Measuring Manufacturing Capacity and Utilization

Date: December 9, 2014

Measuring Manufacturing Capacity and Utilization

Prerequisite for Manufacturing Capacity Management

One of the most challenging tasks in supply chain management is measuring performance. This is because there are many key factors to consider—from the time the customer gets a quote before production starts, to transit, and final delivery.

However, as globalization comes to dominate the supply chain, the convergence of technology, real-time information, and advanced support systems make it easier for managers and manufacturers to take control, monitor progress, and shorten the lead-time in terms of weeks instead of months (e.g., in the apparel industry’s fast-fashion business model).

Triple-braided General Factors in Production

While delays and external factors are unavoidable and accepted as part of the process itself, (e.g., force majeure, accidents, and equipment breakdowns), calculating the general factors such as manufacturing capacity, utility, and productivity is a must in measuring logistics performance. As the popular management adage goes, “You can’t manage what you can’t measure.” This statement directly summarizes the importance of measuring performance in manufacturing, so that you can have better capacity management and planning to improve factory productivity.

In his book, “An Introduction to Supply Chain Management,” Donald Waters expounded these three general factors and said, “in practice, it is much better to use direct measures of logistics, such as the number of tonnes delivered, stock turnover or distance travelled,” and added, “again, there are many possible measures.” So in this article, we’ll focus on how to calculate manufacturing capacity and utilization.

Focus on Capacity: How to Maximize Actual Throughput

In supply-chain management, Waters defines capacity as the maximum amount that can be moved through the supply chain within a specified time. This is a basic measure for SCP or supply-chain performance. Capacity is a flexible factor, meaning it’s not fixed and most of the time is affected by bottlenecks and changes. Why? For the following reasons:

  • It depends on how resources are utilized
  • Manufacturing companies (e.g., two textile factories) may use the same resources, but use them differently with different outputs
  • This could change over time due to several factors (e.g., a factory with 500 workers is able to move 700 boxes per hour at 9AM, but the workers may feel tired after a few hours and, during the last working hour at 5PM, could only produce 600 boxes)

To further understand the concept of capacity, Waters gave three definitions to help us maximize resources: design capacity, effective capacity, and actual throughput.

  • Design Capacity – maximum output in ideal conditions.
    Example: A t-shirt factory can sew 700 t-shirts in an hour, achievable for ‘ideal’ working conditions, with no delays, and in a short period of time.
  • Effective Capacity – what can be achieved over the long term.
    Example: While the t-shirt factory can sew 700 t-shirts in an hour, consider other factors such as break times, workers’ fitness, meetings, equipment breakdowns and unprecedented events. They could only effectively sew 500 t-shirts in an hour.
  • Actual Throughput – Waters defines this as ‘what we actually achieved.’
    Example: Considering the two types of capacity and other external factors—a typical day at a t-shirt factory, workers can actually sew 450 t-shirts in an hour.

Based on the given scenario, the t-shirt factory is working below designed capacity (700 sewn t-shirts per hour) and has failed to maximize its resources. In the end, they need to make adjustments and consider external factors before promising the client a certain delivery time for the finished goods.

Relationship of Capacity and Utilization

Now that we know the designed capacity, a formula is given to determine the utilization. Waters defines this as the “proportion of the designed capacity that is actually used.” Utilization can also be read in a percentage where U = (amount of capacity used / designed capacity).

Based on the given scenario, the utilization of the t-shirt factory is:

450 t-shirts / 700 t-shirts = 0.642 or 66.28% of utilization per hour.

After understanding the measurement of the capacity and utilization, the next thing is how to improve manufacturing productivity with given restrictions.

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