Determining Capacity Utilization and Efficiency

 
Capacity is the number of units a facility can hold, receive, store, or produce in a given time. It is also called “throughput”. Demand and capital requirements influence capacity decisions. A facility that is too large will have areas that go underutilized and raise the cost of existing manufacturing. A facility that is too insufficient may cause for losing market share. Achieving high levels of utilization and a high return on investment is the core goal of capacity planning.

Design capacity

“Design capacity is the maximum theoretical output of a system in a given period under ideal conditions”. It is normally expressed as a rate, such as the number of items produced per week, month, or year.

Example: In Bata shoes, If machines are designed to produce shoes/hr and the plant operates 16 hrs/day.

Design Capacity = 100 shoes/hr x 16 hr

= 1600 shoes/day

Effective capacity

“Effective capacity is the capacity a firm expects to achieve given the current operating constraints”.

Effective capacity is often lower than design capacity because effective capacity considers the constraints which may come with changing product designs.

If the Bata company loses 3 hours of output per day (namely 1 hour/day on preventive maintenance + 1 hour/day on employee breaks + 1 hour/day on machine setting up).

Effective Capacity = 1600 shoes/day - (100 shoes/hr.)(3 hrs./day)

= 1600 shoes/day - 300 shoes/day

= 1300 shoes/day

Actual output

Utilization is the actual output as a percent of design capacity.

Actual output = Effective capacity - lost output during unplanned resource idleness (e.g., absenteeism, machine breakdowns, etc.)

On average, if machines at Bata are not running 1 hr./day due to machine breakdowns.

Actual Output = 1300 shoes/day - (100 shoes/hr.)(1 hr./day)

= 1300 shoes/day - 100 shoes/day

= 1200 shoes/day

Determining Capacity Utilization and Efficiency

A Pizza House has a plant for processing pizzas and wants to better understand its capability. Last week the facility produced 14,800 pizzas. The effective capacity is 17,500 pizzas. The production line operates 7 days per week, with three 8-hour shifts per day. The line was designed to process the cheese-filled pizzas at a rate of 120 per hour. Determine the design capacity, utilization, and efficiency for this plant when producing these pizzas.

Solution :

Design capacity = (7 days x 3 shifts x 8 hours) x (120 rolls per hour) = 20,160 pizzas

Utilization = Actual output/Design capacity = 14800/20160 = 73.4%

Efficiency = Actual output/Effective capacity = 14800/17500 = 84.6%