4.3 Key Capacity Measures and Performance Indicators
In capacity planning, two critical measures are invaluable tools for assessing and optimizing operational performance: design capacity and effective capacity.
Design Capacity represents the maximum theoretical output rate or capacity as envisioned by the system’s design specifications. It is a benchmark for the absolute upper limit of production capabilities under ideal conditions.
Effective Capacity, on the other hand, is a more pragmatic measure that accounts for real-world constraints and allowances. It is derived by subtracting factors such as planned downtime, maintenance, and other operational inefficiencies from the design capacity. Effective capacity provides a more realistic estimate of the achievable output rate, given the practical limitations of the production environment.
These two capacity measures are the foundation for calculating two essential performance indicators: efficiency and utilization.
Efficiency is a measure of how effectively the available effective capacity is being utilized. It is calculated as:
Utilization, conversely, quantifies the extent to which the maximum design capacity is being leveraged. It is calculated as:
Utilization = (Actual Output ÷ Design Capacity) × 100%
By monitoring and analyzing these performance indicators, organizations can gain valuable insights into their operational performance, identify areas for improvement, and make informed decisions regarding capacity optimization strategies. High efficiency and utilization rates may indicate the need for capacity expansions, while low rates could signal the presence of bottlenecks, inefficiencies, or excess capacity that requires adjustment.
Example
Actual production last week = 25,000 units
Effective capacity = 28,000 units
Design capacity = 230 units per hour
Factory operates 7 days/week, three 8-hour shifts
- What is the design capacity for one week?
- Calculate the efficiency and utilization rates.
Solution
(Using the formulas above)
- Design capacity = (7 × 3 × 8) × (230) = 38,640 units per week
- Utilization = 25,000 ÷ 38,640 = 64.7%
Efficiency = 25,000 ÷ 28,000 = 89.3%
The following video summarizes the above concepts in capacity planning.
Video: “Capacity Planning – Overview and Key Concepts” by LeanVlog [2:55] is licensed under the Standard YouTube License.Transcript and closed captions available on YouTube.
“7 Strategic Capacity Planning” from Introduction to Operations Management Copyright © by Hamid Faramarzi and Mary Drane is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.—Modifications: some paragraphs rewritten; added additional explanations; added video.
