Bottleneck

What Is a Bottleneck?

A bottleneck is a point of congestion in a production system (such as an assembly line or a computer network) that occurs when workloads arrive too quickly for the production process to handle. The inefficiencies brought about by the bottleneck often creates delays and higher production costs. The term "bottleneck" refers to the typical shape of a bottle and the fact that the bottle's neck is the narrowest point, which is the most likely place for congestion to occur, slowing down the flow of liquid from the bottle.

A bottleneck can have a significant impact on the flow of manufacturing and can sharply increase the time and expense of production. Companies are more at risk for bottlenecks when they start the production process for a new product. This is because there may be flaws in the process that the company must identify and correct; this situation requires more scrutiny and fine-tuning. Operations management is concerned with controlling the production process, identifying potential bottlenecks before they occur, and finding efficient solutions.

Understanding a Bottleneck

As an example, assume that a furniture manufacturer moves wood, metal, and other raw materials into production, and then incurs labor and machine costs to produce and assemble furniture. When production is complete, the finished goods are stored in inventory. The inventory cost is transferred to cost of goods sold (COGS) when the furniture is sold to a customer.

If there is a bottleneck at the beginning of production, the furniture maker cannot move enough raw materials into the process, which means that machines sit idle and salaried workers are not working productively, creating a situation of underutilization of resources. This increases the cost of production, as well as presents a potentially large opportunity cost, and may mean that completed goods do not ship to customers on time.

Bottlenecks and Production Capacity

A bottleneck affects the level of production capacity that a firm can achieve each month. Theoretical capacity assumes that a company can produce at maximum capacity at all times. This concept assumes no machine breakdowns, bathroom breaks, or employee vacations.

Because theoretical capacity is not realistic, most businesses use practical capacity to manage production. This level of capacity assumes downtime for machine repairs and employee time off. Practical capacity provides a range for which different processes can operate efficiently without breaking down. Go above the optimum range and the risk increases for a bottleneck due to a breakdown of one or more processes.

If a company finds that its production capacity is inadequate to meet its production goals, it has several options at its disposal. Company management could decide to lower their production goals in order to bring them in line with their production capacity. Or, they could work to find solutions that simultaneously prevent bottlenecks and increase production. Companies often use capacity requirements planning (CRP) tools and methods to determine and meet production goals.

Bottlenecks and Production Variances

A variance in the production process is the difference between budgeted and actual results. Managers analyze variances to make changes, including changes to remove bottlenecks. If actual labor costs are much higher than budgeted amounts, the manager may determine that a bottleneck is delaying production and wasting labor hours. If management can remove the bottleneck, labor costs can be reduced.

A bottleneck can also cause a material variance if materials are exposed to spoilage or possible damage as they sit on the factory floor waiting to be used in production. Bottlenecks may be resolved by increasing capacity utilization, finding new suppliers, automating labor processes, and creating better forecasts for consumer demand.

Real World Example of a Bottleneck

Bottlenecks may also arise when demand spikes unexpectedly and exceeds the production capacity of a firm's factories or suppliers. For instance, when Tesla, Inc. (TSLA) first began production of its all-electric vehicles, demand was high for the vehicles and some analysts were concerned that production would be slowed due to problems in the production line. And, in fact, Tesla has experienced ongoing production bottlenecks due to the need to manufacture the custom battery packs that supply their vehicles with power.

By mid-2018, the company claimed its factory was already the highest-volume battery plant in the world in terms of gigawatt-hours (GWh). In order to make a dent in the waitlist for backordered vehicles, Tesla says it will need to continue to invest in and build more Gigafactories worldwide.