Defining and Measuring Capacity in Operations Management

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Table of Contents

Introduction
Design Capacity and Effective Capacity
Efficiency and Utilization
Conclusion
References

Introduction

Capacity planning is an integral part of operations management. Generally defined as the maximum output rate achieved by an organization, there are two additional essential concepts: design capacity and effective capacity. These two rates are, in their turn, used for defining two measures of system effectiveness. This paper aims to discuss and contrast the aforementioned types of capacity and present two ratios of system effectiveness – efficiency and utilization.

Design Capacity and Effective Capacity

There are two definitions of capacity that provide necessary measuring methods of the organization’s output. While design capacity is “the maximum output rate or service capacity an operation, process, or facility is designed for”, effective capacity is measured by extracting allowances, equipment maintenance costs, delays, changing the mix of products, and other factors from the design capacity (Stevenson, 2014, p. 188). This difference is essential as design capacity reflects the rate under ideal conditions. Therefore, the effective capacity is always less as it considers actual circumstances that the organization can find itself in.

Efficiency and Utilization

Efficiency and utilization are two measures used for defining system effectiveness. Both are expressed as percentages and calculated as ratios of actual output to different types of capacity. Thus, efficiency considers effective capacity, and the capacity utilization ratio includes design capacity. Although both ratios allow the organization’s management to assess its operations’ effectiveness, it is essential not to overlook any of them and consider these concepts equally.

The example of a delivery company can illustrate this significance. If it has a design capacity of offering delivery service to 100 deliveries per day, but due to lunch breaks, delivery car maintenance, and other factors such as traffic situations and logistics problems, the effective capacity drops to 70 deliveries. With the actual output of 50 orders, the efficiency ratio would be entirely satisfactory and equal to 71%. However, compared to the design capacity of 100 orders per day, the utilization ratio would be only 50%. These numbers could signify the necessity to address the existing issues and work on particular factors that decrease the effectiveness.

Conclusion

Design capacity and effective capacity allow an organization to measure its output both in ideal and given circumstances. Based on these concepts, two ratios – efficiency and utilization – can be computed and expressed in percentages. The obtained results can serve as a foundation for operating decisions to improve organizational activities’ effectiveness and address the issues that might undermine the capacity utilization and effective capacity.

References

Stevenson, W. J. (2014). Operations Management. McGraw-Hill Education.

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Defining and Measuring Capacity in Operations Management

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