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Managing Capacity Because It's What You Sell

9/26/18 10:00 AM


What do you sell?

In the job shop machine industry there is a funny answer to the question, “What do you make?” The response is, “Chips. We make metal chips. The faster we make them, the better we are doing.” (Metal chips are made with a metal cutting tool removing the material you don’t want. The tools are used on equipment like a lathe or a mill. Want to know how they work? Read this.)

I don’t know the first time I heard that clever answer, but I heard it a number of times. I remember it because I like the wittiness, insight, and clarity of that answer. An owner of a job shop that works with metal can make a variety of different finished goods. At a high level, the owner doesn’t care what is being made; they just want to keep the machines running, and running efficiently. They want to make chips, and they want to make them as fast as possible. The quicker they get the jobs done, the quicker they open up capacity for the next job.

That is the clarity and insight. The owner doesn’t sell product, the owner sells capacity. Product is shipped, but capacity is sold. This isn’t just true for job shops; it’s true for any manufacturer. When sales goes to production looking to get a rush job through, they don’t ask if production wants to produce the product, they ask if they can. In other words, is there enough capacity to produce this on time? These conversations take place over and over again in every manufacturing environment I’ve ever been in.

Since it is capacity that’s sold, you would think manufacturers would measure and control it the same way a bank manages money. Banks don’t guess how much money they have on hand or what your loan payment is going to be – they know. Most manufacturers don’t manage their capacity. They don’t know how much capacity there is, how much is consumed by their open work orders, or how much is available and when it’s available. So they guess on when they can deliver their product. It is an educated guess, but it’s still a guess.

Why is this the case? Well, if you think about it, the bank uses math to manage their money. For a loan payment, anyone can do the math and come up with the exact same answer. Manufacturing deals with many more variables. Some employees are faster, some are slower. Sometimes the machine runs well, sometimes it doesn’t. Then volume needs to be considered. No matter how many loans a bank generates, the payment calculation is the same.  A manufacturer’s lead time, on the other hand, is affected by how busy they are (or aren’t). I could go on, but you get the picture. Managing capacity has a lot of variables; managing money is much more black and white.

Just because managing capacity is difficult doesn’t mean it’s not needed. Companies that don’t manage their capacity can list reason after reason why they should; and their reasons are valid. So what stops them from managing their capacity? They don’t know how, or they think it’s too difficult and/or impossible to do. Let me leave you with this: Other companies have done it. Visual South can show you how.

Let me know if you would like to discuss this.

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Jack Shannon

Written by Jack Shannon

Jack is the President of Visual South and has been working with ERP since 1996 when he bought it in his role as a Plant Manager. Since 1998 he has worked for Visual South with roles in consulting, sales and executive management.