As you are most likely aware, “utilization” is a measure of the actual number of units produced divided by the number possible when machines and people work at full capacity.
Conventional wisdom says that the best way to maximize profits is to encourage every department within an organization to achieve 100% utilization. Like so much of conventional wisdom, this has a ring of truth to it; and it has the added beauty of simplicity. We can evaluate and reward each department independently of one another, and if everyone is given incentives to get as close as possible to 100% utilization, then the company will surely be maximally profitable.
But this premise will fail us in the real world… a world riddled with variation.
For example, let’s say a company has three operations:
• Glass Blowing
• Filament Insertion
• Cap & Wrap
Utilization of the 3 departments is 50% in Glass Blowing, 100% in Filament Insertion, and 80% in Cap & Wrap. So where do you focus your improvement efforts? The natural conclusion is that you would focus on increasing utilization in Glass Blowing: either by increasing production (which would simply increase the inventory of bulbs waiting for insertion) or by decreasing capacity.
But if you look at the throughput of the process as a whole, you see that Filament Insertion is the bottleneck. At 100% utilization, they are unable to produce enough to keep the next operation, Cap & Wrap, fully utilized. Furthermore, Glass Blowing, despite the lousy utilization numbers, is already piling up inventories of bulbs waiting for filaments. The utilization numbers suggest that Filament Insertion is the last area needing improvement, but to improve the process flow, it must be the first area to improve.
If the world were perfectly predictable, we could reduce the capacity in Glass Blowing and Cap & Wrap to exactly match Filament Insertion to achieve 100% utilization. But if we did so in ‘Murphy’s world,’ any variation in glass blowing production — such as machine downtime, absenteeism, yield deterioration, material availability or quality issues — will not only impact Glass Blowing utilization numbers, but the bottleneck — Filament Insertion —will also be idle! Production opportunity lost at the bottleneck is lost forever. Instead of trying to optimize individual operations, identify the bottleneck and make sure there is enough capacity in the feeder operations to ensure that any disruptions do not impact the utilization of the bottleneck capacity. Instead of aiming to maximize utilization at each operation, as conventional wisdom would have us do, we must find and eliminate waste at the ‘bottleneck’ or ‘rate-limiting’ step in order to increase profitability.