If you were to ask the layman about what percentage they believe a manufacturing plant should produce relative to its maximum, they might say 100%.
This would be incorrect.
Optimal capacity utilization is the sweet spot between too much and too little production. If a factory produces 100% of its maximum output, it is likely to experience bottlenecks, waste, and inefficiency.
On the other hand, if a factory only operates at 50% of its maximum output, it is wasting money on underused resources. The goal for any business should be to find that happy medium between over and under-utilization of capacity.
In this article, we will examine:
- What is capacity utilization in manufacturing?
- How do you calculate capacity utilization?
- What is a good manufacturing capacity utilization?
- A capacity utilization example
Ready? Crank up that conveyor belt and let’s get started!
What is capacity utilization (in manufacturing)?
Capacity utilization is a metric that measures the amount of output produced by a manufacturing plant relative to its maximum potential output. It is typically expressed as a percentage.
This important key performance indicator (KPI) helps businesses to track efficiency and optimize production while making sure they have room for sudden increased market demand if necessary. It can be used for individual factories, assembly lines, or even specific pieces of machinery.
One of the hardest things to understand for many businesses is when to slow down. If a company can produce more, it may be tempted to do so to meet customer demand and increase profits.
However, this can often lead to over-utilization of resources, which can then cause bottlenecks, waste, and inefficiency. The goal is to find that happy medium between too much and too little production.
How to calculate capacity utilization
The capacity utilization formula is relatively simple:
Capacity Utilization = (Actual Output / Maximum Potential Output) x 100
For example, if a factory has the potential to produce 10 widgets per hour but is only producing 8 widgets per hour, its capacity utilization would be:
(8/10) x 100 = 80%
When calculating capacity vs utilization, you need two pieces of information:
- The maximum potential output of the manufacturing plant
- The actual output of the manufacturing plant
The first piece of information is usually easy to find. Most businesses have a good understanding of their production capabilities.
The second piece of information can be more difficult to track down. You will need data on the number of products or services produced by your manufacturing plant over a specific period.
This can be done by tracking output at the individual machine level, or by tracking overall production for the plant.