Production - capacity management

Author: Jim Riley Last updated: Sunday 23 September, 2012

Production & operations - Managing production capacity

Capacity can be defined as:

The maximum output that a business can produce in a given period with the available resources

Capacity is usually measured in production units (e.g. 1,000 cars per month, or 500 customers served per day). It is unusual for a business to used all its capacity all of the time.

The proportion of capacity that a business uses is known as capacity utilisation, and it is an important measure of how efficiently a business is operating.

When a business is operating at less than 100% capacity, it is said to have “spare capacity”.

Sometimes spare capacity is not the problem – a business finds itself with excess demand (i.e. it cannot produce enough to meet demand). In such circumstances, what can it do to operate at higher than 100% normal capacity? It can often:

Increase workforce hours (e.g. extra shifts; encourage overtime; employ temporary staff)
Sub-contract some production activities (e.g. assembly of components)
Reduce time spent maintaining production equipment

However, there are some potential pitfalls with operating at very high capacity (i.e. around 100%):