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Measuring Capacity:The Basics

By: Cameron TidwellDecember 12, 2006

Marriott School of Business - Brigham Young University

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So…What is Capacity?

• What do YOU think Capacity is?

• Google the term “Measuring Capacity” what comes up?

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Google search results…

Possible finds:• Math activities• Units of measurements:

– Cups, Gallons, Ounces etc. • Ideas for teachers• Measuring Capacity fisheries and Web

Servers

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What is going to be covered • What is Capacity?• Difference Between Measuring and

Calculating• Efficiency • Utilization• Real World Examples• Applications

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Capacity Defined:

Capacity is the capability of a worker, machine, plant, organization to

provide goods and services (output) per period of time.

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An easy way to remember…Capacity is like a Funnel.

“Wright’s Funnel” was developed by Oliver Wright demonstrate the idea of capacity.

(Blackstone, 1989)

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However…The Funnel only focuses on OUTPUTS.

Capacity can also be measured by an organization’s INPUTS.

(Blackstone, 1989)

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Units of MeasurementsINPUTS

• Number of Labor Hours available in a time period

• Number of Machines Hours available in a time period

• Seats on an airplane• Beds in a Hospital

OUTPUTS• Number of units produced

in a time period…

– Cars washed per hour

– Beds assembled per day

– Oil changes per hour

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What are Possible units of measure of Capacity for the following?

• A Bottling Company?– Work Hours, Bottles Filled…

• An Car Dealership?– Cars sold, Cars serviced…

• What about your Organization?– ?

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Let’s Think… • What is the benefit of knowing capacity?

• How could it help an organization?

• How could knowing how to measure capacity benefit this organization?

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Measuring/Calculating CapacityJohn H. Blackstone’s “Capacity Management,” distinguishes between the two…

• Measuring Capacity:

“One averages some set of historical data.”

• Calculating Capacity:“One sets capacity equal to the product of time available (T),

efficiency (E), and utilization (U).”

C = T x E x U

(Blackstone, 1989)

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Measuring Capacity:This part is easy…

1. Take historical outputs from equal time periods and add them together.

(output 1 + output 2 +…output N)

2. Divide the total output by the number of periods.

(output 1 + output 2 + …output N)/ # periods

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Measuring Capacity

Example:

Louisville Slugger’s factory in Louisville, KY produced an output of 2700 bats, 2000 bats, 1900 bats, and 2400 bats. What is the measured capacity?

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Louisville SluggerStep one: Add the Historical Data…

2700+2000+1900+2400 = 9000 bats

Step two: Divide the total by the number of periods, 4.

9000/4 = 2250 bats

Thus, 2250 bats is the average capacity.

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Calculating Capacity:Now it gets a little tricky…

Capacity = (# of shifts) x (# of hours a day) x (# of machines) x (# of days a week)

(Provides Mins and Maxs in the ability to produce)

Important! Variables are subject to change depending on information

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Calculating Capacity:

Example:

Ford has a factory in Detroit which produces transmissions. The factory has 2 shifts which man 4 machines, 8 hours day, 6 days a week. What is the factory’s calculated capacity?

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Ford cont.Remember the Equation:

Capacity = (# of shifts) x (# of hours a day) x (# of machines) x (# of days a week)

There were 2 shifts, 4 machines, 8 hours a day, and 6 days wk

Capacity = (2) x (4) x (8) x (6)

Capacity = 384 standard hours per week

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Even more Ford.• As mentioned Capacity = T x E x U. • This calculated capacity is also call Rated or

Nominal Capacity.

• Example cont.

Say that Ford historically has a utilization of 93 % and a efficiency of 98 % then what would their capacity equal?

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Even more Ford cont.Capacity = T x E x U

*Time Available = 384 hrs *Efficiency = .98 *Utilization = .93

Capacity = (384) x (.98) x (.93)

Capacity = 349.98

Capacity = 350 standard hours

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Efficiency

• Definition:

“A measure (usually expressed as a percentage) of the actual output to the standard output expected.”

(APICS Dictionary, 1998)

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Calculating Efficiency:

Efficiency = Standard hours x 100 Hours worked

-or-

Efficiency = Actual units produced x 100 Standard rate of production expected

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Calculating Efficiency:

Example: At company X work is measured in hours. It took employees 12.75 hours to produce 12 standard hours of work. What is the companies efficiency?

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Calculating Efficiency:Efficiency = Standard hours x 100

Hours worked(Standard Hours = 12 Hours worked = 12.75)

Efficiency = 12 = .9412 x 100

12.75Efficiency = 94.12%

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Let’s try a different one…

Example: Company Y produces a standard of 250 units per hours. Today, in one eight hour shift the company produced 1925 units. What was the company’s efficiency for the shift today?

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Calculating Efficiency:Efficiency = Actual units produced x 100

Standard rate of production expected

• Actual units produced = 1925 units• Standard rate of production expected = ?

(250 units per hour x 8 hours per shift = 2000)

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Calculating Efficiency:Efficiency = Actual units produced x 100

Standard rate of production expected

Efficiency = 1925 = .9625 x 100

2000Efficiency = 96.25%

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Utilization

• Definition:“A measure (usually expressed as a percentage)

of how intensively a resources is being used to produce a good or service.”

(APICS Dictionary, 1998)

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Calculating Utilization :

Utilization = Hours available – hours down x 100

Hours available

Utilization = Hours worked x 100

Hours available

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Calculating Utilization :Example:

Your company has 4 machines which are staffed by 2 eight hours shifts 6 days a week. Lately information has shown that there are about 20 per week in which machines are not in use due to breakdowns. Calculate your companies machine utilization.

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Calculating Utilization :Capacity = (# of shifts) x (# of hours a day) x (# of

machines) x (# of days a week)

Utilization = Hours available – hours down x 100Hours available

Utilization = Hours worked x 100 Hours available

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Calculating Utilization :First step, the company’s machine hour capacity?

Capacity = (# of shifts) x (# of hours a day) x (# of machines) x (# of days a week)

Capacity = (2 shifts) x (8 hours a day) x (4 machines) x (6 days a week)

Capacity = 384 machine hours

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Calculating Utilization :Second Step:

Utilization = Hours available – hours down x 100Hours available

Utilization = (384 machine hours) – (20 hours down) x 100384 machine hours

Utilization = 364 machine hours x 100 = .9479 x 100

384 machine hours

Utilization = 94.79 %

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Real World ExampleFisheries in Europe

“A measure that has gained increase use in fisheries…is capacity utilization”

(Pascoe, 2004)

Capacity and Utilization are being determine based on the same ideas but much more in

depth.

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One final point on Utilization• Note that:

– Over Utilization:• Machine Breakdown

• Decrease in quality

• Lost time injuries

– Under Utilization:• Increase Costs

• Employees downtime (standing around)

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Applications cont.• What is the right utilization and efficiency

level for your organization?

• Companies need to find their “Best Operating Level”

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Review• What is Capacity?

• What is the Difference between Measuring and Calculating Capacity?

• How does one determine Efficiency?

• How does one determine Utilization?

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Readings List• Blackstone, J.H. (1989). Capacity Management.

Ohio: South-Western Publishing.

• Bozarth, C.C. & Handfield R.B. (2005). Introduction to Operations and Supply Chain Management. New Jersey: Pearson Education

• Cox, J.F. & Blackstone, J.H. eds. (1998). APICS

Dictionary (9th ed.) Virginia: APICS

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Readings List• Fare, R., Grosskopf, S., & Kokkelenberg, E. C. (1989).

Measuring Plant Capacity, Utilization and Technical Change: A Nonparametric Approach. International Economic Review, 30 (3), 655-666.

• Newman, M. (2006). Empty wards and promises. Hospital Doctor, 20-22.

• Mahanti, T. K. (2006, October 2). Higher capacity utilisation raises global competitiveness. Knight Ridder Trinbune Business News. pg 1.

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Readings List• Morlok, E. K., Chang, D. J. (2004). Measuring capacity flexibility of

a transportation system. Transportation Research Part A: Policy & Practice, 38 (6), 405-420.

• Pascoe, S., Greboval, D., Kirkley, J., & Lindebo, E. (2004) Measuring and appraising capacity in fisheries: framework, analytical tools and data aggregation. Rome: FAO Fisheries Circular. No. 994

• Ruist, E., Söderström, H. T. (1975). Measuring Capacity Utilization and Excess Demand. European Economic Review, 6 (4), 369-386.

• Taverna, M. A. (1998). BMW Rolls-Royce Targets Development Capacity Issues. Aviation Week & Space Technology, 149 (16), 77.