Garrett Automative Ltd (GAL) is a UK subsidiary of a American parent company that manufactures turbochargers for the automative industry. GAL decided to begin its profit improvement programme by examining its factory throughput. Throughput was defined as the rate at which raw materials were turned into sales. In other words, throughput was defined as sales less material costs per period of time. All operating costs, other than direct materials, were considered to be fixed in the short run.
In conjunction with its new OPT scheduling system, factory bottlenecks, defined as an activity within the organization where demand for the resource outstrips the capacity to supply, were identified.
The bottlenecks became certain machines in the factory. The mechanism to improve profitability was to maximize throughput contribution by optimizing the use of bottleneck resources.
Management sought to alleviate the bottlenecks by making additional investments to improve bottleneck capacity and by shifting some of the operations from bottleneck to non-bottleneck machines.
New investments to improve efficiency at nonbottleneck machines were rejected because this greater efficiency did nothing to improve throughput contribution. Priority was given to investments in bottlenecks. To motivate the employees to increase throughput, the performance reporting system was changed. Less emphasis was given to labour efficiency and schedule adherence was introduced as a key performance measure. Employees at nonbottleneck operations were requested not to produce more than the scheduled quantity and use any surplus time on training and TQM initiatives.
GAL has found throughput accounting to be extremely helpful in its particular situation. By concentrating on managing its bottlenecks, GAL has been able to increase its production to meet its sales demand of many different types of turbochargers in relatively small batch sizes.
Question:
1 How could the approach described above be applied in a service organization, such as the National Health Service?