Idle capacity incurred cost and postponement of commitment hampers OTIF

Dear Steve,
In your book I read about Protective and excess capacity.
Does it mean that we need to keep more manpower or equipment than required? Wouldn’t it be an expensive affair ?
Kindly explain with reasons.

Further I have also read the remark “Once we become aware of these different categories of Capacities, we must avoid falling into the Cost Accounting trap”.
That’s true but how to justify that, if cost of product get increased drastically.

You also advise to postpone commitments to avail capacity.
In most of the cases its not possible to postpone.
Secondly it also hampers OTIF.
Kindly revert .

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What happens when you don’t have capacity and cannot postpone commitments?

Do you find that condition to be an enabler for OTIF delivery? If so, how?

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Hi @dosianil,

Adding to @oysteinm’s reply.

No, the mindset is the opposite: having Protective Capacity is absolutely required; and even better to have some Excess Capacity on top of that. With Cost Acounting the very notion of what is needed is wrong!

If you ignore the impact of the Constraint then you would be losing money. The question is still framed from a Cost Accounting perspective.

Compare having or not having Protective/Capacity in terms of the difference in Financial Throughput, not in terms of Cost Savings. Then it will become obvious what is most beneficial.

Looking a cost of product is irrelevant. Look at the difference in Financial Throughput instead. Compare the two cases: and it will be obvious where you make and where you lose money.

If it is not possible to postpone, then there is something wrong in Demand Shaping, or setting customer expectations. Review your contracts!

You would have proper OTIF performance with correctly positioned and sized buffers. See the TOC solutions for Supply Chain Management.

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Thanks Steve.
I am doing diagnostic study for an organisation.
Will study in line with your inputs.
My worry is if the profit is thin then keeping extra manpower & equipment lead to losses or no good profit

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Dosil

As long as you see it as “extra” manpower & equipment your prisoner of the Cost Accounting mindset.

With the Throughput Accounting perspective you will realize that it is not extra but “necessary.” And that it “costs” nothing as long as it doesn’t change the “Financial Throughput.”

Hope this helps!

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