Measuring Capacity: The Basics

By: Cameron Tidwell

December 12, 2006 Marriott School of Business - Brigham Young University

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SoWhat 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.

Wrights 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 organizations INPUTS.

(Blackstone, 1989)

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Units of Measurements
INPUTS

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
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OUTPUTS Number 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 Filled

An Car Dealership?
Cars sold, Cars serviced

What about your Organization?

?
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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?
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Measuring/Calculating Capacity
John H. Blackstones 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=TxExU
(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 Sluggers 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 Slugger
Step 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 factorys 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 12/12/2006 Measuring Capacity 17

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

-orEfficiency = 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 12.75

= .9412 x 100

Efficiency = 94.12%
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Lets 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 companys 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

2000
Efficiency = 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 100 Hours available Utilization = Hours worked x 100 Hours available
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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
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Calculating Utilization :
Second Step:
Utilization = Hours available hours down x 100 Hours available Utilization = (384 machine hours) (20 hours down) x 100 384 machine hours Utilization = 364 machine hours x 100 384 machine hours Utilization = 94.79 % = .9479 x 100

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Real World Example

Fisheries 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.
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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. 12/12/2006 Measuring Capacity 38

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., 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.

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