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 stops or severely slows the system. The inefficiencies brought about by the bottleneck often create delays and higherproduction costs.

The term “bottleneck” refers to the typical shape of a bottle and the fact that the bottle’s neck is the narrowest point, which is the most likely place for congestion to occur, slowing down the flow of liquid from the bottle.

In business, bottlenecks can result from short-term constraints, like the vacation of a key employee, or longer-term causes, like a shortage of crucial supplies. Production managers need to carefully study their operations to identify potential bottlenecks before they occur.

There are two main types of bottlenecks: short-term and long-term. A short-term bottleneck is temporary and typically caused by temporary conditions such as employees on vacation or on sick leave. Long-term bottlenecks are baked into the production process and include such things as inefficient machinery.

Bottlenecking, the process that creates bottlenecks, can have a significant impact on the flow ofmanufacturing and can sharply increase the time and expense of production. Companies are more at risk for bottlenecks when they start the production process for a new product. This is because there may be flaws in the process that the company must identify and correct; this situation requires more scrutiny and fine-tuning.Operations management is concerned with controlling the production process, identifying potential bottlenecks before they occur, and finding efficient solutions.

How Bottlenecks Impact Production Systems

As an example, assume that a furniture manufacturer moves wood, metal, and otherraw materials into production, then incurs labor and machine costs to produce and assemble furniture. When production is complete, the finished goods are stored in inventory. The inventory cost is often transferred to thecost of goods sold (COGS) when the furniture is sold to a customer.

If production starts with abottleneck, the furniture maker can't move enough raw materials, leading to idle machines and underused workers. This increases the cost of production, presents a potentially largeopportunity cost, and may mean that completed goods do not ship to customers on time.

How Bottlenecks Affect Production Capacity

A bottleneck affects the level of productioncapacity that a firm can achieve each month. Theoretical capacity assumes that a company can produce at maximum capacity at all times. This idea assumes there are no machine breakdowns or employee breaks.

Because theoretical capacity is not realistic, most businesses use practical capacity to manage production. This level of capacity assumes downtime for machine repairs and employee time off. Practical capacity provides a range for which different processes can operate efficiently without breaking down. Exceeding the optimum range raises the risk of bottlenecks as processes may break down.

If a company finds that its production capacity is inadequate to meet its production goals, it has several options. Company management could decide to lower their production goals to bring them in line with their production capacity. Or, they could work to find solutions that simultaneously prevent bottlenecks and increase production. Companies often usecapacity requirements planning (CRP) tools and methods to determine and meet production goals.

Identifying Bottlenecks Through Production Variances

Avariance in the production process is the difference between budgeted and actual results. Managers study variances to make changes and 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. If management can remove the bottleneck, labor costs can be reduced.

A bottleneck can cause a material variance if materials spoil or get damaged while waiting in the factory. Bottlenecks may be resolved by increasingcapacity utilization, finding new suppliers, automating labor processes, and creating better forecasts for consumer demand.

Real-World Example: Bottlenecks in Tesla’s Production

Bottlenecks may also arise when demand spikes unexpectedly and exceeds the production capacity of a firm’s factories or suppliers. For instance, whenTesla Inc. (TSLA) first began production of its all-electric vehicles, demand was high for the vehicles, and some analysts were concerned that production would be slowed due to problems in the production line. In fact, Tesla has experienced ongoing production bottlenecks due to the need to manufacture the custom battery packs that supply their vehicles with power.

Tesla founderElon Musk has said the company’s ability to expand its product lineup depends squarely on its ability to produce a large number of batteries. To make that happen, in a joint venture with Panasonic, Tesla opened a massiveGigafactory near Reno, Nev., in 2016, which makes the company’s lithium ion batteries and electric vehicle subassemblies. By 2023, the company claimed that its factory was producing more than 37 gigawatt-hours(GWh) of storage capacity every year, making it the largest battery plant in the world in terms of production capacity. To make a dent in the waiting list for back-ordered vehicles, Tesla says it will need to continue to invest in and build more Gigafactories worldwide.

The Bottom Line

A bottleneck is a point of congestion in a production system that slows or stops progress. Short-term bottlenecks are temporary and often caused by a labor shortage. Long-term bottlenecks are more incorporated into the system itself and characterized by inefficient machinery or processes.

Since bottlenecking is counterproductive and leads to a reduction in production efficiency, it is essential to identify bottlenecks in advance before they occur. The best way to eliminate bottlenecks is to increase system capacity by restructuring business operations or investing in people and machinery.