Time to think hard about your spare capacity

Not the spare capacity that's essential to success; I mean the hidden, unwanted capacity that's a drain on your costs and that's there because of inefficiency.

When you have to cut operational budgets but still meet aggressive targets, then you need to think about how to find and eliminate this spare capacity that's lurking in your production chain. Everybody that I talk to these days is trying to reduce operating expenses (sometimes on an ongoing basis), but there's not always a corresponding production target reduction. Excess spare capacity costs you money, and if you can focus on it savings will be there for the taking.

Unfortunately, spare capacity can be hard to get at. But how does it arise in the first place? Let me give you an example from the energy sector, where I spend most of my time. When the economy is good (for example, when the price of oil is rising dramatically), then there's more attention on producing ‘stuff’ than there is on how it is produced. In the last five years everybody was running as hard as they could to get oil and gas out of the ground. So what if there was an extra rig here or there? So what if a rig was idle because it was moved around excessively, or because parts weren't available exactly when needed? What did it matter if rigs weren't shared between different operational groups because there was no proper collaboration going on?

You may be in a completely different industry sector, but doesn't this strike a chord?

Today, you have to think in a fundamentally different way about your operations and root out the inefficiencies. I'm seeing more initiatives in energy, like the adoption of lean manufacturing principles, and processes being radically altered and streamlined, for example, both of which are aimed at eliminating spare capacity and improving production performance. Our software solutions are being used to model multiple resource allocation scenarios, and test various assumptions about the production chain and the way it's sequenced. A lot more emphasis is being put on decisions that involve trade-offs (“Should we spend X% more if that will yield a 2X% production increase?”), and there's an encouraging trend towards better organizational collaboration.

All this is hard work. But you can get started by:

• Digging into cost and value drivers that really matter to your processes;
• Looking at opportunities to push increased responsiveness and process reliability throughout your operations;
• Focusing more on demand-driven operations;
• Searching for ways to improve operational collaboration that are centered on your targets.

I've read elsewhere, and heard on various webcasts, that some companies think that there might be up to 30% spare capacity in their operations. How about you? What's it worth to you to shave a few percentage points off this number?