Bottlenecks are one of the biggest detriments to businesses

If you've run a business, worked in a business, or have studied business, you should know exactly what a bottleneck is. For the uninitiated, a bottleneck is a step in a process that slows down the other steps. Even if other steps in a factory process go faster, it won't matter because the speed of the bottleneck hasn't been changed. This is a useful tool, not just for factories, but also for corporate businesses.

To further illustrate the effects of a bottleneck, I'll show an example below.

Bottleneck Example.

In a bottleneck, one process slows up all the other ones. Let's take a production process with three steps as an example:

• Step 1: Prepare units for production: 5 minutes per unit
• Step 2: Run units through machine 1: 10 minutes per unit
• Step 3: Place finished units in box: 2 minutes per unit

There are three steps in this production process. We will start by seeing what happens when running 10 units through this process. Because there are three steps that total 17 minutes in the production process, we would expect each unit to take 17 minutes to produce, right?

Wrong. Take a look at what happens. The first unit is finished in 5 minutes, and is placed into machine 1. Five minutes later, unit 2 is ready. But the first unit hasn't finished going through machine 1 yet, and unit 2 waits for an additional five minutes before it can be placed into the machine. Unit 1 did take 17 minutes to get through the process, but unit 2 took 22!

Key Definitions.

In order to understand what is going on here, there are some key definitions that we should take a look at. Capacity can be defined as the number of units that can be processed in a certain time frame. In the above example, step 1 can process 12 units per hour, step 2 can process 6 units per hour, and step 3 can process 30 units per hour.

This calculation shows us that the bottleneck is step 2, which means the overall process can produce only 6 units per hour.

Utilization is an important metric, as it measures the percentage of time in which a resource is being used. We can calculate utilization using flow rate divided by capacity. In this example, step 2 is at 100% utilization because it is the bottleneck, step 1 is at 50% utilization, and step 3 is at 20% utilization. In this example, it would make a lot of sense to add a second machine to eliminate the bottleneck, but that's not always possible in business.

Expand Beyond Factories.

Not every process takes place in a factory. In fact, processes take place all around us every day, and businesses spend a ton of time and money on them.

But there's one process that seems to be neglected in a lot of operations: The actions of people. Businesses today have the ability to track and streamline their processes, and should do so to determine where their bottlenecks lie and make decisions based upon that.

Here's a real world example to illustrate what I mean. I'm going to use the example of a college student renting out an apartment in a development (assuming I am the owner) in New York. Here are the steps.

• Step 1: Phone call with a prospect, inform them of rent, apartment information, mail application: 15 Minutes
• Step 2: Applicant receives application, sends back in mail: 5 days
• Step 3: Request documents and wait for from prospect, etc, 2 days
• Step 4: Wait for approval, credit and full background check: 7 days
• Step 5: Receive approval, show and schedule applicant apartment: 2 days
• Step 6: Wait for applicant to make a decision: 2 days
• Step 7: Acceptance from applicant, schedule movein, collect first month's rent and security deposit: 3 days

As you can see, this process is very involved, and could potentially involve a lot of people.

Step 1 would likely be conducted by a leasing agent, who receives all phone calls and handles all inquiries. It doesn't take much time, so the leasing agent should be busy sending out applications to interested parties. If it's all done by mail, it's going to take a while to get what you're looking for back. It's nice to see that the applicant is serious, but a scanned document provides enough of the information, and cuts down on time spent. That's the first bottleneck in the system, creating a bigger list of applicants than what the process can handle. Once the documents are received, it's possible that the leasing office will need even more.

If done by mail, this can create even more of a time problem.

If all the documents necessary are included initially, the applicant will be placed through an extensive background check. With most rental offices, this takes a long time as checking credit, previous home history, and income can take a long time. Here we have yet another bottleneck in the system. This won't matter for the first applicant, but it will delay all future applicants, similar to what we saw in the more simple example.

The entire process for the first applicant will take exactly 21 days and 15 minutes, if everything goes smoothly. However, if we have another applicant in process, let's take a look at what happens. There will be an initial 15 minute phone call, and an application will be sent out.

Because the second step is handled by the applicant, there will be no delay there. If all documents are there (not always the case), the prospect will advance to step 4. However, the first applicant is already in this step, and is only 15 minutes ahead. Only one person is processing the credit reports, so that means applicant number two will wait for almost 7 days before the credit check person can start working on it. Then it will take another seven days for that person to finish the credit check. In the background, applicant number one has already finished steps 5, 6, and 7. That means applicant two should finish the rest of the process without a hitch. Now how long did that take? It took exactly 28 days and 15 minutes, 7 days more than the initial applicant!

That's because one person couldn't process applications fast enough.

All other applicants will be slowed down by this bottleneck, and the owner of the apartments will lose money. That's just one example, but it demonstrates why managing operations in business is so important.