The goal of a manufacturing organization is to make money.
Three measurements indicate the health of a manufacturing organization:
- Throughput
- Inventory
- Operational Expense
Throughput is the rate at which the system generates money through sales. It is different from production; production does not mean the produced good is sold. Throughput is something you produce that you sell.
Inventory is the money that the system has invested in purchasing things it intends to sell.
Operational Expense is money spend turning inventory into throughput.
A balanced plant is a plant where every resource is in concert with market demand.
Insufficient capacity has an opportunity cost of missing out on potential sales. Excess capacity is an unnecessary operational expense.
The efficiency of a multi-step process (such as an assembly line or a whole supply chain) is the product of dependent events and statistical fluctuations. Each step in the process can only move as fast as the steps before it — if the step before is too slow, it is a bottleneck.
Bottlenecks are resources whose capacity is less than the demand for it. Bottlenecks are not inherently good or bad. They merely exist and should be taken into consideration when designing the full chain of events — especially for what followsthe bottleneck.
A bottleneck’s monthly cost is the entire system’s total monthly expense divided by the monthly production hours of the bottleneck.
The five-step process that Jonah shares with Al is the Theory of Constraints.
The Theory of Constraints:
- Look for bottlenecks
- Get the most out of your bottlenecks steps; set them up to not have downtime and alleviate the rest of the system
- Subordinate other resources of the system to support the bottleneck
- Elevate the constraints bottlenecks
- Repeat
The TOC’s focus on the bottleneck is intended to restructure the rest of an organization around it.
TOC adopts the common idiom “a chain is no longer than its weakest link.”
THEORY OF CONSTRAINTS — WIKIPEDIA
By focusing on the bottleneck and restructuring the company around it, a company can strengthen its operations (hypothetically speaking — if it succeeds in taking advantage of the bottleneck).