Measuring the production capacity is a key aspect of managing a business, as it ensures that output levels can capitalize on customer demand and that the supply chain is not delayed.
By understanding their production capacity, management can gauge their productivity levels, allocate their resources more effectively, and gain insight into their ability to maximize profits.
What is Production Capacity?
Production capacity refers to the maximum level of products or services a business can create in a given period with their current resources. This can be calculated based on production throughout the day, week, or months.
Businesses will generally measure their production capacity to make adjustments to fulfill market demands and to monitor the utilization rate of their equipment. Additionally, it can provide visibility into a production process and how a business can efficiently manage existing employees, time, and inventory.
Some factors that affect production capacity are-
Current Stock of Raw Materials
Raw materials should be readily available for production to begin whenever necessary. This is helpful for businesses that experience changes in seasonal demands.
For example, during the holiday seasons, clothing retailers will typically have more customers seeking heavier coats and sweaters. In this instance, businesses should be prepared and have ample stock to meet these demands.
Human Resources and Labor
Businesses should have staff available to work or operate machinery at all times to ensure that production capacity is high.
Management can use a shift work system where a group of employees is scheduled to operate machinery during the day from 8 a.m. to 6 p.m. and have a second set of staff work during the night from 6 p.m. to 4 a.m. Doing so can help businesses increase the level of products they produce during the week.
Businesses should purchase and utilize equipment that functions optimally. This will reduce the time and expenses necessary to repair defective machinery. It will also minimize any delays in the production line.
Since the capacity of some equipment may decrease over time or from frequent use, machines should be inspected and recalibrated regularly. If necessary, obsolete equipment should be replaced promptly to ensure production capacity.
Proper Inventory Storage
Raw materials and stock items should be kept in adequate warehouses to ensure its quality is properly maintained before it is sold or used for production.
By conducting effective inventory management, businesses can keep track of inventory levels and monitor the shelf life of perishable products.
How to Calculate Capacity in Different Scenarios
There are various ways to calculate production capacity, depending on the number of products being considered. However, the basic formula to calculate production capacity is-
Production Capacity = Machine Hour Capacity / Time it Takes to Produce One Product
To fully understand production capacity, businesses must calculate the machine hour capacity of their manufacturing facility.
Machine Hour Capacity
This can be calculated with the formula-
Machine Hour Capacity = Number of Machines x Hours the Machine is Operated
For example, if a textile company has 50 sewing machines and all employees use the machine for a total of 16 hours a day, the daily capacity is 800 machine hours.
Production Capacity with One Product
To calculate the time it takes to manufacture one type of product, the basic production capacity formula can be used-
Production Capacity of One Product = Machine Hour Capacity / Hours it Takes to Produce One Product
Following the previous example of the textile company, if it takes a staff member half an hour (0.5 hours) to operate a sewing machine to make a curtain and the machine hour capacity is 800 hours, the production capacity would be 1,600 curtains per day.
Production Capacity with Multiple Products
Companies that produce more than one type of product will need to calculate their capacity for their wide range of output. They can use the following formula and insert variables for the number of products-
Machine Hour Capacity = (Number of Product 1 x Hours it Takes to Produce Product 1) + (Number of Product 2 x Hours it Takes to Produce Product 2)
For example, if the textile company also manufactures blankets and it takes 15 minutes, or 0.25 hours, to produce it using the sewing machine, management would solve the formula by plugging in-
800 = (A x 0.5) + (B x 0.25)
Variable A represents the number of curtains produced and it is multiplied by the hours it takes to create it. Variable B signifies the number of blankets produced and it is multiplied by the hours it takes to manufacture it.
One possible combination, after calculation, shows that 800 curtains and 1,600 blankets can be created in 800 machine hours.
4 Best Practices for Increasing Capacity
The best practices to increase production capacity are based on measuring manufacturing performance and implementing systems to optimize operations. The most common methods include-
1. Overall Equipment Effectiveness (OEE)
OEE can help businesses improve their manufacturing productivity by measuring how a company uses its facility, time, and resources, and comparing it to its full potential.
This enables management to make goals, implement adjustments to manufacturing, and measure their current progress in minimizing equipment losses, such as malfunctions.
To gauge the performance of their manufacturing processes, businesses can use the OEE score, which is calculated with the following formula-
OEE = Availability x Performance x Quality
2. Total Effective Equipment Performance (TEEP)
TEEP is a performance metric that measures the overall effectiveness of equipment and provides visibility into the capacity of a business's manufacturing operation.
This is recommended for managers who have control over when equipment is operated, such as production schedulers. TEEP will enable them to proactively utilize all machines and decide if new ones should be purchased.
The following formula can be used to calculate TEEP-
TEEP = OEE x (Planned Production Time / All Time)
3. Theory of Constraints
The theory of constraints is a method that allows business owners to identify constraints or limiting factors that prevent their company from meeting its performance goals. It also highlights improvements that can be made to minimize constraints and ensure that resources are used optimally.
By reducing bottlenecks to the manufacturing process, businesses can increase capacity.
4. Lean Manufacturing
Lean manufacturing is a production method that focuses on eliminating all forms of waste in the manufacturing process.
There are various lean manufacturing tools that businesses can implement to optimize their operation, such as continuous flow. This refers to the system of producing a product from start to finish without stopping, ensuring that goods are continuously sent to retailers or customers.
Many factors can affect a business's production capacity. By regularly measuring productivity and implementing the best practices to maximize output, businesses can boost their profitability and effectively conduct production planning.