In this article we learned about something called Constraint Theory: basically, what is the biggest constraint on your business’s ability to make money? In manufacturing plants, usually, the constraint is that it’s very expensive to buy the industrial equipment used to manufacture. So they find it makes sense to use a 24/7 manufacturing schedule to get the most use they can out of that equipment.
Looking at 24/7 manufacturing schedules
Let’s take an example: Princess Capybara makes a cosmetic skin treatment derived from spinach leaves. She has a large industrial extractor that gets the beneficial liquid out of the leaves without damaging the most important chemical in the process.
This allows her to make a superior product and charge far more than her competitor Leo, who wrings the juice out of the leaves with his bare hands.
Of course, this extractor was a huge capital investment! She spent a few hundred thousand dollars to purchase the extractor and another hundred thousand to make all the necessary modifications to her building and set up the waste lines. So she better make sure she makes good use of it!
The extractor can process enough spinach to make 50 bottles of serum every hour. Princess Capybara has calculated that she makes a profit of $10 per bottle. (Assume this number has factored in everything – the spinach leaves, the marketing, wear and tear on the equipment, and all other expenses – except labor.)
For every hour Princess Capybara runs her extractor, she makes
She’s easily able to hire employees to run the extractor for much less than $500 per hour, even for nights and weekends. So, to make the most money, she should keep the equipment running as close to 24/7 as possible!*
Comparing Cost of Labor to Equipment
This is basically what happens in most large manufacturing plants: the biggest cost by far is one or more pieces of large, expensive equipment used in the manufacturing process. The cost of labor is very low by comparison. So (as long as the market for the product is large enough and the company is able to capture enough of the market through their advertising) they might as well run their equipment as much of the time as they possibly can.
*Advanced Note: this simplified example also assumes that there is a direct relationship between her marketing expenditure (which was already factored into her profit calculation) and the number of bottles she can sell. In other words, we’re assuming it costs her a predictable (for example) $3 of advertising to get each sale. Real-life situations will probably be more complex.
Weekly Challenge:
Have a happy labor day! And here’s an additional thing to think about: have you ever seen a manufacturing plant that DIDN’T operate 24/7? (There are plenty!) What do you think or know to be some of the reasons a plant would choose NOT to use a 24/7 manufacturing schedule?
Ps. Next time we’ll continue the manufacturing capacity theme and learn about manufacturing bottlenecks!
