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.