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Is There Too Much Capacity

During 2007 industrial capacity utilization was high throughout the world. Increasing stock and house values and easy credit fueled purchases of larger homes, fancy appliances, luxury cars, big screen TVs, and lots more goods and services. Robust demand for goods in the U.S. and rapid growth in China, India, and Brazil fueled a positive growth cycle. Increasing consumption drove the demand for more capacity. Reliability professionals focused on capacity-improvement projects and companies constructed new capacity.

Will we ever return to the good ol' days of 2007? Several strong drivers make this unlikely for many years.

The first is the end of easy credit. Banks have tightened requirements for loan qualification and are unlikely to ever return to a time when someone could get a loan by just saying that they had the necessary income. Furthermore, governments are enacting laws or being more vigilant to protect against wild behavior. There is little doubt that the extremely easy credit of 2007 is gone.

Second is the more-frugal consumer. Credit is tight, wealth is diminished, and thriftiness is cool. Wealth won't reach the levels of 2007 for many years and the ridiculously easy credit won't return. Furthermore, the baby boomers are nearing or at retirement age and need to rebuild their nest eggs. Although thriftiness might be just a passing fad that will end when the recession ends, economic factors argue strongly that consumption will be diminished for many years.

There are some drivers for increased growth. First, governments worldwide coordinated massive stimulus packages that have partly offset reduced demand from consumers and businesses. These packages will wind down, and then governments, especially in the U.S., will have to address large deficits. Second, the GDPs of China, India, and Brazil are projected to increase at 4 to 8% per year. These newly industrialized countries are driving the recovery. However, their combined growth rates don't offset the cutbacks from the American consumer.

When we consider these drivers and others, the most likely scenario is for a period of muted demand extending for another three to five years, and maybe longer.

Should I Change My Thinking?

There is a new reality. First, all ships rise in a rising tide. During the boom years, well-run and not-so-well-run businesses survived; going forward, only the well-run businesses will survive. Second, severe staff cutbacks during the Great Recession reduced staffing levels 10, 20 or 40%. During the boom years, staff was available (although it might have seemed that you needed more staff); going forward, fewer staff will be the norm. Third, capacity utilization is low. During the boom years increased capacity provided the justification for many reliability projects; going forward, increased capacity has zero value. Other new realities exist, but we'll focus on these three.

Since there is so much excess capacity, you might conclude that reliability- and process-improvement efforts are no longer necessary. After all, if a machine goes down unexpectedly, you can always make up the lost production. However, this viewpoint fails to consider the reality of competition. Somewhere, a competitor who can produce without unplanned events and other wastes will gain an advantage. Winning the competitive war depends on improving the efficiency and effectiveness of your company's processes. Expect to see continuing, or more, pressure to produce better results with the same or fewer resources. Recognize that maximum productivity is now absolutely critical, both personally and organizationally. Realize that improving productivity is more than just working faster, it's about accomplishing better results with limited resources.

Yet, at a time when productivity improvement is vital, justification for reliability- and process-improvement projects is harder. Since increased capacity has zero value, justification must come from lower material cost, lower cost of consumables, reduction in overtime or contractor's costs, reduction in required inventory, reduction in labor (or enabling critical processes to be accomplished despite past headcount reductions). If you reduce unplanned downtime you need to link the savings to labor costs. If you reduce rework, you need to relate to material or labor costs. The justification is there, it is just harder to calculate.

How Can I Best Position Myself and My Organization?

Here's the challenge: improve productivity while resources are already strained just performing daily duties. You need to be productive at improving productivity. Here's how.

First, recognize that you might never get back the resources that you lost and plan and act accordingly. Have a positive attitude and resolve to make progress a step at a time.

Second, improve execution. If your experience is typical, you view meetings negatively-lots of talk and no action. In this typical situation, organizations fail to execute crisply and time is wasted. These days, you can't afford this inefficiency. You can take steps to improve execution starting with good meeting performance. Good meeting performance means setting a purpose and agenda; assigning a facilitator who uses facilitation techniques to ensure that everyone contributes and that ideas and actions are captured; documenting decisions and action items; and posting the action items with visual management (i.e., red-yellow-green status) to drive accountability. You'll be surprised how these simple practices will improve your organization's ability to execute.

Third, create an agreed-to guiding vision. Draw from Lean Reliability, Operational or Process Excellence, or other approaches and document the characteristics of your preferred maintenance and operating system. Don't let this be a long process. Agree to the essence and move on to implementation (you can always refine the vision later). There is a big difference between organizations that attack losses randomly versus planned. The vision will help you select improvement projects efficiently and in a way that the projects will move your organization toward the vision.

Fourth, prioritize wastes and problems with work flow. Undoubtedly, the collective wisdom in your organization can agree on a couple of high-priority improvement opportunities. You can start on these right away; however, don't assume that organizational wisdom is reliable for the long term. You needed to make data-based decisions. Identify your critical processes. Gather data on unplanned downtime and other problems. Carefully follow the flow of work during critical events (such as unplanned downtime, major rebuilds, rework, etc.) and identify wastes and disconnects. Through these efforts, you can effectively direct your limited resources for improving process performance.


The economy has fundamentally changed since 2007. Lower demand means long-term overcapacity and an even tougher competitive landscape. In this environment, you need to adjust your expectations for staffing levels and expect more difficulty justifying reliability and operating improvement. Despite that, reliability and process improvement is essential to win the competitive race. You will need to financially justify any improvement project without taking credit for increased capacity. And, since headcount has already been slashed, you might need to demonstrate how a project will enable you to accomplish critical tasks through eliminating wastefully activities. Furthermore, you will need to improve performance while your resources are already consumed with their daily duties. To make those improvements, more than ever, you will need a can-do attitude, improved execution, a vision, and fact-based prioritization of opportunities.

Article submitted by Mike Bresko
GP Allied

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