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Advanced Fundamentals · Lesson 2 of 8

Hidden capacity

Every company has capacity it can’t see: in operations, in its market, and in its managers’ time. Learn the symptoms of each, and the local-optima thinking that hides them.

14 min · Not completed yet

The way out of the crisis is to get more from what you already have before expanding. Where is that hidden capacity? In three places.

1. Hidden operational assets

Get more out of existing capacity before you expand capacity. Capacity is quietly consumed by:

  • Producing things that aren’t needed yet
  • Unplanned set-ups
  • Expediting and changing priorities
  • Rework

Symptoms to look for: output that is uneven over time, with effort and output skewed towards the end of the month or quarter, and a high level of expediting and priority changes.

2. Hidden market assets

Get more share from existing products and markets before you expand into new products and categories. Two kinds of capacity hide here.

Wasted capacity in the sales team. Much of a salesperson’s week goes to non-sales activities: chasing material, receivables and documents; travel; waiting for meetings and approvals; preparing quotations, entering orders, handling tenders.

Hidden opportunity in the market. Customers nobody is addressing; reach gaps; enquiries nobody follows up; a definition of the market that is too narrow. A company with 10% market share has 90% of the market’s potential customers still to win.

3. Hidden managerial assets

Management bandwidth should not be used up running after short-term issues and targets, rather than working on the long-term plans that secure the firm against disruption. Symptoms:

  • Capacity consumed by short-term issues, conflicts and endless meetings, with nothing left for the long term
  • Each role doing the work of the level below, or of another role
  • No time even to think about issues

We will keep having lots of meetings until we find out why no work is getting done.

Exercise: what kind of hidden capacity is this?

  • The plant runs next month’s products to keep its machines busy
  • Sales engineers spend two days a week chasing payments and documents
  • The head of sales personally approves every discount and follows up deliveries
  • Half the enquiries from the website are never followed up
  • A third of welds are redone after inspection
  • The leadership team meets for 12 hours a week, mostly on this month’s numbers

What causes capacity to be wasted?

The waste is not caused by lazy people. It comes from a set of beliefs, call it local-optima thinking, that is the guiding mantra of most management:

  • If every resource is busy, overall productivity will be higher. And so, the more work we put into the system, the more output we’ll get.
  • If we improve everywhere, the improvements will add up.
  • If every manager meets their individual budget, the company will meet its budget.
  • The more improvement projects we run, the more improvement we’ll get.

Pause and think: why does local-optima thinking waste capacity?

  • Because people don’t work hard enough
  • Because parts of a system depend on each other, so improving each part on its own pushes work in the wrong direction and creates piles, waiting and rework
  • Because budgets are too low
  • Because there are too few improvement projects

In a system of dependent parts, local improvements don’t add up. A busy non-constraint just builds inventory; many projects at once just divide attention. The sum of local optima is not the system optimum.

Check your understanding

Answer all five. Get four right to complete the lesson.

1. A symptom of hidden operational capacity is…

  • Steady output every day
  • Low inventory
  • Output skewed towards month-end, with lots of expediting
  • Idle salespeople

Uneven output and expediting signal wasted capacity.

2. “Get more share from existing products and markets before expanding into new ones” refers to…

  • Hidden market assets
  • Hidden operational assets
  • Hidden managerial assets
  • Financial assets

Unaddressed customers, reach gaps and missed enquiries.

3. Senior managers doing the work of their subordinates is a sign of…

  • Strong leadership
  • Hidden market assets
  • Efficient operations
  • Hidden managerial capacity being wasted

Bandwidth used below the role’s level.

4. Which belief is part of local-optima thinking?

  • Only the constraint must be busy
  • If every manager meets their own budget, the company will meet its budget
  • Improvements should be focused
  • Fewer projects give more output

Local targets don’t add up to the system’s result.

5. In a system of dependent parts, improving every part separately…

  • Always adds up
  • Has no effect
  • Often creates piles, waiting and rework, rather than more output
  • Doubles output

The sum of local optima is not the system optimum.