What Is A Bottleneck? (And Tips To Resolve One Successfully)

By Indeed Editorial Team

Updated 7 November 2022

Published 5 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Professionals in the manufacturing or production industry often create processes and procedures to help improve efficiency. To do this, they may study the current system and identify areas that could be improved, such as a bottleneck where there is a point of blockage in the current system. If you want to specialise in managerial accounting, you might benefit from learning more about how bottlenecks affect a company's finances and how to mitigate them. In this article, we discuss what a bottleneck is, how it arises, what the consequences of bottlenecks in accounting are and how to handle them.

What Is A Bottleneck?

Knowing the answer to 'What is a bottleneck?' might help you if you work as an accountant in a production-based industry. A bottleneck is a point of blockage in a production cycle, like the manufacturing line or the infrastructure. This situation may arise when demands increase at a rate that exceeds the current manufacturing capacity. Shortfalls caused by the bottleneck frequently result in delays and lead to higher production costs. The term bottleneck relates to a bottle's appearance, especially the bottle's neck, which is the narrowest part, making it the most probable location for causing an obstruction.

A bottleneck is a stage in the production process where the production slows down. The organisation might achieve optimum efficiency by resolving the issue. Bottlenecks are typically critical in cost or managerial accounting because they affect a business's capacity to continue operations, lowering sales volume and reducing profit. Bottlenecks can develop at any stage during the manufacturing process, causing production to decline or stall. Learning how to avoid them or reduce them from occurring can help companies make higher profits.

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How Does A Bottleneck Occur?

A bottleneck develops when a stage in the manufacturing process hinders the efficiency of other processes, resulting in a constraint on the commodity's production. A bottleneck can form if a preceding step in the production process unexpectedly increases or decreases its output or input from the expected levels. For instance, if an auto parts manufacturer buys new machines that allow faster production, the following stage, packaging, may experience a decline in output without the requisite upgrades. Similarly, getting new manufacturing equipment may also require companies to train their employees in its operation, which might require time and create further bottlenecks.

A bottleneck may also arise because of an unplanned rise in consumer demands. This might happen when a company can handle only the regular number of orders, creating a bottleneck, which hampers the revenue. Bottlenecks can also occur when the capacity of a process component decreases. This may take place if there is a major technical error or a significant fall in the number of employees available because of holidays or layoffs.

Related: What Is A Production Manager? (Duties And Qualifications)

Effects Of Bottlenecks In Accounting

Given below are some of the probable effects of bottlenecks from an accounting perspective:

  • Lower revenue potential: Bottlenecks generally decrease the amount of profit a firm can generate from its output in a given period. This is because, regardless of demand in the market or resources available, bottlenecks can decrease production, affecting the revenue.

  • Increase in costs: Production costs are likely to rise because of bottlenecks, such as professional service expenditures, like employing a machine repair technician. These expenses might also include the costs of obtaining new equipment or the costs of recruiting and training new employees.

  • Cause customer dissatisfaction: Bottlenecks can also lead to unwanted delays in product shipping and delivery, leaving customers dissatisfied. If these consumers switch to a competitor brand or share their unsatisfactory experiences with their friends, it can lower the revenue and customer base of a company.

  • Delay in production: A stall in production occurs when one unit slows down the entire process, rendering the other machines unable to perform, building a significant backlog in production. As many resources, including people and machines, continue to be sources of expenses, this breakdown typically delays production with equal expenses, reducing revenues for the company.

  • Storage of materials: If the number of tasks or materials accumulate due to long-term bottlenecks, the rate of operation may be very low, requiring businesses to store the excess resources. This expense can be substantial because it involves resources to carry goods and store them as required, along with staff to maintain them.

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Tips To Handle Bottlenecks

A bottleneck can affect the manufacturing processes and increase production time and cost. Usually, when a company begins the development process for a new product, it can be more vulnerable to bottlenecks. This is because the organisation may require detecting and rectifying issues that arise during operations. Such an event requires additional monitoring and streamlining of the entire process to optimise it. This involves regulating the manufacturing process, anticipating possible bottlenecks before they surface and finding effective solutions.

Follow these managerial accounting tips to handle bottlenecks:

Determine the bottlenecks

The very first step is to determine the cause of the decrease in productivity. This might include problems regarding workforce or machine hours, the process running time or supply of raw materials, space and infrastructure. These limits may be present before or may form because of developments in the company or something they cannot control. Removing a bottleneck previously encountered can sometimes help identify a new constraint.

For example, a cement manufacturer might resolve a bottleneck in the heating process by repairing the kiln. They might find that operating the kiln causes wastage of production capacity because of variance in customer requirements. This might decrease efficiency and increase the prices, which may result in fewer customers.

Optimise the constraint

You can explore ways to achieve considerable profit despite the limited capacity once you discover which resource is limiting production. Calculating the contribution margin (CM) of each commodity per unit of the constrained resource is one such technique. The CM per unit is the difference between net product revenue and the variable cost of the product. If a watch with a retail price of ₹5000, for instance, holds a variable cost of ₹1500, the contribution margin is ₹3500.

The next step is to divide the CM by the limited resource after calculating the CM for each product. A watchmaking company, for example, may find gold as a limited resource. If a watch A's CM per rupee spent on gold is more than a watch B's, the managerial accountant may suggest creating more quantities of A to optimise the use of gold. The goal is to make the most profit possible from the restricted resource. The most profitable product per unit of that resource is the ideal option in this case.

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Prioritise the bottleneck by redirecting resources

Other parts of the manufacturing process may consume limited resources without limitation. If work hours are a finite resource, there may be steps in the process that use labour but possess adequate staff. As a result, despite consuming the same resource, these actions might not cause a bottleneck. The business can train some personnel to shift from a non-bottleneck step to a bottlenecked situation. This can help to reduce the additional pressure created by a limited supply of total work hours.

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Improve the bottleneck stage

The previous step may help to reduce the backlog in some cases. The next step is creating a more effective process to manage the bottleneck. If the problem persists, the company may want to minimise its reliance on the resources that are causing the bottleneck. They may also want to bring back their re-prioritised resources to their former position. If the restricted resource is an accessible furnace, for example, the firm might buy more or better furnaces.

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Repeat the steps in case of new bottlenecks

Sometimes, you may create a new bottleneck in another area if you remove the recognised issue. If you can improve the manufacturing process of furniture, for example, you may later discover that the labour to box and prepare them for transportation is scarce. The dolls may gather in bulk at the packaging station, creating a new bottleneck. To manage the new constraint, you might go through the same process as before.

Related: What Is A Cost Accountant? (With Duties, Salary And Skills)

Example Of A Resolved Bottleneck

Here is a hypothetical example of a bottleneck in an organisation:

BetterMade Designs is a fashion e-commerce company that sources and sells clothing, and it specialises in hand-woven pieces. After gaining popularity, the company launches its own brand. To promote this brand, it starts a season sale to attract new customers. Because of the success of this campaign, they were able to double the profits. The management accountant noticed that the company did not produce these garments in sufficient quantities to supply the demand, hampering revenue.

They identified the bottleneck as the shortage of skilled personnel. The company hired additional local artisans to help create more clothes. They also bought new equipment for the weavers and started a training program to increase efficiency and solve this problem.

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