In talking with many manufacturing owners over the years, it’s amazing to me how some of the owners put so much of their focus into improving the efficiency of their production capabilities, yet you start talking about how many shifts they are running and you find out they aren’t even close to utilizing their existing capacity.

Improving your production processes is great and generally a safe investment of time and energy because most of it is within your control and in general if you can shorten the time it takes to make a product or improve quality and yield, you’re gonna be in a better position.

Meanwhile, you’re putting very little effort into increasing sales, perhaps because it’s foreign to you or you’re having a hard time measuring ROI on that investment.

Sales vs Capacity, it’s a classic chicken and egg situation. An increase in one typically means that you’re likely to need to make an investment in the other to have them even out. However, which one do you go after first? On an ongoing basis, which one do you want to be the bottleneck?

Obviously, when just getting started there’s a base amount of capacity you need to at least have access to before you can confidently make a sale and know you can deliver for the customer. But after that, how should you manage investment in both areas to optimize the overall growth and profitability of your company?

Well, for one reason or another, many companies either become “satisfied” with where they are at from a sales perspective or maybe more accurate, aren’t confident that investments in improving their sales or sales organization’s performance will bring about quantifiable ROI. In these companies, the bottleneck is in the sales team. Production could likely be doing more, but the investment to increase sales is not there and thus growth is slow or non-existent. This status quo mindset is more understandable if you are near or at capacity AND its just not in the cards to invest in new equipment, facilities or labor at the moment.

However, over the long term I think this overall line of thinking is flawed. A company’s sales team is extremely important for many reasons. For one, the sales team is the company’s connection to their customers. They are an early warning sign of what’s going on out in the market. They can bring valuable insight into market conditions that can allow the company to be proactive and get ahead of significant changes in demand or shifting customer preferences.

Advantages of having the bottleneck in Production instead of Sales

• It’s easier to increase production capacity than to drum up more sales
• Facilities, equipment, labor and other somewhat fixed costs are more fully utilized, driving margins higher
• With demand being greater than supply, you can increase price, driving bottom line improvements without any additional investment
• With consistent sales performance, investments in capacity increases can be made with more confidence

Disadvantages of having the bottleneck in Sales instead of Production

• Production capacity may not be fully utilized, leading to a host of issues
  • Margins lower as fixed costs are higher per sale
  • To meet basic cash flow needs, you may have to discount product to generate more sales, further compounding lower margins
• It’s much harder to increase sales than it is production capacity
• In general, growth is slower and margins lower

In general, it really comes down to the fact that if you look at a manufacturing company as an overall system, you don’t want the bottleneck to be at the beginning, because it has an overall compounding impact on the rest of the system. If sales are high and/or growing, then improvements can be made downstream in production to accommodate the sales via several different means. If sales are low and growth stagnated, there’s no investment in production that’s really going to help things.

The truth is, you need to be investing in both, and these two areas may go back and forth on which one is the bottleneck at the current moment as you seek to find balance between demand and supply. In an ideal world, where sales forecasts were 100% accurate you may try to keep production at just a hair above forecasts to make sure you have no lost opportunities. However, in the real world you should strive to have sales always edge out capacity by at least a little. This situation represents growth, less risk and drives not only revenue but profitability for your organization.

Where is your bottleneck and what are you going to do about it?