Bottlenecks determine the throughput of a supply chain. Recognizing this fact and making improvements will increase cash flow.

A bottleneck (or constraint) in a supply chain means the resource that requires the longest time in operations of the supply chain for certain demand. Usually, phenomena such as increase of inventory before a bottleneck and insufficiency of parts after a bottleneck are often seen. Statistically, since fluctuations are inconsistent, the phenomena (excess inventory and insufficient materials) do not always occur. In the case of hiking, a bottleneck means the slowest member in walking. An interval between the bottleneck member and the one before spreads, and narrows with the one after.

An important thing about bottlenecks is that bottlenecks determine the throughput of a supply chain. If a bottleneck person in hiking can walk faster, the speed of the whole group will increase. Similarly, if the capacity of a bottleneck in a supply chain improves, the throughput will increase. From the definition of bottlenecks, the operating rate of non-bottlenecks is below 100%. If so, the operating rate of non-bottlenecks will increase only within 100% even if the capacity of the bottleneck increases and the throughput increases. If the operating rate of non-bottlenecks exceeds 100%, it means that the bottleneck place is moved to the place of non-bottlenecks.

If bottlenecks are not recognized enough, you will miss a chance to increase throughput. There are many cases where energy is used for a small cost cut and a chance for a large cash flow is missed due to lack of recognition of bottlenecks. Cost per hour on a bottleneck equals to the loss of one hour for an entire supply chain and also the loss of the throughput of an entire supply chain.

Theory of Constraints (TOC) explains why recognition and management of bottlenecks will increase the throughput of a supply chain, use machines efficiently, and increase profit significantly. If increasing the capacity of a bottleneck operation incurs 0.1% of the total cost, the rest, 99.9% can be spent to increase throughput without incurring extra cost.

It can happen that time and energy are spent only on cost reduction, and as a result, only the improvement that can be made is to decrease the operating rate of a bottleneck from 80% to 60% and no improvement is made on cash flow. If a production division thinks that cost variance due to capacity utilization in standard cost accounting is not their fault, it is because they only think about partial optimization.

Taken with kind permission from the book:
"Understand Supply Chain Management through 100 words" by Zenjiro Imaoka.
Published by KOUGYOUCHOUSAKAI