Profit per bottleneck hour

Training 1015 minutesproduction bottleneck

You run a workshop where one machine limits output. Next week you have 20 machine hours, $2,000 in cash and two types of orders. Every other stage keeps up with the machine.

Training goal: Get the best result from limited time

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Situation

1. Order A earns $90 after all variable costs and takes 3 machine hours. Order B earns $50 and takes 1 hour; demand for B covers the whole week, and deadlines and payment reliability are the same. Which order is better on a limited machine?

Order A: more is left from each order
Order B: compare margin per machine hour
Equal hours for each order type

2. New week, new facts: only 8 B orders and 4 A orders are available. The machine still has 20 hours; materials and payment are secured, and no other orders will come in this period. How do you allocate capacity?

Take 8 B orders and 4 A orders
Take only the 8 B orders
Take 8 B orders and 3 A orders

3. The plan of 8 B orders and 4 A orders fills all 20 hours. A new rush order earns $80 of margin and needs 2 hours; it can only be done instead of two B orders, and cancelling them carries no penalty. What is the minimum surcharge to ask so margin does not fall?

Accept without a surcharge: that is another $80
Ask for $10 on top
Ask for at least $20 on top

4. For the next period there are 6 extra B orders at $50 margin, each needing one machine hour. 6 extra machine hours cost $240 and 6 packing hours cost $60; packing already copes, and materials and payment are secured. What raises margin after paying for capacity?

Buy 6 packing hours for $60
Buy 6 machine hours for $240
Buy both services for $300

What you will learn

When capacity is short, compare margin per unit of the limiting resource.
Once the best demand is used up, less profitable orders help too.
Price a rush job by the orders it displaces and the new costs it adds.

Your real-life step

Take two real order types. Write down the margin, the time on the limiting stage and the number of available orders, then plan one week.

Questions and answers

How do you find a production bottleneck?

Look for the stage with a regular queue in front of it whose throughput caps paid output. One overloaded task does not prove it limits the whole system.

Why can a more profitable order be worse?

It can use far more of the scarce time. In the example $90 for 3 hours is $30 per hour, while $50 per hour wins when demand is enough.

When is extra capacity worth buying?

When the confirmed extra margin exceeds the full cost of the capacity. Also check materials, payment, quality and the next stage of the process.

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Numbers are illustrative. A game, not financial advice.