Halil SATIK

Industrial Engineering Department, Dokuz Eylul University, Turkey

 

CAPACITY UTILIZATION

Extent or level to which the productive capacity of a plant, firm, or country is being used in generation of goods and services. Expressed usually as a percentage, it is computed by dividing the total capacity with the portion being utilized.

ABSTRACT

WHAT IS THE CAPACITY UTILIZATION? Capacity utilization is an economics concept which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. Thus, it refers to the relationship between actual output produced and potential output that could be produced with installed equipment, if capacity was fully used.

Production capacity is usually defined in terms of the following three factors:

Factors of production that is used in production activities of company,

Product which is obtained as result of utilization of production factors,

Being of the whole occupations and efforts of production within a certain period of time,

Consequently, the production capacity is said that business will bring about the amount of production by using the factors of production in a rational manner in a certain period of time.

PRODUCTION CAPACITY 

Three types of capacity are often referred to:

Potential Capacity

Immediate Capacity

Effective Capacity

TYPES OF CAPACITY

The capacity that can be made available to influence the planning of senior management (e.g. in helping them to make decisions about overall business growth, investment etc). This is essentially a long-term decision that does not influence day-to-day production management

Potential Capacity

The amount of production capacity that can be made available in the short-term. This is the maximum potential capacity - assuming that it is used productively.

Immediate Capacity

An important concept. Not all productive capacity is actually used or usable. It is important for production managers to understand what capacity is actually achievable.

Effective Capacity

Capacity, being the ability to produce work in a given time, must be measured in the unit of work.

For example, consider a factory that has a capacity of 10,000 " machine hours" in each 40 hour week. This factory should be capable of producing 10,000 "standard hours of work" during a 40-hour week.

MEASURING CAPACITY

The actual volume of product that the factory can produce will depend on:

the amount of work involved in production (e.g. does a product require 1, 5, 10 standard hours?

any additional time required in production (e.g. machine set-up, maintenance)

the productivity or effectiveness of the factory

The capacity utilization rate, also known as the capacity utilization ratio, is a percentage-based ratio that applies to the actual productivity of a business or country. It specifically references the ratio between true output – what is actually produced, and potential output – what could be produced.

CAPACITY UTILIZATION RATE

In general, maximum actual output of a company is always going to be less than 100% due to the actual resources. it possesses, human factors including employee output, machinery limitations and maintenance

Capacity utilization rate reveals how close a firm is to its best operating point.

Capacity used rate of output actually achieved Best operating level capacity for which the process was designed

Example of Capacity Utilization RateDuring one week of production, a plant

produced 83 units of a product. Its historic highest or best utilization recorded was 120 units per week. What is this plant’s capacity utilization rate?

Capacity determination is a strategic decision in plant planning or factory planning. Capacity decisions are important because:

I. They have a long-term impact. II. Capacity determines the selection of

appropriate technology, type of labor and equipments, etc.

III. Right capacity ensures commercial viability of the business venture.

IV. Capacity influences the competitiveness of a firm.

DETERMINATION OF CAPACITY

a) Market demand for a product/service. b) The amount of capital that can be

invested. c) Degree of automation desired. d) Level of integration (i.e. vertical

integration). e) Type of technology selected.

Factors affecting determination of Plant Capacity:

f) Dynamic nature of all factors affecting determination of plant capacity changes in the product design, process technology, market conditions and product life cycle, etc.

g) Difficulty in forecasting future demand and future technology.

h) Obsolescence of product and technology over a period of time.

i) Present demand and future demand both over short-range, intermediate-range and long-range time horizons.

j) Flexibility for capacity additions.

Growth opportunities of the facility in future, the development plans of the facility for the future, Scale value of the facility that took place in the

economic sector, Efficiency, productivity and profitability are targets

which is anticipated by the facility Funding opportunities which can be benefited by the

facility, Technological level and production methods, Production Types Production quality assurance / security, Demand / sales level

Factors which will be cared while a capacity of plant is being examined:

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