Types of capacity
/What is Capacity?
The capacity of a work center is its maximum output level. At the level of an entire business, it is the maximum level of output that an organization can sustain to provide customers with goods or services. There are several ways to categorize capacity, as noted next:
Productive capacity. Productive capacity is the amount of work center capacity required to process all production work that is currently stated in the production schedule. This equipment should be the newest and best-maintained, to ensure that scheduled production can be completed on-time.
Protective capacity. Protective capacity is an additional layer of production capacity that is maintained to provide additional units as needed to keep the bottleneck operation from running out of work. This can be fine-tuned to ensure that a business has invested in just enough extra capacity to keep the bottleneck operation running. Beyond this point, it may be cheaper to outsource any additional production work on the rare occasions when it is needed.
Idle capacity. All remaining unused capacity is considered to be idle capacity. Only this layer of production capacity can be safely eliminated without impacting the ability of a work center to meet all anticipated needs. However, idle capacity should not be eliminated if there are occasional spikes in demand, since the extra capacity will be needed to deal with them. It is generally not cost-effective to eliminate idle capacity anyways, since the associated equipment tends to be the oldest and most run-down, and so has the least market value if you were to sell it.
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There are several other types of capacity that relate to an entire production facility. They are as follows:
Theoretical capacity. This is the amount of throughput that could be attained if a production facility were able to produce at its peak efficiency level with no downtime. Theoretical capacity should not be used for planning or bonus compensation purposes, since it is nearly impossible to attain in practice. Many factors can interfere with the ability of a facility to attain its theoretical capacity, including scheduled and unscheduled maintenance, raw material and labor shortages, equipment replacements, power failures, flooding and earthquakes.
Practical capacity. This is the highest realistic amount of output that a factory can maintain over the long term. It is the maximum theoretical amount of output, minus the downtime needed for ongoing equipment maintenance, machine setup time, scheduled employee time off, and so forth.
Operational capacity. This is the total output that a production facility can achieve under normal working conditions during regular operating hours. It represents the practical capability of a facility to produce goods or services, factoring in standard constraints such as employee work hours, routine maintenance, and standard operating procedures.
The Impact of Capacity on Management Decisions
If management decides to reduce the capacity of a work center, and the result is a reduction in protective capacity, it is likely that the bottleneck operation will eventually run out of material inputs, and so will stop production. The result is a decline in the throughput of the entire manufacturing facility that relates to the bottleneck operation, and therefore a reduction of total company profits.
Thus, any decision to reduce work centers should first consider the type of capacity that is to be eliminated, and how the reduction can impact the throughput of the business. In many cases, the cost reduction to be achieved does not offset the risk of reduced throughput.