Creating Demand or Improving Capacity ?

"Our production capacity is much more than the existing demand , I think we need to be working on creating more demand through some marketing efforts" said many manufacturing business owners to me when they were asked on how their factories where performing. Some of them changed their opinion when I got a chance to visit their plants and explain that how solving problems at their factories can actually result in both improved capacity and an increased demand !

Where does this thought comes from ?

Factories with higher capacities tend to have more inefficiencies for obvious reasons , there is no urgency in delivering the products as the cycle time of almost every tasks normally are much lower than the Takt time ( the minimum time to complete tasks to meet the customer demand ). This means that there are high chances of taking too much time than necessary to complete all these tasks , this naturally means to consume more resources in terms of man and machine times. Factories with fixed assets cannot reduce the over head expenses in such situations and naturally they turn in to getting more orders to match their expenses and turn more profits

What will this thinking lead to ?

Fundamentally there is nothing wrong in this approach. It is always good to scale with more and more demand creation so that the assets are properly utilised , but there is one problem that will keep haunting , and that is when you take all the inefficiencies together to scale up. Let me make it more clear , if your team has set a pace of work when there was abundant time due to low demand , it is very likely that the team continues to work in the same speed even when you have a demand surge due to some favourable conditions in the market, you may think that they are working faster due to all the new hustles that you see to arrange the materials , move the products or set up the machines etc , but at the end of the day the activities that really matter, the value adding works still get delayed due to the lack of process improvement efforts in the past. This will force you to ramp up your capacity to avoid potential sales loss. Suddenly , you now have more fixed expenses to manage on a rainy day , This cycle continues !

If you look at the diagram above , you can see that the problem of low productivity is carried over to all the successive steps. This can be very difficult to understand when you are not able to see the hidden wastes in the system. Also , with low productivity , there is always a chance of poor quality because of the inconsistency of the process outputs. Creating more demand in such cases will not solve the problem of being inefficient !

What can be done ?

One of the major problems that comes in when there is an excess capacity is that the tasks that can be completed in its normal cycle times of the machines can sometimes lead to over production ( producing more than what is required by the customer ) when you run at the normal operating time . This means that you don't have to run the machines full time in a shift to meet the demand. Unfortunately , people tend to keep producing as per the forecast to build inventory for future. This is the real reason why there will be no urgency to improve the processes as there will be always an inventory buffer to meet the demand or it can be quickly produced when there is an urgent requirement . If you have to develop a culture of productivity and continuous improvement , you have to schedule the factory operating time as to just meet the demand of the customers with minimum inventory buffers. The natural question in such cases is to how to use the extra time , well you can use it for many things like trainings, group improvement projects , brainstorming sessions for problem solving etc.

The above figure gives you an illustration on how improving capacity can actually lead you to scale with productivity leading to meeting more demand with the same fixed costs. The key is to schedule your operating time at the beginning to produce according to your actual calculated capacity even when there is low demand. This will give you more free time to work on improving processes and also an opportunity to negotiate with your customers for an early delivery in case they needed it. With more and more demand coming in , you can be more flexible through either increasing or decreasing your operating time and continuously improving your productivity through process improvements . This can be achieved now as you are now creating the urgency by "shortening" the extra time that you used earlier for simply producing !

That's it for today , Hope you have enjoyed it . Also, please feel free to comment or suggest anything that could be worth discussing or writing in the future, Thank You !