Measuring Capacity:The BasicsBy: Cameron TidwellDecember 12, 2006Marriott School of Business - Brigham Young University

Measuring Capacity

SoWhat is Capacity?

What do YOU think Capacity is?

Google the term Measuring Capacity what comes up?

Measuring Capacity

Google search resultsPossible finds:Math activitiesUnits of measurements:Cups, Gallons, Ounces etc. Ideas for teachersMeasuring Capacity fisheries and Web Servers

Measuring Capacity

What is going to be covered What is Capacity?Difference Between Measuring and CalculatingEfficiency UtilizationReal World ExamplesApplications

Measuring Capacity

Capacity Defined:Capacity is the capability of a worker, machine, plant, organization to provide goods and services (output) per period of time.

Measuring Capacity

An easy way to rememberCapacity is like a Funnel.

Wrights Funnel was developed by Oliver Wright demonstrate the idea of capacity.(Blackstone, 1989)

Measuring Capacity

HoweverThe Funnel only focuses on OUTPUTS. Capacity can also be measured by an organizations INPUTS.

(Blackstone, 1989)

Measuring Capacity

Units of MeasurementsINPUTSNumber of Labor Hours available in a time periodNumber of Machines Hours available in a time period Seats on an airplaneBeds in a HospitalOUTPUTSNumber of units produced in a time period

Cars washed per hour

Beds assembled per day

Oil changes per hour

Measuring Capacity

What are Possible units of measure of Capacity for the following? A Bottling Company?Work Hours, Bottles FilledAn Car Dealership?Cars sold, Cars serviced What about your Organization??

Measuring Capacity

Lets Think What is the benefit of knowing capacity?

How could it help an organization?

How could knowing how to measure capacity benefit this organization?

Measuring Capacity

Measuring/Calculating CapacityJohn H. Blackstones Capacity Management, distinguishes between the twoMeasuring 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)

Measuring Capacity

Measuring Capacity:This part is easy1. 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

Measuring Capacity

Measuring CapacityExample: Louisville Sluggers factory in Louisville, KY produced an output of 2700 bats, 2000 bats, 1900 bats, and 2400 bats. What is the measured capacity?

Measuring Capacity

Louisville SluggerStep one: Add the Historical Data2700+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.

Measuring Capacity

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

Measuring Capacity

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 factorys calculated capacity?

Measuring Capacity

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

Measuring Capacity

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?

Measuring Capacity

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 = 349.98Capacity = 350 standard hours

Measuring Capacity

EfficiencyDefinition: A measure (usually expressed as a percentage) of the actual output to the standard output expected. (APICS Dictionary, 1998)

Measuring Capacity

Calculating Efficiency:Efficiency = Standard hours x 100 Hours worked -or-Efficiency = Actual units produced x 100 Standard rate of production expected

Measuring Capacity

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?

Measuring Capacity

Calculating Efficiency:Efficiency = Standard hours x 100 Hours worked(Standard Hours = 12Hours worked = 12.75)

Efficiency = 12 = .9412 x 100 12.75Efficiency = 94.12%

Measuring Capacity

Lets try a different oneExample: Company Y produces a standard of 250 units per hours. Today, in one eight hour shift the company produced 1925 units. What was the companys efficiency for the shift today?

Measuring Capacity

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

Actual units produced = 1925 unitsStandard rate of production expected = ?

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

Measuring Capacity

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

Efficiency = 1925 = .9625 x 100 2000Efficiency = 96.25%

Measuring Capacity

UtilizationDefinition:A measure (usually expressed as a percentage) of how intensively a resources is being used to produce a good or service. (APICS Dictionary, 1998)

Measuring Capacity

Calculating Utilization :Utilization = Hours available hours down x 100Hours available

Utilization = Hours worked x 100 Hours available

Measuring Capacity

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.

Measuring Capacity

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

Measuring Capacity

Calculating Utilization :First step, the companys 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

Measuring Capacity

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 %

Measuring Capacity

Real World ExampleFisheries in Europe A measure that has gained increase use in fisheriesis capacity utilization(Pascoe, 2004)Capacity and Utilization are being determine based on the same ideas but much more in depth.

Measuring Capacity

One final point on UtilizationNote that: Over Utilization:Machine Breakdown Decrease in qualityLost time injuries

Under Utilization:Increase CostsEmployees downtime (standing around)

Measuring Capacity

Applications cont.What is the right utilization and efficiency level for your organization?

Companies need to find their Best Operating Level

Measuring Capacity

ReviewWhat is Capacity?

What is the Difference between Measuring and Calculating Capacity?

How does one determine Efficiency?

How does one determine Utilization?

Measuring Capacity

Readings ListBlackstone, 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

Measuring Capacity

Readings ListFare, 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.

Measuring Capacity

Readings ListMorlok, 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., Sderstrm, 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.

Measuring Capacity

Measuring Capacity: These slides are to help Employers teach their employees the different techniques of measuring capacity. It is meant to be as basic as possiblePlease take time before you teach to understand the material yourself. It would be wise to do some research yourself if possible.This presentation is very participation base take advantage of this and get people involved. Suggest time to spend in discussion is in the notes bolded in the upper right corner, however you can adjust as needed. 3-5 minutes. To get participations thinking about capacity ask the question What do you think capacity is? Dont limit their answers just let them brainstorm take a minute or two and get some feed back. If they have computers ask them to Google it. The reason for this is that many people in this day and age turn to the internet to get information about topics which they do not know. Using the internet may or may not be an effective tool. Again take a minute or two to discuss participants findings. (ON THE NEXT SLIDE)2-3 minutes discussing the Google search results here are possible things they may have foundwhat did others find? The point is not only to get them thinking, but to show that it is not always easy to find information on subjects through the internetIt is important that they pay attention and learn this information.What is Capacity? This section will focus on defining capacity, using the funnel and trough ideas. It will also discuss units of measure and proivde opportunities for discussion of the effect knowing capacity could have on an organization.Difference between Measuring and Calculating: This section will define measuring and calculating capacity and teach the class about measuring capacity. Calculating Capacity will be broken up into the next two sections.Efficiency: This will define efficiency, explain how to calculate it and provide examples that participants will be able to work through to learn efficiency.Utilization: This will define utilization, explain how to calculate it and provide examples that participants will be able to work through to learn utilization.Real World Examples: This section will give a couple of examples of how capacity is effecting them and may also provide more time to discuss the importance of capacity.Applications

Please Note: this definition is a combination of on given by Dr. Thomas Foster of The Marriott School at Brigham Young University and one taken from C.C. Bozarth and R.B. Handfield, Introduction to Operations and Supply Chain Management, 1st ed. 2005. Bozarth and Handfield, used a definition from J.F. Cox and J.H. Blackstone, eds., APICS Dictionary, 10th ed. (Falls Church, Va: APICS, 2002)Explain that Oliver Wright a leader in capacity management developed this funnel to show and explain capacity. An organizations capacity does not depend on the work in a system but the output it produces in a period of time. EXAMPLE: Bring a normal size funnel, water, and a bucket to catch the water. Pour the water into the funnel. Point out that the funnel is the organization, the water its inputs, even though the funnel can contain large amounts of input, its capacity is only equal to the amount coming out the other side. Note that the funnel only focuses on outputs. However capacity can be measured in inputs as well. The topics of inputs and output will be discussed on the next slide.These are possible measures of input and output. The numbers of labor or machine hours available in a time period would be considered an input. APICS dictionary describes inputs as the work arriving at a facility or organization. Inputs are can be very important in the calculation of efficiency and utilization. APICS dictionary describes outputs as the product being completed by a process of facility. 2-5 minutes Take some time to see if participants can think of possible units of measure a bottling company and car dealership could use there are a couple of examples are there more? What about their own organizations? This is key they need to know what they would measure their capacity by or these equations will not benefit them. Also by know these units they will be better able to help their company become more efficient. 5-10 minutes discussing these questions. Doing so will help employees and/or participants to see the possible benefits and the importance of learning about Measuring and Calculating Capacity.There is a difference between measuring and calculating Capacity. When measuring capacity one will take historical data, past levels of output and average them over the number of periods. This information gives a company an average or standard to base and compare future production levels. Calculating capacity allows organizations the ability to calculate their possible max and min capacities. They also allow for reality factors, what really happens. Calculating capacity involves the time available, efficiency of the company, as well as the utilization of their inputs; machine hours, labor hours, etc. Explain that Measuring Capacity is just a simple averaging problem, they take all the outputs from equal periods then divide them by the number of periods. Remember this is just an average. Here is a simple problem that allows participants a chance to use the new equation. Read the problem out loud then let them work on their own3-5 minutes for participants to work the problem out on their own. Then go through the problem step by step. This equation is important because it provides managers with an equation that will tell them what their Maximum capacity could be and what their Minimum Capacity could be. It is also important to point out that the variable that produce this capacity number are possibly different depending on the information had or provided. 5 minutes Give time for participants to solve the problem. This formal allows for business the calculate the time available in either labor or machine hours. We will get to the C = TxExU equation in the next step of this problem.Note that this is neither a minimum nor a maximum for the Ford factory. To determine that all that would need to be done is change all variables to either their min or max. However, as you can see the capacity is what was calculated in the Ford example. 5 minutes Using C=TxExU gives us calculated capacity. Calculated capacity is also now as rated capacity, nominal capacity, effective capacity and standing capacity. The previous part of the problem allowed us to find T the time available capacity of that Ford factory. Now that we have T we can add both efficiency and utilization to get the complete or nominal capacity of the factory. Based upon the number of work hours available multiplied by the fact that they are 98% efficient with their time and that they utilize 93 % of their time, the actual capacity based on standard hours will be 350 hours, instead of the 384 available. Definition comes from J.F. Cox and J.H. Blackstone, eds., APICS Dictionary, 9th ed. (Falls Church, Va: APICS, 1998). The actual output is what the organization is producing right now, the standard output. Please inform participants that the purpose for this efficiency equation is to measure how well a company, firm, or organization is doing compared to their standards they have set in the past. Thus it is used as a performance measure to identify employees how are not capable of meeting the standard (Blackstone, 1989)

Please explain that these are basic equations for finding efficiency. However, that users must be aware that they could change depending on what factors they are equating. Notice that standard hours were divided by actual hours when using hours. But when using units produced actual units were divided by the standard rate expected.2-3 minutes to try the problem on their own before moving on to the explanation.Use this slide to help go over the solution to the problem. Make sure people are clear on how this is done.3-5 minutes to try this problem. This problem is focused on units produce instead of hours.Remind participants of the difference in the equation when using units instead of hours. Then show them that the actual units produced that day was 1925 units. The difficult part may be in determining the Standard rate of production expected. Remember that if there is a standard of 250 units produced in one hour and there is 8 hours in a shift then the production expected will be 250x8=2000 units in one shift. This is just a continuation of the problem. 96.25% means that they made that percentage of what is considered the standard for that time period.Definition comes from J.F. Cox and J.H. Blackstone, eds., APICS Dictionary, 9th ed. (Falls Church, Va: APICS, 1998). Again, please inform participants that the purpose of this Utilization calculation, according to Cox and Blackstone, is to compare actual time used to the time available. This number gives companies a good idea of how they utilized their machines, work hours, and employees. However it may not be totally accurate because down time (the time in which machines are not utilized) can be caused by two factors. 1. Because the machine breaks down. 2. Because of lack of work. (Blackstone, 1989) These two factors need to be taken into consideration. Explain that Hours worked is figured by take the hours Available and subtracting the hours down which is given in the problem. Hours down could be due to machine break downs or failures or workers being sick. Whatever makes a company fully utilize their available hours. 5 Minutes. After giving participants time to complete the problem on their own, walk though it with them using the following slides. Remind then that we find available hours with the capacity equation that is shown above. When that number is found plug it into the Utilization function were it says Hours Available. Hours worked This has found us the Machine hours available for the company.The final answer tells has our utilization of the companies machine hours for a given time period.Fisheries in Europe are a great example of one who understands the importance of Capacity utilization. They have come to the realization that there is a need for understanding capacity and capacity management. Researchers found that about 50 percent of the worlds fisheries are fully exploited and are,producing catches that have either reached or are very close to their maximum limits (Pascoe, 2004) Thus the FAO has produced a plan of action which requires participants to develop capacity management plans by last year. They are using a number of methods to determine appropriate capacity levels and capacity utilization. Capacity Utilization is a major concern because of the economic consequences, underutilization results in foregone profits. This is an example of how companies are using these calculations to better their companies situation. These are some of the effects that over or under utilization can have on a company. It is important companies find the right amount of utilization and efficiency for themselves. Being 95% efficient and utilizing 93% of labor hours may be expectable and perfect for one company but not for another. Companies need to find what works for them.What works best for them is considered the Best Operating Level. This is the point at which the average cost of a unit is at its minimum and the company is most efficient. For a summary have the class discuss these questions without their notes this will provide a nice review for every one.This reading list contains books and articles which both explain Measuring and Calculating Capacity and also examples of companies using the information in their day-to-day operations.