Linkages, differences and the strategic impact
It is impossible to match capacity to demand!
The above is a major TOC realization, which is the key for challenging all current cost-account methods. In a previous post on “Non Linear Behavior of the Cost of Capacity” I have stated the three main causes for being unable to use (drawing value from) all available capacity. The first cause is the need to maintain protective capacity to ensure adequate delivery in the face of dependencies and statistical fluctuations.
What dictates the right amount of protective capacity?
TOC does not have a formula to answer the question! When the protective capacity of just one resource is penetrated then some time later the amount of red-orders would go up sharply. So, looking back to the recent load could identify the amount of excessive load that threatens the stability of the delivery performance. The intuition of the production manager, being exposed to such cases, should be used to assess the practical limit on the load that will be used for operations planning.
What impacts the level of protective capacity?
Three critical factors:
- The acceptable response time in the market.
- The level of fluctuations of demand within the acceptable response time.
- The size of time or stock buffers used.
The impact of maintaining the appropriate protective capacity on the global performance of the organization is very significant. It impacts the following issues:
- Establishing the service level that matches the commitment of the organization to its customers. This match should be part of the organization global strategy.
- The vast majority of I and OE of the organization is spent on maintaining adequate capacity to support sales. The protective capacity is crucial in deciding how much capacity to maintain.
- The short-term planning of Sales and Operations has to consider the limit imposed by the protective capacity.
While we cannot match capacity to demand, we like to draw the most of the available capacity to generate high throughput relative to I and OE levels.
My insight is that Operations has to recognize two different protective capacity levels:
- For the weakest-link resource! Even when the weakest-link is an active CCR, being able to satisfy the market is still a must that forces leaving certain protective capacity on the CCR, providing flexibility to deal with Murphy and urgent requests.
- For all the other resources, making sure they have more protective capacity to support the CCR and all the other urgent needs. In other words, properly subordinate to the exploitation planning.
Definition: Capacity buffer are all the fast means to increase capacity for a cost.
Overtime, extra shifts at night and/or during weekends, using temp manpower and outsourcing are included in the capacity buffer. The main objective is to protect from peaks of demand.
Capacity buffers are critical for growth where instead of investing in much more available capacity the organization is ready to pay-per-usage of extra capacity. It should definitely be an integral part of the Strategy of the organization.
Capacity buffers can be used as protective capacity. It allows 100% utilization of the resource and when additional capacity is required the capacity buffer is used. It does impact T,I and OE calculations because any usage of a capacity-buffer causes additional truly-variable-cost (TVC) and by that reduce the Throughput-per-unit. I think, by the way, that it is much more practical to treat those additional TVC as delta-OE, but that is another discussion for a different post.
Maintaining capacity buffers has to be part of the strategy planning and buffer-management should be used to monitor their consumption. Any capacity buffer has a limit. Thus, when too much of the capacity-buffer is used a red-signal should be raised. As long as the organization does not exhaust a specific capacity buffer no red-orders are created by it, but once it is exhausted then it is question of time until red and black orders would appear and then it is too late to quickly fix the situation!
The concept of capacity buffers is new to TOC. It impacts our understanding of what is an active capacity constraint (CCR), and it has a big impact on Throughput Accounting.
Any comments, questions or reservations? Please, let’s talk about it.