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