cutting time per week to meet the demand of 120 units per week. In terms of sewing time, women shirts need 1800 minutes a week to meet that demand of 120 units per week. Whereas men's shirts again the 1200 minutes per week to meet the total demand. That means that the sewing machines are the constraints step in this process, because we only have 2400 minutes a week available, and to meet the full market demand for both men's shirts and women's shirts would require more than that time. If we move on to calculate the throughput per unit of constraint, and a different picture begins to emerge.

We can see on the slide that the throughput per unit of a woman shirt is 60 euros whereas the throughput per unit of a men's shirt is 50 euros. However, the sewing is the constraint resource And the woman's shirt needs 15 minutes per shirt to sew. Whereas a man shirt needs 10 minutes sewing time pressure. That means that the throughput per minute of the constrained resource sewing for the woman shirt is three euros 53 per minute of sewing time, and for the men shirt is five euros per minute of sewing time. So the men's shirt has a higher throughput per minute of the constrained resource. throughput accounting argues that maximizing throughput at the constraint maximizes profit.

And this suggests that men's shirts should be produced in preference to women's shirts because they have the higher throughput per minute of the constrained resource. So let's look at the picture if we produce the full market demand of men's shirts, 120 units and then fill the remaining space with women shirts. That means we were produced 80 units of women's shirts with a revenue of 8400 euros and the material cost of 3600 euros. We produce 120 units of the men's shirts with a revenue of 12,000 euros and material cost of 6000 euros and the total throughput for the process for that level of production is 10,800 euros. The operating expense as we've seen is 10,500 euros. So in this scenario, the profit per week is 300 euros.

A different picture from what we had before product cost is not maximizing the profitability of this process. It is maximizing the throughput per unit of constrained resource which is maximizing the profitability of this process. And if your organization is using product costs and product profitability, to make decisions about its production schedules, and how it should improve processes then idea to suggest that that is the wrong lens to be using. What I suggest is that you should be identifying the constraint within the business process and maximizing the throughput of the contribution per unit through that constraint. Now let's use throughput accounting to consider an investment decision. Sticking with the shirt manufacturer, let's say we have the opportunity to either invest 10,000 euros at the cutting process, which would deliver 30% that's 720 minutes a week extra capacity or to invest 100,000 euros at the sewing process to deliver 30% that 720 minutes a week extra capacity, the 10,000 euro investment at the cutting process, which seemed to offer better value, and it might well improve efficiency metrics at that step in the process through faster cycle times.

However, we've already got plenty of spare capacity at the cutting step, and the investment would yield no financial benefit to the business. At the sewing step, however, the 720 minutes a week extra capacity would allow us to completely fulfill market demand for both types of shirts, men and women's. An additional 14 women's shirts per week could be produced and sold, generating an additional 2400 euros throughput contribution per week. This is pure profit as our operating expenses have already been covered, and the investment would pay back in 42 weeks. However, only 600 additional minutes are actually needed at the zoning step to meet the current market demand and that leaves 120 minutes per week spare capacity. This offers the business the potential for new product development to use this additional capacity to sell more shirts.

That's of a different type for example, that's all we're going to cover on throughput accounting in this course, in terms of Further reading and sources. If you want to learn more Thomas Corbett's book throughput accounting, published in 1998 is worth a read Eli goldratt book. The goal is now in its third revised edition, published 2004. And now co authored with Jeff Cox, and the Wikipedia articles on the Theory of Constraints and throughput accounting are also interesting and useful.