What is a 'Bottleneck'
A bottleneck is a point of congestion in a production system that occurs when workloads arrive too quickly for the production process to handle. The inefficiencies brought about by the bottleneck often create delays and higher production costs. The term "bottleneck" refers to the shape of a bottle, and the fact that the bottle's neck is the narrowest point, which is most likely place for congestion to occur, slowing down the flow of liquid from the bottle.
BREAKING DOWN 'Bottleneck'
The term is used to describe points of congestion in everything from computer networks to a factory assembly line.
A bottleneck has a significant impact on the flow of manufacturing costs, and the bottleneck can sharply increase the time and expense of production. Companies are more at risk for bottlenecks when a firm starts the production process for a new product, because there may be flaws in the production process that must be identified and corrected, and this situation requires more production time. The analysts following Tesla are concerned that first-generation car production may be slowed due to changes in the production line.
Factoring in the Flow of Manufacturing Costs
Assume, for example, that a furniture manufacturer moves wood, metal and other materials into production and then incurs labor and machine costs to make furniture. When production is completed, the finished goods are stored in inventory, and the inventory cost is transferred to cost of sales when the furniture is sold to a customer. If there is a bottleneck at the beginning of production, the furniture maker cannot move enough material in the process, which means that machines sit idle and that salaried workers are not working productively. This situation increases the cost of production and may mean that completed goods do not ship to customers on time.
Examples of Production Capacity
A bottleneck impacts the level of capacity that a firm can produce each month. Theoretical capacity assumes that a company can produce at maximum capacity; this concept assumes no machine breakdowns 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.
How Variance Analysis Can Remove Bottlenecks
A variance 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 waiting to be used in production.