Organizational Capital - Breaking Bottlenecks

Breaking Bottlenecks

We can raise our pin factory’s productivity even more by applying Eliyahu M. Goldratt’s insights as described in his book, The Goal. Suppose, for example, our factory’s profitability is falling. Thousands of feet of wire are going into the plant, but far less of that wire is coming out in the form of finished pins. We’re paying for raw materials that are not returning any revenue. A walk through the plant reveals a large pile of cut wires in front of the “pin pointer,” and another pile of pointed wires in front of the pin header. The task of cutting the wire must be taking less time than the job of pointing it, which, in turn, must take less time than adding a head. To "break" these bottlenecks, we could have the wire cutter and pin header take their breaks and lunch hours at different times, and then have the cutter add heads while the regular header is away. This would speed the task of pin heading and, at the same time, allow the pointer to catch up with the cutter.

Production could also be increased by locating the various work stations in the factory so as to facilitate the flow of the unfinished pins between them, and by arranging the available light sources to their best advantage. Again, in each case, productivity is raised without increasing either the workforce or tangible capital.

Unlike tangible capital, organizational capital is not an exclusive resource. That is, while only a single person can use a physical resource such as a lathe or a drill press at one time, any number of people can employ the idea of the division of labor or use Goldratt’s techniques to identify and break bottlenecks. At first glance, then, organizational capital appears to fall outside the traditional definition of economics: the study of the use of scarce resources that have alternative uses. However, exclusive is not synonymous with scarce. Organizational capital is, in effect, institutionalized knowledge; knowledge is a scarce commodity and institutionalized knowledge scarcer still.

Organizational capital may, in some cases, be more difficult to change, or “upgrade,” than is tangible capital. This is because new techniques can conflict with existing institutions in unexpected ways. For example, both Goldratt’s insights and just-in-time inventory practices run afoul of accounting standards which treat inventory (including “work-in-progress”) as an asset. When either of these new paradigms is implemented, one impact is that inventories are sharply reduced. While falling inventories lead to lower costs and higher profits, they show up on a company’s books as a drop in assets and, therefore, in the company’s net worth. Such a drop may be enough to cause management to have second thoughts about implementing the changes.