Loading the player...

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 create 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 because there may be flaws in the process that must be identified and corrected; this situation requires more scrutiny and fine-tuning. Bottlenecks may also arise when demand spikes unexpectedly and exceeds the production capacity of a firm's factories or suppliers. For instance, some analysts following Tesla Motors (TSLA) were concerned that first-generation car production would be slowed due to changes in the production line. More recently, Tesla faced another bottleneck with its Model 3 pre-orders creating a backlog in production time.

BREAKING DOWN 'Bottleneck'

Factoring in the Flow of Manufacturing Costs

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, and the inventory cost is transferred to cost of sales (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 material into the process, which means that machines sit idle and that 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.

Examples of 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; 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.

How Variance Analysis Can Remove Bottlenecks

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 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.

RELATED TERMS
  1. Capacity Management

    Capacity management is the management of the limits of an organization's ...
  2. Capacity Cost

    A capacity cost is an expense incurred by a company or organization ...
  3. Capacity Requirements Planning ...

    Capacity requirements planning (CRP) is an accounting method ...
  4. Capital Budgeting

    Capital budgeting is the process in which a business determines ...
  5. Yield Variance

    Yield variance describes the difference between actual output ...
  6. Budget Variance

    A budget variance is a measure used to quantify the difference ...
Related Articles
  1. Investing

    Morgan Stanley Asks: Is Tesla Headed for a Fall?

    Shareholders are in for a roller-coaster ride if the carmaker fails to tackle long-term issues.
  2. Investing

    Tesla Sheds More Executives, Holds Hackathon to Fix Bottlenecks

    As electric-car maker Tesla suffers production woes, it's also losing top talent.
  3. Investing

    Tesla Suspended Model 3 Production for a Week in Feb: Report

    Tesla claims the production freeze was necessary to increase Model 3 production rates.
  4. Investing

    Crude Oil Price Forecast: Bears Gather Round

    Oil prices are struggling to come up for air under the weight of OPEC's production plan.
  5. Investing

    3 Oil Stocks Ready to Rally

    As oil prices rise, some of the world's largest oil-field-service providers are set to benefit.
  6. Investing

    Why Tesla's Stock Can Soar to New Highs

    Tesla shares have had a wild ride, but perhaps the worst is now behind the company.
  7. Investing

    Tesla CEO Says "Place Your Bets" in Challenge to Bears

    Elon Musk challenged Goldman Sachs's gloomy assumption that Tesla will continue to fall short of its targets and soon run out of cash.
  8. Investing

    Growing Competition Dims Furniture Makers' Future

    Weak demand and growing competition will increasingly dampen U.S. furniture makers' prospects.
  9. Investing

    Tesla Makes Risky Moves in Model 3 Production

    The electric car maker is racing against time to meet its production timeline of July 2017.
  10. Investing

    Tesla CEO Misled Investors, Says Shareholder Lawsuit

    Company shareholders continue to accuse Tesla of misleading investors about its Model 3 manufacturing capabilities.
RELATED FAQS
  1. How can you calculate diminishing marginal returns in Excel?

    Learn more about production costs and applying the law of diminishing marginal returns using Excel. Find out more about how ... Read Answer >>
  2. What is the difference between standard deviation and variance?

    Understand the difference between standard deviation and variance; learn how each is calculated and how these concepts are ... Read Answer >>
  3. What is the difference between prime cost and conversion cost?

    Understand the difference between prime costs and conversion costs, and learn how each type is used in analyzing business ... Read Answer >>
  4. How do you calculate variance in Excel?

    To calculate statistical variance in Microsoft Excel, use the built-in Excel function VAR. Read Answer >>
  5. What are the types of costs in cost accounting?

    Cost accounting aids in decision-making by helping a company's management evaluate its costs. There are various types of ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center