When a factory isn’t running as well as it could be, it can lead to problems in production output, customer satisfaction, and overall efficiencies within a business. And, above all else, it can waste important time and resources that should be used to increase revenue and grow the business.
All leaders in the manufacturing industry want their factories to be running as optimally as possible to avoid these outcomes. In order to achieve this goal, capacity utilization is an important metric that can be used to determine how effectively factories are running and where there is room for improvement. It helps organizations understand what their inputs and outputs are, and at what points within their manufacturing process they can implement better practices.
Capacity utilization is used outside of manufacturing by economists who want to determine if the economy is reaching its full potential. It takes into account how factors like the federal reserve and interest rates are helping contribute to the full utilization of economic resources. However, it has a very different definition in a manufacturing setting.
In the manufacturing industry, capacity utilization refers to the potential output of a factory, versus its actual output of products. It represents the potential production and manufacturing abilities that a company has, and measures the ratio between potential and realized outputs.
It’s important for businesses to track capacity utilization in order to understand where they stand as far as output goes. If everything within the factory was running optimally, how much would the factory be able to produce? This provides a helpful baseline, and allows businesses to see how far below that line they are currently operating.
To measure capacity utilization, take the actual output over a set period of time and divide it by the total potential production capacity. Then multiply that number by 100 to get a percentage:
Capacity utilization = actual output / potential output x 100
For example, if a business had the potential capacity to create 100 widgets in a week, but only creates 83 widgets per week on average, then the percentage of capacity utilization would be 83%, with a 17% gap between actual output and potential output.
83 widgets created / 100 potential widgets = .83 x 100 = 83%
KPIs, or key performance indicators, are important metrics that help you understand a specific objective. They can be used to help you understand if you’ve achieved the goals you’ve set, or if you’ve come up short somewhere. As a KPI, capacity utilization helps manufacturers understand where they aren’t performing as well as they could be in order to reach their maximum potential capacity.
Different metrics that come into play when considering manufacturing capacity utilization might include:
Let’s take a step back and walk through an example of manufacturing capacity utilization in action. Say that you own a factory that produces wooden dining tables. You know that the factory has been underperforming, and the reports that you’ve generated seem to point towards a capacity issue. There are contributing factors, like the poor use of raw materials and long cycle times, that are causing your utilization to decrease rather than increase over time.
In order to calculate the capacity utilization in this example, you first need to figure out what your total capacity is. Let’s say that your machines are capable of producing 300 dining tables a week if they are running for the full length of the shift without interruptions. However, your factory is only producing 230 a week. That means that your capacity utilization percentage is 77%, with a 32% gap.
Your next step is to determine where that lack of efficiency is coming from. Examining KPIs like the cycle time of a table and the amount of raw material going to waste will allow you to use the capacity utilization KPI to identify areas of improvement, and parts of your process to optimize.
Increasing utilization in your company is an important step in avoiding downtimes, slowdowns, and wasted resources. There are a few different strategies you can implement that can help you boost your manufacturing capacity utilization percentage and get your factory back on track:
Lean manufacturing is a principle that centers around avoiding all forms of waste in the manufacturing process. Waste is often one of the reasons why businesses don’t reach their maximum capacity, and their actual output doesn’t match their potential output. By implementing lean manufacturing principles into your workplace, you avoid excess waste and bottlenecks that can slow down production and lead to lower capacity utilization.
Overall Equipment Effectiveness, also known as OEE, is a term used to describe manufacturing productivity in regards to equipment. When equipment and machines aren’t working optimally, you can use availability, performance, and quality indicators to determine where slowdowns or mistakes are occurring. Once you identify the problem areas, you can shift your focus to bringing everything back up to standard.
While there are a few common issues with the ways in which machines are monitored, proper monitoring equipment and software solutions can help you realize your machines’ effectiveness, improving your OEE and your capacity utilization in the process.
TEEP, or the total effective equipment performance metric, is another important factor that you should keep an eye on. It helps to determine the true capacity of your entire manufacturing operation. While OEE tracks productivity over a scheduled production time, TEEP takes a more all-encompassing approach to the total productive time of your organization.
When used in conjunction with OEE and the capacity utilization ratio, you can account for a wide range of losses that can have an impact on your productivity and production. Once you identify those issues, you can come up with a plan to rectify them in order to create more stability and optimal practices in your business.
Capacity utilization is a term that is used to create a ratio between your business’s potential capacity output, and its current level of output. It can also find the excess capacity within the factory floor and help with forecasting future outputs. Boosting the percent of capacity that a factory has can improve customer relations, make production processes smoother, and help identify areas of concern in equipment or machines.
However–you can’t improve something, if you’re not measuring it in the first place!
If you want to get a better understanding of how your machines are operating and collect more data from your equipment, then check out Amper’s machine monitoring tools. You’ll be able to create better reports, pull important data points in real-time, and avoid costly machine maintenance issues. Contact us today to get started.
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