Maximizing capacity utilization - the paradigm shift

As I have highlighted in this article, value streams, i.e. production systems have to be balanced between demand and supply (materials and capacity). Whenever demand exceeds capacity, a queue (backlog) builds up. This backlog is only eliminated once capacity is higher than demand.

Understanding types of variation, capacity utilization and lead time - Kingman's formula

This theorem developed by John Kingman in the 1960s, is describing an approximation of the mean queuing time in a system with limited capacities. Most important in this context is the recognition of the interdependence between capacity utilization and process stability (aka variation).

The equation demonstrates the exponential increase in queuing time (lead-time) with increasing capacity utilization in connection with the level of process variation in a production system. As the utilization increases, uncertainty escalates, i.e. lead-times in the system become unpredictable.

Reflecting on this observation, high capacity utilization targets in a corporate environment may appear arbitrary. Due to its impact such underlying capacity targets, and business strategies must be identified before starting any optimization activities. In any optimization scenario, I would recommend that one proceeds in a certain order. This recommended order is based on years of personal observation of multiple business improvement initiatives.

1. In the first phase of implementation, measures to reduce overburdening (Muri) of a system i.e., increasing capacity if possible or else reducing capacity utilization, must be taken. Creating this capacity buffer allows one to protect the lead-time performance of the production system from unwanted, uncontrollable effects of process variation. This step must be understood as a temporary measure, especially in an optimization phase, but it is most crucial at the same time to make steps 2 & 3 work.
2. In the next phase, unevenness, e.g. process, arrival (demand) variation (Mura), non-steady flow must be addressed; consideration being also given to interruptions, etc. Typically, process variation may be narrowed by strategies, including improved staff flexibility, specific training, better-qualified operators, smaller batch sizes, adopting a right-first-time mind-set, reducing product variants, better customer communication, six sigma tools, and standard work. In this regard, the lean toolbox primarily focuses on these aspects. However, be aware of excessive standardization - that might lead to risk and unexpected failure demand or worse dissatisfied customers. One must bear in mind, an understanding of the innate process and demand variability of your business environment is the key to designing such an optimization approach, appropriately.
3. In the last phase, we then address the elements of waste (Muda). Systemic waste is varicolored, but an appropriate mnemonic, the acronym TIMWOODS, describing the eight wastes as Transportation, Inventory, Motion, Waiting, Overproduction, Overprocessing, Defects and Skills, offers a resolution.

Addressing phase 1. & 2. diligently, one will notice that eliminating or reducing instability, unpredictability and interruptions will also impact on the psyche of the teams involved. As a result, aspects of Muda will also be eliminated, simultaneously.

As a rule of thumb, aiming for lower lead times means either having reduced utilization or lower process or order variation. Further, the higher your demand variation the longer will be your queues for any level of utilization. Thus we recognize that the key lesson from Kingman’s Equation is that variation is the enemy of flow. If we better manage both arrival variation and process variation, we will be able to process more in a stable predictable manner, even if we have less capacity. (Bicheno and Holweg, 2016).

To summarize I would like to highlight the interdependence between capacity utilization and order lead-time, driven by process variation. As a result, when business targets are defined, a consensus must be reached, regarding the targeted levels, and a balance must be struck between utilization (productivity) targets and targeted lead times. Business improvement initiatives in this context should always focus on reducing or creating ways to better manage innate process variation. The key skill in any business optimization initiative is not to acknowledge specific tools to dispense with the 3 M's, but to develop and practice acknowledging and recognizing them in all or specific parts of processes, systems, or organizational aspects.

Recommended further reading:

Pound, E.S., Bell, J.H. and Spearman, M.L. (2014). Factory physics for managers : how leaders improve performance in a post-lean six sigma world. New York: Mcgraw-Hill Education.

Hopp, W.J. and Spearman, M.L. (2011). Factory physics. Long Grove, Ill.: Waveland Press.

Bicheno, J. and Matthias Holweg (2016). The lean toolbox a handbook for lean transformation. Buckingham, England Picsie Books.