1

Production Capacity

Name

Affiliation

Course

Instructor

Date
 2

Introduction

Production capacity refers to the potential business process’s output using finite resources in a given

time under normally expected circumstances.

Production capacity can also be conceived as the maximum potential of the business to make use of

the prevailing budget and and raw materials/input to produce goods.

The production capacity is normally computed over a given time period that could be

days/weeks/months or even years.

Often, production capacity is presented in unites of finished goods produced in a given unit time.

For instance, 50000 chairs in a month(MBA Skool Team, 2015).

Importance.

During the designing of a business process, production capacity is very important helping in

establishment of the potential capacity that a business expects to be sold for the next few months or

years.

Basing on the anticipated capacity, one makes purchase of equipment, raw materials and other

inputs in that the capacity of production meets demand.

In cases where a business over invest in the production capacity whereas the market demand is less,

this implies that a lot of the goods produced might probably go to waste.

When the business fails to make use of the pre-planned capacity, it would then translate to business

losses on the invested money during building of capacity (MBA Skool Team, 2015).

Production Capacity factors

An efficient way to meet demand is shelled in the way one manages raw materials, time, employees

and storage.

 Raw materials that will be vital in the production of the final goods.
 3

 Labor is a resource that will be working in aiding machinery and make produce.

 Storage of both finished and and intermediate products will be accomplished in warehouses

to ensure that the inventory is maintained well.

 Another factor is machinery and equipment even their downtime.

 Production scheduling that could vary. For instance, 8 hours a day or 24 hours a day. Does it

include weekends?

 Delivery timeliness.

 Business conditions.

 Required output (MBA Skool Team, 2015).

How to increase production capacity

Every person can understand and relate that capacity can be raised by hiring of new staff and

purchasing of new equipment.

Nevertheless, in almost every production company, it is plausible to raise the production capacity by

utilizing the available resources.

 Better planning: In many cases when things seem to go contrary to the plan, work stops. The

small effects can have massive impacts that were not anticipated hence affecting across the

company.

 Business process improvement: For instance, backward scheduling could aid in material

procuring timely finishing of production. Similarly, it might also help in lowering inventory

and promote flow of cash.

 Make use of manufacturing methodologies to promote for instance the use of lean

manufacturing principles to get rid of waste. The theory of constraints identify and promote

bottlenecks SMED to cut down on change-over time.

To address short term solutions in raising the production capacity to substantiate abrupt shifts in

demand can be accomplished through:

 4

 Having employees work overtime or adding shifts: this could be applied more efficiently

where the work is accomplished manually or in case machinery is not already used in full

capacity.

 Outsourcing production: in this case, it can be accomplished when machinery is operating

under full gear and cannot accommodate any increase in capacity (MBA Skool Team, 2015).

How to determine production capacity.

Production capacity can be determined in several ways.

1. Measuring the capacity manually. This is a simple approach of determining previous

performances and making use of them to plan the future.

2. Rough-cut capacity planning- this is a method for general planning for long-term.

3. Capacity planning and scheduling- a method for accurate planning for short-term (Karl,

2021).

1. Manually measuring capacity

This method involves manually keeping count of the number of products pass through the entire

process of manufacturing in a given particular time when production is on full gear.

Nevertheless, this can only be accomplished in make-to-stock environments established on push

system basis and in make to order system that are pull based systems when there is high demand or

exceeding production capacity.

Be cautioned that;

 the system is simplistic and could be inaccurate.

 One will get to understand their historical capacity, there is no certainty of maintaining the

same capacity in future.

 It is improbable to assess ones production capacity utilizing this method in case a large mix

of different goods is produced (Karl, 2021).

2. Rough-cut capacity planning (RCCP)

 5

To have a more realistic production capacity idea, majorly when there is production of a mix of

goods one should make use of computations that consider;

 Productive hours per day: How many machine or people are working on a particular type of

product at a time? How many shifts are there in a day and how long are these shifts? What is

the mean downtime? When are the planned maintenance and holidays?

Products throughput time: What is the amount of time that is taken to make one product

from the beginning to the end.

Understanding these variables helps in determining the production capacity.

The production capacity can eventually be assigned to various product mixes to establish whether it

is plausible to meet demand and duration for the lead time.

3. Capacity planning and scheduling.

To establish capacity for the future period accurately, there is need for a detailed planning.

Manufacturing of every product need to be cut down into a sequence of workstations, operations

and their respective individual availability defined, consideration of material availability and lead

time, measure of setup times and any other schedule affecting details.

This can be accomplished with the use of the MRP software because doing so manually is difficult.

The software solution will make use of available constraints and information to provide a realistic

schedule.

Therefore, one needs to be aware that:

 Since there are numerous moving details, the method is most helpful when planning for

short-term. As a result of the butterfly effect, a minute change in short-term could result in a

dramatic shift in log-term plans.

 This method of computation is very resource intensive that needs use of specialized software

(Karl, 2021).

Production capacity formula.

 6

With the use of a formula, the mean annual production capacity could be computed as;

(Production capacity at the start of the year) + (Mean annual production capacity of the introduced

equipment during the year) – (Mean annual capacity of the removed equipment during the year).

This would aid in the computation of the production capacity of a business (MBA Skool Team,

2015).

Production capacity in an example.

Take for instance, a company produce 500 ml beverages bottles. There two different kinds of

machine in the company whereby one of the machines manufacture glass bottles whereas another

machine set manufacture drinks and fill glass bottles.

The two types of machines are required to work in synchrony. In cases where there are not

sufficient bottles of glass, there will be waste of beverages and vice versa.

Lets assume that the machines can perform for 15 hours a day.

If the first machine manufactures 10 bottles per minute, it implies that in 15 hours, the machine can

manufacturer 15 * 60 * 10 which translates to 9000 bottles on a particular day.

However, the second machine can produce only 1000ml of beverage in a minute implying that in 15

hours, it produces 15 * 60 * 1000 that translates to 9000000 ml on a particular day.

Therefore, with 9000000 ml of beverage and 500 ml bottles, only 188 bottles can be filled in a day

that represents the production capacity hence the company is in dilemma to either cut down on their

bottle manufacturing or raise their beverage making capacity.

Similarly, the ,market demand need to be put into consideration in order to ascertain the reasonable

convenient production capacity.

Capacity utilization rate.

 7

Capacity utilization rate is a vital KPI associated with production capacity. This shows the amount

of production capacity of the company that is under utilization and the amount that is being left

unused.

Usually, the CUR is presented as a percentage and is usually computed by dividing actual output

level by the production capacity multiplying that by 100.

capacity utilization rate = (Actual output/production capacity) * 100%.

The capacity utilization rate is very vital in understanding operational efficiency and costs and

pricing. Normally, the optimal preferred rate is 85%.

Capacity utilization rates that are higher translates to lower costs per unit that permits a company to

proffer products at lower prices and sell more or just raise their margin of profit (Karl, 2021).
 8

References

Karl. (2021, June 29). What is production capacity and how to calculate it? - MRPeasy. Blog for

Manufacturers and Distributors. https://manufacturing-software-blog.mrpeasy.com/production-

capacity/

MBA Skool Team. (2015, December 24). Production capacity - Meaning, importance, factors &

example | MBA Skool. MBA Skool. https://www.mbaskool.com/business-concepts/operations-

logistics-supply-chain-terms/15483-production-capacity.html