Investing in More Capacity Could Actually be Damaging Your System…

The most common method to increase output is to invest in additional capacity, however, often businesses jump straight to that decision when there are several steps they should take beforehand. It may well be that you don’t need to spend a penny on additional capacity to reach your goal!

In a complex system, that is a system where the product must pass through many operations multiple times, it is common for lead-times to extend. If, for example, a business needs to produce one product every thirty days, and it is currently only producing one every forty-five days – something needs to change. The answer to this problem seems obvious: you need extra capacity. But is investing in additional capacity the right solution? Maybe not.

The Theory of Constraints follows the 5 Focusing Steps:

  1. Identify the Constraint
  2. Decide how to Exploit the Constraint
  3. Subordinate everything else to the above decisions
  4. Elevate the Constraint
  5. Prevent Inertia from becoming the Constraint; go back to Step One.

As an Operations Director/Manager, if someone comes to you and says they do not have enough capacity in three of your twenty or so operations, the natural reaction is to invest in more capacity in these areas. But in doing so, you are jumping straight to Step 4 which is to ‘Elevate’ (spend some money and invest in more capacity). Most likely, this decision on its own will not solve the problem; it will not improve your system’s flow. The reality is that once you release work into the system and it sits in a queue, it gets delayed and adds to the lead-time. A common business practice is to keep people busy all the time; however, this means the work spends most of its time sitting in queues. So, what happens is that work is released at the pace at which the fastest operation, or the front-end can work. This creates queues everywhere else and subsequently increases the lead-time.

Lead-time is inextricably linked to how much inventory is in the system, and where that inventory sits within the system. When a product needs to visit multiple operations, multiple times, the people working in those operations need to know which things they should be working on and which things they shouldn’t. This becomes more difficult when there is too much WIP in the system as it can mask the priorities and cause confusion. To avoid this, you must make sure you release work according to the rate your bottleneck can operate. This is because a plant can only produce as quickly as its bottleneck can perform. The key to increasing output, is to increase the output of the bottleneck – and this doesn’t have to mean investing any more money into the operation, remember there are three steps that precede ‘Elevate’. To learn more about how you can use the Five Focusing Steps to source additional capacity with no additional costs, get in touch.

So, adding more and more capacity does not always give the desired outcome; sometimes it can create the opposite effect. It is common in many businesses to focus on local optima; to improve individual areas so that they can output more. However, this does not necessarily correlate to more output from the system as a whole. You need to be controlling the amount of inventory in the system and aligning priorities. When you are doing these things, and you have enough overall capacity in the system as a whole, hidden capacity is revealed, WIP will go down and flow will improve dramatically.

You have to look for the causality. If you simply increase capacity, the business will not automatically make more money. With increased capacity comes increased inventory as you will be able to produce more. So, you are putting more work into the system, which can mean more delays and queues; this means extended lead-times and with extended lead-times comes less money being made! Too much output from the wrong areas can mask priorities and businesses get caught in a vicious cycle.

Increasing capacity is only useful if it is directed toward the right areas; otherwise you may experience the exact opposite of what you are trying to achieve. You can’t lose sight of the business goals. You want to increase profits and speed up the flow of work through the system by ensuring inventory is in the right place, at the right time. You need to focus on controlling the release of work into the system to ensure you are using your capacity in the most effective way. If you would like any more information on how you should be monitoring the release of work, drop us an email at [email protected].

By Lauren Wiles, Andy Watt.