Capacity, the unloved buffer

There’s no doubt about it: to meet uncertain demand quickly and reliably, it’s best to have capacity margins. If you have spare capacity, or if your suppliers have spare capacity, it’s easy to use that spare capacity to meet the demand you are exposed to.

Available capacity is also a factor of resilience, a notion that is becoming increasingly important when we see the extent to which our companies and our economies are having difficulty getting back on track following the crises of recent years.

We have three types of buffers in an industrial system to deal with variability: stock, time, and capacity.

Which of these three buffers really has the most potential?

If you invest in inventory, you are bound to make decisions long before you have visibility into your actual orders. Even if your model is well designed, with carefully positioned and managed strategic decoupling points and with a postponement strategy, you are still exposed to the risk of not having invested in the right stock, and not being able to meet demand as well as you had hoped.

If you place time buffers in your industrial flow, you will have longer response times, thereby restricting your ability to respond to market fluctuations.

If you and your suppliers have available capacity, you can adapt to virtually any type of demand fluctuation. Of the three types of buffers available, capacity is therefore the one with the most potential, the one that provides the greatest flexibility.

Having machines that are available to increase capacity as needed, having a workforce that can accelerate the production flow on a given product, maintaining redundant capacity on several sites and at suppliers — are these the best ways to ensure an agile and resilient supply chain?

If you’ve worked in a factory, you know that nothing is more frowned upon than having equipment that is not fully loaded, opening a number of shifts that exceed the load, having pools of supernumerary operators, etc.

Efficiency, equipment utilization, OEE — all of our usual productivity metrics are absolutely against this.

This is understandable in very capital-intensive industries, where investments in production resources are extremely heavy. But this mindset has contaminated all industries, to the point where decisions are often made that clearly go against the relevant business model.

I’ll take two examples of companies in the pharmaceutical sector. The process of these two companies is the upstream manufacturing of bulk products: tablets, capsules, liquid forms, etc. This upstream process represents the real technical know-how of the company, and where capital investment is made. This bulk product is in primary packaging, which preserves the stability and quality of the product. It can be stored at this decoupling point.

From this point, secondary packaging enables the company to manufacture finished products, which are subject to linguistic differentiations, brands, etc. From one bulk item, 2 to 10 variants of the finished product are produced.

These two companies have followed absolutely the same logic: They focus on secondary packaging line productivity, and keep packaging line investments to a minimum. Of course, this means smoothing out the secondary packaging load, lengthening packaging lead times, and increasing finished goods inventories — but none of this gets measured, only the productivity of the packaging line!

Note that, in both cases, a packaging line represents a modest investment for the company. Anyone who takes a few steps back will come to the conclusion that overcapacity of the secondary packaging line should be provided, which will bring flexibility, reduce inventory and improve customer service.