Back to Basics – Part 2 | by Martin Powell

In Back to Basics – Part 1 we showed that given that the Goal of a manufacturing organization is to make money, we can operationally achieve it if we increase THROUGHPUT whilst simultaneously decreasing INVENTORY and decreasing OPERATING EXPENSE. Although we will continue to talk about manufacturing plants much of the logic is also applicable for other business systems, including Service where Inventory is not physical materials but is incomplete work (often paper) or in health systems where Inventory is the patients.

We also maintained that we should not balance the capacity of our plants. We said that balancing the capacity of our plants will have a negative effect on the operational parameters – that is THROUGHPUT will go down; INVENTORY will go up; as for OPERATING EXPENSE the result is unclear – cutting capacity will reduce it; increased INVENTORY will increase carrying cost which is an increase in OPERATING EXPENSE.

Attempting to balance the capacity of the plant is a short way to bankruptcy. This is the reason why we cannot find a balanced plant in reality. Survival precludes the possibility of balancing the capacity of a plant.

When we use the term capacity, we mean the capacity of each and every resource in the plant and “resource” is everything that participates in turning Inventory into Throughput – a machine, tool, fixture and worker. Today the general policy is to trim excess capacity – the general belief is that we can balance the capacity of the plant.

So how come that we don’t see balanced plants in reality? Well there are a lot of reasons people are using to explain it.

  • Some will say that demand changes too rapidly
  • Some will say that our workforce is not reliable enough
  • Some will say that the process is not reliable enough or there is too much unpredictable scrap
  • [The most popular excuse] Our vendors are so unreliable they prevent us from balancing the plant

All of these are minor reasons. The major reasons are intrinsic. Two phenomena exist in every manufacturing organization and many systems, and these two phenomena combined together are the one that prevent us from balancing the capacity of our plants. These two phenomena are Dependent Events and Statistical Fluctuations.

What do we mean by Dependent Events? What do we mean by Statistical Fluctuations?

Continue reading this article>

Read Part 1 >

This entry was posted in Articles and tagged . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *