Well-managed capacity is the engine for growth and profit improvement, and it’s often much higher than executives think. Many growing companies can increase their capacity by 20 to 40% (or more) with no capital expense by managing – and improving – the four key elements of capacity:
1) The bottleneck
3) The pacing step
Conventional wisdom says that if you don’t improve the bottleneck, you aren’t improving the output. In his book The Goal, first published in the 1980s, Eliyahu Goldratt laid out the concept of focusing on the bottleneck to drive process improvement. In manufacturing, this is often a machine center, which constrains the overall production process. In distribution, it can be distribution centers or logistics processes that move inventory to satisfy demand. In professional services, it can be a time-consuming step in the process that a limited number of staff are qualified to do.
When many companies measure capacity, they find the bottleneck, determine what its output limit is and suggest that that output is the capacity of the operation. While that’s one component of capacity, it’s often not the real constraint. I had one client that thought their constraint was the welding cell. They bought expensive robots to increase throughput, but found that orders were still late. The engineers would scratch their heads, wondering why their efforts weren’t working, and meanwhile the company had to borrow money to buy the equipment and cover the training costs. They discovered that labor and pacing activities, not the welding cell, were controlling capacity.
Many companies are considering moving manufacturing on or near shore due to changing labor costs in Asia as well as the low cost of utilities and shorter supply chains. Unfortunately, in the years since off-shoring became popular, the US skilled labor base has disappeared. Skilled workers such as welders are hard to find, which drives up labor costs and encourages further technology and automation solutions. Those take time to develop and can be expensive. I know one company that had openings for almost 20 welders that they couldn’t fill.
Recent articles in the Wall Street Journal and Bloomberg Business Week also suggest that CNC operators, warehouse workers and IT specialists are hard to find. Manufacturing engineers have also been in high demand. If you can’t find the people you need to run the operation, focusing only on the constraint won’t help.
The pacing step is the final step, usually an assembly step, before the product is ready for the customer. It may or may not be the bottleneck. The way the pacing step is scheduled and carried out can have a dramatic impact on the efficiency of upstream activities. If a scheduler constantly interrupts assembly activities, the resulting chaos can degrade operations efficiency, effectively reducing capacity.
I had one client where the customer service staff, in their zeal to service an important customer, would run out to the floor with “rush” orders, stop the production process and require that the new order be done first. The time lost resetting the production line caused missed ship dates, high labor costs and additional scrap and rework.
In another case, as we traced the workflow upstream from the pacing step, we went right through the constraining cell, all the way back to customer service where we found the problem. A data entry operator was being redeployed to “important” tasks in accounting, delaying order entry for up to 10 days, which allowed no lead time for production to make and ship the product on time. Clearly not only is the capacity constraint important, but the pacing step needs to be identified to determine and improve capacity.
Key suppliers’ ability to provide materials on time and respond to increases in demand is critical for managing capacity. As you grow, often supplier capabilities don’t keep up and the old reliable supplier becomes the capacity constraint. One company I know had the opportunity to take a great deal of business away from their big competitor who had a product failure in the field. All the company had to do was triple their output for 90 days, well above the “capacity” of the operation. Because of the process and productivity improvements the company had done, the internal capacity could be flexed in a burst mode for that period. The issue was whether the suppliers could keep up. Because of the partner programs the company had in place, they told their suppliers about the opportunity at hand. The suppliers’ response was beyond expectation and production met the demand.
Measuring and managing capacity is much more than just determining the output potential of the constraint or bottleneck. By looking at your pacing step, labor and supplier capabilities, you can obtain leverage on your fixed costs through increased capacity, dramatically improving profitability and growth. That provides real muscle for the organization.
From the Flight Deck
Is your capacity tuned for profit and growth? As the captain of your ship when you call for full speed ahead, can your operations respond? Do you have the muscle you need to keep your promises to your customers? If you have any reservations about the ability of your operations to respond, call me.
© 2015 – Rick Pay – All Rights Reserved