Why is it so Difficult to Remove?
If you talk to the devotees of the Theory of Constraints (TOC), they’ll tell you that attempting to maximize Capacity Utilization (CU) is a ‘false economy’ and a blind alley for Management resources. Why? Because some portion of productive capacity has to be held available (but not necessarily utilized) to buffer and protect the system constraint (the ‘bottleneck’) from all the output variations up and down stream in the production system. These variations in output would otherwise periodically ‘starve’ the bottleneck of input. As we all know, once throughput is lost at the ‘bottleneck’, it is lost forever.
This portion of productive capacity is known to TOC adherents as ‘protective’ capacity. Even if it isn’t used every day or hour, it has to be held available for use on the occasions where an upstream station in a process breaks down and threatens to starve the bottleneck of input. That’s when management calls on the inventory buffers…or the spare machines…or third party suppliers, to feed the constraint/bottleneck when nothing is coming down through the ‘pipe’. So, we are told that if we remove ‘protective’ capacity, because it is not fully utilized, we are simply going to reduce the throughput at the system constraint over time…and of course, that would represent a false economy. We would achieve cost reductions but also lose contribution from lost sales.
While all of this is true in principle, accepting the need to hold some quantity of ‘protective’ capacity doesn’t justify the wholesale abandonment of reducing genuine excess system capacity. The amount of ‘Protective’ Capacity required in any production system should be quantified. This can be done by analyzing the history of standard deviation of output at each system stage or station in relation to the capacity of the system constraint.
In the absence of quantification, business managers often attempt to justify high levels of idle invested capital and idle fixed costs by appealing to the need to ‘protect’ the production system constraint. This is the management theory justification. A related argument commonly invoked to justify maintaining unknown amounts of excess production capacity is the need to meet the customer service imperative (meeting customer service requests, no matter how high the cost). Yet another is the claim that any reduction of excess capacity may endanger employee safety. Often excess capacity is maintained to compensate for the failure of the Sales & Operations Planning (S&OP) process. Poor demand forecasting and production scheduling results in planning resource levels and system capacity to meet peak demand levels.
Attempts to remove excess capacity and its related costs are often met with political campaigns which invoke the specter of violating worker’s safety and failing in the delivery of customer service standards. The same managers who should quantify the requirement for protective capacity may be the ones who deal most voraciously in the political smokescreens to defend and maintain it. The answer is to quantify the amount of resource required to service these imperatives, rather than write blank checks with shareholder’s funds.
Productivity Step Change (PSC) is a global Management Consulting Group based in the US dedicated to maximizing Capacity Utilization, improving Return on Invested Capital (ROIC), and increasing productivity for its clients across industry. Our enterprise-level, data-led, cross-functional business analysis typically requires 4-6 calendar weeks and is designed to provide evidence of your opportunities for overall growth. Please contact us if you would like to schedule time for a discussion and presentation.