What is Capacity Utilization?
Capacity utilization is of the utmost importance to manufacturers. It affects cost, customer satisfaction, inventory — nearly every aspect of the business. Sadly, not many people understand the importance of capacity utilization and how it differs from productivity and efficiency.
Simply stated, manufacturing efficiency measures how well a system is performing relative to existing standards, while productivity measures output compared to a specific input. Efficiency is usually expressed as a percentage of the actual output to the expected output.
Capacity utilization, on the other hand, is a measure of how well an organization uses its productive capacity. It’s the relationship between potential or theoretical maximum output and the actual production output.
While you can apply this ratio to any work center or piece of equipment in the factory, the result is meaningless unless you are looking at a bottleneck operation. By definition, all other work centers are expected to have some idle time, which affects utilization.
How to Improve Capacity Utilization
Improving processes to enable rapid changeovers can improve capacity utilization by eliminating lost time. Preventive maintenance can help by eliminating or reducing unplanned downtime. Both of these are critical activities in a bottleneck operation to ensure smooth operation in the factory and to prevent build up of inventory and delays in shipping orders.
Using rough cut capacity planning and master scheduling to smooth the operational plan will help by ensuring that the plant operates in a way that keeps the bottleneck operations running at peak performance.
What is Throughput Ratio?
The throughput ratio is closely aligned with capacity utilization. The throughput ratio metric compares actual throughput in either hours or units to the standard (expected) hours or units. The larger the ratio the better. The throughput ratio can be used at any work center, and this metric helps to zero in on efficiency or lack thereof.
How to Improve Throughput Ratio
Lean manufacturing can help improve throughput by eliminating non-value-added steps and wasteful practices. Ensuring that machinery and equipment is properly maintained can also improve performance, so keeping to a careful schedule of recommended maintenance can help.
It goes without saying that errors in bills of material and routings will adversely affect the accuracy of this metric, so a routine practice of checking standards can help. As with cycle counting, the idea is not to correct a single error, but to identify process problems that can allow recurring errors and correct the process.
Capacity Utilization vs Throughput Ratio: Which Metric to Choose?
When looking for the best way to measure the shop floor, both capacity utilization and throughput ratio may be viable metrics. If you have bottlenecks, definitely use utilization to ensure that work is flowing through the work center at peak rates.
Throughput ratio is a good choice if you are trying to reduce or eliminate waste, so it fits in well with a lean mindset. If lean plants are measured in terms of utilization, it can create a temptation to generate unneeded inventory in non-bottleneck work centers simply to raise the utilization rate.
Both capacity utilization and throughput ratio are included in QAD’s new Operations and Production Action Centers, which became generally available in the latest release of QAD Channel Islands. In addition, these metrics are included in QAD Operational Metrics. Users can also create custom reports in QAD Business Intelligence (BI) or by using browses. Regardless of how you decide to make the calculation, both of these metrics can help manufacturers operate more effectively.
What challenges are you finding most difficult when it comes to capacity utilization? Let us know in the comments section below.