Supply Chain Management: Measuring Capacity in Manufacturing
Capacity is the capability to produce output over a specific time
Capacity is often defined as the capability of an object, whether that is a machine, work center, or operator, to produce output for a specific time period, which can be an hour, a day, etc.
Some companies - those which don't have supply chain optimization as a core business strategy - ignore the measurement of capacity, assuming that their facility has enough capacity, but that is often not the case. Increasingly, software programs like enterprise resource planning (ERP) and warehouse management systems (WMS) calculate throughput based using formulas that are dependent on capacity.
Companies measure capacity in different ways using, as a measure, either:
- the input
- the output
- the combination of the two
For example, a recycling company calculates their capacity based on the amount of material they clear from the inbound trailers at their plant, while a textile company calculates capacity based on the amount of yarn produced, i.e. an output.
Companies use two measures of capacity, theoretical and rated. The theoretical capacity is defined as the maximum output capacity that does not allow for any downtime, while rated capacity is the output capacity can be used for calculation purposes as it is based on a long-term analysis of the actual capacity.
Within supply chain optimization and manufacturing and production management, there are three basic capacity strategies used by different organizations when they consider increased demand.
- The lead capacity strategy
- The lag capacity strategy
- The match capacity strategy
Lead Capacity Strategy
As the name suggests, the lead capacity strategy adds capacity before the demand actually occurs. Companies often use this capacity strategy, as it allows a company to ramp up production at a time when the demands on the manufacturing plant are not so great.
If any issues occur during the ramp-up process, these can be dealt with so that when the demand occurs the manufacturing plant will be ready.
Companies like this approach as it minimizes risk. As customer satisfaction becomes increasingly important, businesses do not want to fail to meet delivery dates due to lack of capacity.
Another advantage of the lead capacity strategy is that it gives companies a competitive advantage. For example, if a toy manufacturer believes a certain item will be a popular seller for the Christmas period, it will increase capacity prior to the anticipated demand so that it has product in stock while other manufacturers would be playing “catch up.”
However, the lead capacity strategy does have some risk. If the demand does not materialize then the company could quickly find themselves with unwanted inventory as well as the expenditure of ramping up capacity unnecessarily.
Lag Capacity Strategy
This is the opposite of the lead capacity strategy. With the lag capacity strategy, the company will ramp up capacity only after the demand has occurred.
Although many companies follow this strategy success is not allows guaranteed. However, there are some advantages to this method.
Initially, it reduces a company’s risk. By not investing at a time of lesser demand and delaying any significant capital expenditure, the company will enjoy a more stable relationship with their bank and investors.
Secondly, the company will continue to be more profitable than companies who have made the investment with increased capacity.
Of course, the downside is that the company would have a period where the product was unavailable until the capacity was finally increased.
Match Capacity Strategy
The match capacity strategy is one where a company tries to increase capacity in smaller increments to coincide with the increases in volume.
Although this method tries to minimize the over and under the capacity of the other two methods, companies also get the worst of the two, where they can find themselves over capacity and under capacity at different periods.
To optimize your supply chain, you need to be able to supply your customers with what they want, when they want it - and accomplish that by spending as little money as possible. By understanding and taking advantage of your facility's actual manufacturing and production capacity, you can accomplish this all-important supply chain optimization goal.
Updated by Gary Marion, Logistics and Supply Chain Expert.