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Manufacturing Capacity Control

 

PART I. 

 

In the course of my normal business activities I visit many plants. I almost always ask for and get a plant tour. One of the things I require to be pointed out are the bottleneck machines or processes.

I have been shown many bottleneck machines during my career but I have yet to see a bottleneck machine. What I am saying is we make machines bottlenecks, through mental attitudes and physical constraints. Remove these and the output of bottleneck machines, and hence the whole plant, goes up 30% or more with no capital expenditures.

Understand Your Four Capacities

The first problem is the word capacity. It is a very misunderstood term. To help to clarify the word, I will describe four different capacities. The relationship of these four capacities to each other and to customer demand is critical.

1. Theoretical

The amount the machine or process could produce under ideal conditions working 24 hours per day, 365 days per year.

2. Required

That rate of output that exactly matches the customer demand. Produce more and you create excess inventory, produce less and you create shortages and back-orders.

3. Demonstrated

Your recent historical rate of output. To change this rate requires a managerial decision, such as work more or fewer hours, add or delete people, subcontract or bring in-house, etc.

4. Effective

That percentage of demonstrated that is the right amount of the right things your customers need short term. Anything not going directly to customers to be converted into cash is ineffective capacity.

Theoretical capacity is a rate of output you cannot possibly achieve. Murphy will guarantee you never make this number. And it's a rare plant that even tries to work 24 hours per day, 365 days per year. We normally set operating rates below this, for social, maintenance, and other business reasons.

Required capacity is where we make the biggest mistake. It is determined by your rate of sales, not by your need to recover the capital investment. Pushing manufacturing people for machine utilization will get them to exceed the required capacity, creating excess unwanted inventories. And often creating the very bottle­necks that hurt output of the things our customers need.

How should required relate to theoretical? The answer is below, as a minimum for two reasons, Murphy and to allow you to grow the business until the next increment of capacity comes on stream, pushing the theoretical out of the way to allow the next period of growth. Any time required gets close to theoretical you are deciding not to take additional business. This may be valid for a mature product, being used as a cash cow, but it is not valid for products that you wish to grow in volume.

Demonstrated is a measure of the historical output of a machine or process. But this measure includes all the losses that occurred

while the process was running, such as making scrap, doing rework, making obsolete and slow moving inventory, operator on breaks, doing material handling, cleanup, etc. For a bottleneck machine these losses must be minimized. And it's in this program that you can find 30% or more actual processing time.

How should demonstrated relate to theoretical and required? By definition, it will always be less than theoretical. Murphy will guarantee it. How about required? The answer is exactly the same, no more, no less. You want to demonstrate tomorrow what you require tomorrow, next week what you require next week, next month what you require next month and so on. Demonstrating more or less than you require gives you the problems mentioned earlier.

But what if this rate doesn't pay for the machine? What should we do with excess idle capacity?

It's obvious running equipment above the customer demand rate won't pay for the machine. Building excess inventory (an idle asset) won't absorb the costs of the idle equipment. The problem is we either bought the wrong or too big a machine in the past. You don't solve this problem by creating an excess inventory problem.

The solutions are to sell the wrong machine and buy a smaller, slower piece of equipment. I doubt this will really pay off. Or you have to stimulate customer demand for products that are made on this piece of equipment so the required capacity increases and then you can increase demonstrated to match. Check that all other equipment needed to make this increased customer demand also has excess capacity to avoid creating bottlenecks that will block this scenario.

Effective capacity is almost always less than demonstrated. Lot sizing guarantees it, load leveling peaks and valleys of demand guarantee it, seasonal production in the slow season to cover the peak also guarantees it.

How should effective relate to the theoretical, required and demonstrated? As also for demonstrated, effective will always be less than theoretical. How about required and demonstrated? The answer is exactly the same. You would like every unit of actual production to leave the plant to satisfy a customer order so it is quickly converted to cash. Putting production into inventory in the hope of a future sale is a terrible waste of capacity. And often creates the bottlenecks that block sending things directly to customers.

To be Continued


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