Is your organization running at full capacity? Whether you know everything or nothing about capacity utilization, there’s always more to learn. Let’s start with a definition. Capacity utilization measures the extent to which your organization uses its productive capacity. Is your business running at full speed or is it trailing behind your competitors? Moreover, inefficiency and poor productivity can both result from low capacity utilization. Without tasks to keep staff occupied, they are likely to let their minds wander, and stray from your business objectives. As such, it’s imperative for you to keep the fires burning. Otherwise, your success is likely to get doused. Learn how you can improve your capacity utilization with Six Sigma.
Why is Capacity Utilization Important?
Don’t underestimate the importance of proper capacity utilization. By letting your business practices slip, you will start to fall behind your competitors. Problems like defect and waste can also accumulate over time due to lapses in your business practices. Remember, the ideal business should use capacity utilization as a measure of their productive efficiency. The more products you are producing, and the more efficient your process, the greater your success. Moreover, as output increases, your average production costs start to fall. What does this mean? It means higher utilization can significantly reduce unit costs to make your organization more competitive.
Furthermore, you should always aim for full capacity, that is, 100% utilization. Think of it like continuous improvement (Kaizen). It isn’t just a practice, but a mindset, a culture for you to cultivate in your employees and push for through your leadership. Problems like inefficiency from poor maintenance, low quality, and human error can all contribute to decreased capacity. Equally, a decrease in demand or insufficient technology to handle increased demand bring about the same issues. Not only does this demotivate your employees, but it can also reduce quality and minimize profits.
The Formula for Calculating Capacity Utilization
By ensuring your company functions at a high capacity, you can maintain a strong output. To calculate your business’s capacity utilization, all you need is this simple formula. Now, take note.
Actual output level / Maximum potential output x 100
This formula will give you a percentage, providing a clear picture of how your business is running. Take a look at the following example.
Capacity utilization for first quarter, 2017 =
45,000 / 50,000 x 100
= 90%
Now imagine you make mobile phones that people buy and sell the world over. If your actual output for production is 45,000, and your maximum potential output 50,000, your capacity utilization percentage is 90%. This is an ideal figure, but not quite as good as can be. In fact, in Six Sigma, 90% doesn’t come close to what we define as true success. The object of Six Sigma is to ensure 99.99966% of all opportunities yield zero defects. This works out at just 3.4 defects per million opportunities.
By applying Six Sigma ideas to your capacity utilization, you can make significant changes for greater results. Use Root Cause Analysis and fishbone diagrams to identify the cause of your low capacity. Once you have the answer, you can carry out Six Sigma improvement projects to target the problem and develop solutions.
No responses / comments so far.