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Archives for August 2010

What is the Cost of A Supply Chain Bottleneck to Your Business?

By Herb Shields | 08/06/2010 | 1:41 PM

 

Bottlenecks occur everywhere in the business world.  They exist in the processes employed in every business.  They happen in production, distribution, fulfillment, and other functions within a supply chain.  Most supply chain managers devote at least some of their time to identifying and eliminating bottlenecks in their area of responsibility.  A colleague of mine – John Lafferty of CFO-PRO – devoted his recent newsletter to discussing the subject of bottlenecks.  Here is what John said:

“I believe the primary culprits that cause bottlenecks are these:

·     Inadequate infrastructure—capacity has topped out

·     Inefficient processes—the quantity of raw material (or data) processed in a given time, known as ‘throughput’ has topped out

·     Poorly trained workers—individual production has topped out

Capacity constraints affect a company’s ability to grow.  Firms that find themselves bumping up against their system’s capacity constraints soon find that growth has stopped; profits begin to decline unless expenses are cut accordingly.

Any part of your business that has a capacity bottleneck will find the production and efficiency of everyone reduced to the speed of throughput at the bottleneck.  The operation will slow to the lowest common denominator—the productivity at the slowest part of the process.

For example, if a bottleneck is reducing throughput by 30%, and your customers are unwilling to wait in line, your sales levels could be 30% lower than what they should be.  How much margin are you losing at the bottleneck?  If your normal throughput is $1,000,000 annually and the bottleneck reduces it by 30%, you have a new sales level of $700,000.  At a gross margin of 60% applied to the lost sales of $300,000, the lost profits amount to $180,000!  And this is just a one million dollar organization!

Worse yet, are you paying for “stand around” time while the under performing parts of your process “catch up” to the rest of your production?

What could you do with the money that you are leaving on the table?”

If you want to read more of John Lafferty’s newsletters, go to his web site:  www.cfo-pro.com

The opinions expressed herein are those solely of the participants, and do not necessarily represent the views of Agile Business Media, LLC., its properties or its employees.

About Herb Shields

Herb Shields

Herb Shields has run Chicago-based HCS Consulting since 2000, helping clients across multiple industries and in higher education improve their supply chain strategy and execution. Shields has more than 30 years as an operations executive for capital equipment, automotive, electrical machinery and consumer products companies. As vice president of materials management at consumer goods company Helene Curtis, Shields led the supply chain organization that helped Helene Curtis win "Vendor of the Year" awards from Wal-Mart Stores and Target Corp. Shields has a B.S. degree in Electrical Engineering from Clarkson University and did graduate work in business at Bowling Green State University.



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