You Created Your Operating Problems

Local operating problems are not the causes of performance loss. They are the collective effect of lower enterprise capacity utilization. Excess capacity must be either discarded or stored. It moves instantly to the point of least resistance to be discarded and is always reflected in lower performance outcomes.

Large companies tend to have a difficult time looking at themselves holistically. They tend to see problems as being caused locally. As a result, problem-solving is often merely plugging one hole while sending the excess capacity to create more issues.

To accommodate excess capacity, the business needs an operating problem to occur and recur. 

If someone is working hard to make sure problems do not occur within one function, excess capacity will migrate to another functional location where there is less resistance to preventing an operating problem.

Aggregate performance is really a proxy for enterprise capacity utilization. Operating problems are caused by holding excess productive capacity.

Excess capacity may be discarded by:

• Leaving it idle (idle and unscheduled);
• Allowing it to become ‘unavailable’ when scheduled (due to mechanical downtime, absenteeism skill deficits, or other problems);
• Producing output more slowly (lower efficiency);
• Producing defective output which is unsaleable (poor quality);
• Storing output and subsequently determining it can’t be sold or has no financial value (inventory write-offs/write-downs);
• Producing output and selling it at a financial loss.

The implications are profound:

• Aggregate operating performance improvements cannot be sustained until capacity utilization is first improved;
• Everything else held constant, any improvement in one local performance outcome must result in a concurrent deterioration of other local performance outcomes;
• Excess capacity migrates across function to the point of least resistance to be discarded or stored;
• Enterprise performance cannot be managed or improved subject to intra functional initiatives.

Unless you begin by improving enterprise capacity utilization, the best you can do is to push excess capacity into the respective backyards of your functional colleagues.