INSTALLED CAPACITY: WHAT IT CONSISTS OF, FACTORS AND EXAMPLES - DUDAS - 2024

The installed capacity is the maximum yield that can be produced in a production plant or company in a given period, using the resources you have available at a given time. It is an important aspect of the production system; it is a measure of efficiency that can be adjusted in such a way that production matches demand.

If demand is greater than capacity, then the customer cannot be supplied. On the other hand, if the capacity is greater than the demand, you will have many idle workers and machines, which is not good either.

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Understanding installed capacity allows a company to estimate future financial performance and establish a schedule for product delivery.

Some companies that do not have supply chain optimization as a core business strategy ignore measuring capacity assuming their facilities have sufficient capacity, but that is often not the case.

Enterprise resource planning (ERP) software programs and warehouse management systems calculate performance based on capacity-dependent formulas.

What is the installed capacity?

Installed capacity is a dynamic value that changes with improvements in technology, labor efficiency, and the organization of production and work.

It is defined as the maximum output that an organization can produce with available resources in a given period. Installed capacity can be calculated based on a single product type or a mix of products.

It is generally measured in units of production. For example, 50,000 meals per day or 1,000 cars per month.

This ability could have changes. For example, if a machine is undergoing maintenance, the installed capacity is reduced during the time the machine is stopped for this reason.

It is also linked to workforce planning. For example, installed capacity can be increased by working more production shifts.

Capacity increase

Capacity can be increased to meet an immediate real increase or anticipate a future increase in customer demand. Immediate capacity increases are generally achieved by:

- Use existing equipment for longer, adding overtime or shifts.

- Using the equipment of another company, which is known as outsourcing.

On the other hand, future increases in installed capacity are generally achieved through:

- Use existing equipment in a more effective way, improving processes.

- Purchase of new equipment, which implies an expense.

Loss of capacity

Before considering adding shifts or overtime, outsourcing, or purchasing new equipment, make sure you understand and consider the untapped potential that exists in the current factory.

It can be divided into two categories, each of which represents a restriction on capacity:

Equipment losses

This is the capacity lost due to the equipment operating at less than its full potential.

In fact, the difference between a typical manufacturing (60% rating) and a best-in-class manufacturing (85% rating) represents an astonishing 41.6% increase in installed capacity.

Programming losses

It is the capacity lost due to the time the computer is not scheduled to run.

Factors to determine installed capacity

Machine-hour capacity

To determine the installed capacity, the machine-hour capacity of the manufacturing plant is calculated as a first step.

For example, suppose a plant has 50 production equipment. Workers can use these machines from 6 am to 10 pm, or for 16 hours a day.

In hours, the daily capacity of the plant is 16 hours multiplied by the 50 machines, which would be 800 machine hours.

Installed capacity with a single product

Planning installed capacity for a single product is a fairly straightforward calculation.

How long it takes to produce a unit of the product is established, then dividing the daily plant capacity in hours by the time it takes to produce an item to reach the daily production capacity.

Suppose a worker spends half an hour (0.5 hours) on a machine to make a product and the machine-hour capacity is 800 hours. So the installed capacity will be 800 divided by 0.5. This results in 1,600 articles per day.

Installed capacity with multiple products

Calculating installed capacity for a product mix can be more complex. For example, suppose that in addition to making products that take half an hour, the company also makes parts that take 15 minutes (0.25 hours) on the machine.

In this scenario, the number of products multiplied by 0.5 plus the number of pieces multiplied by 0.25 must equal the total capacity per hour, which is 800. The equation for these two variables is solved: number of products and amount of pieces.

A possible combination for 800 machine hours could be the production of 800 products and 1,600 parts.

Utilization rate

If the installed capacity is known, it will be possible to measure how well that capacity is being used. The utilization rate is an indicator of the percentage of capacity with which a company performs.

The installed capacity utilization rate will be: actual production / potential production.

For example, suppose a company has the capacity to manufacture 1,800 items per day, yet produces only 1,500.

So the utilization rate would be 1,500 / 1,800, or 83.3%. The higher the percentage, the closer the company will be to performing at full capacity.

Installed capacity should be estimated every year. The average annual installed capacity is also estimated, defined as:

Installed capacity at the beginning of the year + Average annual capacity of equipment introduced during the year - Average annual capacity of equipment withdrawn during the year.

Examples

Installed capacity is the volume of products or services that can be delivered by an organization's operational resources.

Resources include factors such as land, labor, facilities, infrastructure, and machines. Below are examples that illustrate what installed capacity is.

Infrastructure

The installed capacity of a solar power plant is 25 megawatts based both on the equipment as well as on the solar modules that are currently in operation at the site.

Information technologies

A software platform has an installed capacity for 9,000 concurrent users, taking into account limitations such as the structure of the network.

Manufacture

A production line has an installed capacity of 400 units per hour, taking into account the speed of the slowest machine on the line.

References

1. Business Dictionary (2019). Production capacity. Taken from: businessdictionary.com.
2. Vorne (2019). Increase Manufacturing Production Capacity. Taken from: vorne.com.
3. Madison Garcia (2018). How to Calculate Production Capacity. Bizfluent. Taken from: bizfluent.com.
4. Martin Murray (2019). Supply Chain Management: Measuring Capacity in Manufacturing. The Balance Small Business. Taken from: thebalancesmb.com.
5. All About Lean (2015). What Is Your Production Capacity? Taken from: allaboutlean.com.