Capacity utilization is a percentage measure or KPI which indicates the amount of available capacity that is being used to supply current demand. It is a good indicator of business and market conditions as when times are good most plants are able to run at close to 70-80% capacity utilization and in some cases all the way up to 100%.
Capacity utilization is calculated by:
Capacity Utilization = Capacity utilized or gross production / Optimum capacity or production level
The use of capacity utilization as a KPI
Capacity utilization is a widely used KPI and operational measure in many industries in the strategic capacity and business planning functions of many organizations. It can be used as a measure which helps determine optimum timing of capacity expansions, entry into new markets, market exits, cost curves for different manufacturers and profitability.
Capacity utilization, along with other information, can also be used in operations and production management to calculate the average marginal cost of production, the split between fixed and variable costs, inventory , manning, overtime costs, and engineering/maintenance costs.
The Capacity Utilization figure can vary among different industries,inventory/production models, stock building cycles, seasonal demand cycles, and warehousing practices. It is important to set the aim capacity utilization rate with consideration to customer demands first and the other factors mentioned above. It may be that several aim rates will be set for different times in a year or business cycle.
When Capacity utilization is at a high level it is important that most gross production is actually saleable production. This means the production process must produce minimal waste, monitor its safety stock levels and be efficient. Lean manufacturing principles are valuable in achieving these required efficiencies, as a lean well run production process will maximize revenue for the business and also cut down customer lead times.
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