Full Answer
What Is a Bottleneck?
A bottleneck is a point of congestion in a production system (such as an assembly line or a computer network) that occurs when workloads arrive too quickly for the production process to handle. The inefficiencies brought about by the bottleneck often creates delays and higher production costs.
Understanding a Bottleneck
As an example, assume that a furniture manufacturer moves wood, metal, and other raw materials into production, and then incurs labor and machine costs to produce and assemble furniture. When production is complete, the finished goods are stored in inventory.
Bottlenecks and Production Capacity
A bottleneck affects the level of production capacity that a firm can achieve each month. Theoretical capacity assumes that a company can produce at maximum capacity at all times. This concept assumes no machine breakdowns, bathroom breaks, or employee vacations.
Bottlenecks and Production Variances
A variance in the production process is the difference between budgeted and actual results. Managers analyze variances to make changes, including changes to remove bottlenecks. If actual labor costs are much higher than budgeted amounts, the manager may determine that a bottleneck is delaying production and wasting labor hours.
Real World Example of a Bottleneck
Bottlenecks may also arise when demand spikes unexpectedly and exceeds the production capacity of a firm's factories or suppliers. For instance, when Tesla, Inc.