Measuring Capacity: The Basics

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Measuring CapacityThe 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

• 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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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 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 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
• 2700200019002400 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

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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
• 12.75
• 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 .9479 x
  100
• 384 machine
  hours
• Utilization 94.79

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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.

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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.