*Intended learning outcomes: Explain the determination of rated capacity as the product of theoretical capacity, capacity utilization, and work center efficiency. Produce an overview on other capacity definitions and their relationship to each other, such as demonstrated capacity, productive capacity, protective capacity, excess capacity, idle capacity, and activation.*

Section 1.2.4 already presented basic definitions around *work center* and *capacity*. This chapter presents them in a more detailed way.

Depending
on the type of work center,
different capacities will be used *as the primary basis* for capacity
management and for allocating costs:

*Machine capacity*(referred to as*machine hours*, when using hours as the capacity unit), that is, the capacity of machines and equipment to produce output, is frequently used for parts manufacturing.*Labor capacity*(referred to as*labor hours*, when using hours as capacity unit), that is, the capacity of workers to produce output, is frequently used for assembly or stores.

These concepts are part of the *capacity determination*, as shown in Figure 14.1.1.1.

**Fig.
14.1.1.1** Determination
of capacity. Rated capacity is the product of theoretical capacity, capacity
utilization, and work center efficiency.

*Theoretical capacity* is the maximum output capacity, with no adjustments for unplanned downtime, determined by the number of shifts, the capacity theoretically available for each shift, and the number of machines and workers. The value thus determined applies up to a given boundary date, after which the calculation factors may change.

Theoretical capacity can also
vary from one week to the next in response to *foreseen*, overlapping
changes that must be taken into account, such as

*Scheduled downtime*, that is, downtime due to individual workers’ vacations or for preventive maintenance, for example.*Scheduled overtime*due to additional shifts, for instance.

*Planned capacity utilization* is a measure of how intensively a resource should be used to produce a good or service. Traditionally, it is the ratio of actual load to theoretical capacity. There are two distinct factors in capacity utilization:

- *Availability (in capacity)*: Downtime due to breaks, cleaning tasks, clearing up, unplanned absences, breakdowns, etc., must be considered for each work center. These losses are considered by the availability factor (hours actually worked / hours available).

- *Tactical underload or underutilization*: To avoid long queue times (see Section 13.2.3) or for non-bottleneck capacities or nonconstraint work centers, the desired capacity utilization should generally be less than 100%.

The measurement of *actual capacity utilization* cannot as a rule be broken down according to the two factors. This
is the main reason for capturing availability and tactical underload in one
factor, namely, capacity utilization.

The *work center* *efficiency *(or *efficiency rate*)* *is the ratio of “standard load to actual load,” “standard hours produced to actual hours worked,” or “actual units produced to standard units to produce” (see [APIC16]), averaged over all the operations performed at the center.[note 1401].*Rated capacity* is the expected output capability of a work center. It is defined as theoretical capacity times planned capacity utilization times work center efficiency.

We should therefore consider *standard load *to be scheduled (that is, load on the basis of standard setup and run loads) to *rated capacity*, and not to theoretical capacity.

The *overall equipment effectiveness* (OEE) includes the achieved quality. OEE can be defined as planned capacity utilization times work center efficiency times the yield factor.

In principle, rough-cut planning uses the same attributes, usually applied to fully utilized work centers at the level of the department or entire plant. The capacity of a rough-cut work center is thus not necessarily equal to the sum of all the individual capacities concerned.

There are other capacity-related terms that are useful for capacity management.Figure 14.1.1.2 shows possible relations among the terms. The definitions are based mainly on [APIC16]. Barry Firth, CPIM, Melbourne, contributed the figure and the explanations.

**Fig.
14.1.1.2** Some
capacity definitions and their relationship to each other.

*Demonstrated capacity* is proven capacity calculated from actual performance data, expressed in standard hours (for job shop) or production rate (for flow shop).*Maximum demonstrated capacity* is the highest amount of actual output produced in the past, when all efforts have been made to optimize the resource.

Demonstrated capacity is a practical measure of capacity available in job shop manufacturing. The alternative of working with rated capacity (see below) is not as easy as it seems, because there are practical difficulties in measuring the utilization and efficiency factors.

*Productive capacity* is the maximum of the output capabilities of a resource (or series of resources) or the market demand for that output for a given time period.

Where the productive resource or system of linked resources is identified as the system constraint, its productive capacity is its maximum achievable output and should usually be based on 168 hours of available time per week (24*7; otherwise, TOC (theory of constraints) practitioners would say that this is not a true constraint. Where the system constraint is the market demand, productive capacity may be relative to a smaller number of hours per week.

*Protective capacity* is quantifiable capacity that is or can be made available at a nonbottleneck capacity to protect against fluctuation (idle time) of the bottleneck capacity. Technically, protective capacity provides contingency against unplanned events only, such as breakdowns and rework requirements.*Safety capacity* is quantifiable capacity that is available over and above productive capacity that includes an allowance for planned events, such as on-shift plant maintenance and short-term *resource contention* (that is, simultaneous need from a common resource), and for unplanned events. It includes “protective capacity.”*Excess capacity* is defined as output capability at a non-constraint resource that exceeds the productive and protective capacity required.*Idle capacity* is defined as capacity that is generally not used in a system of linked resources. It consists of protective capacity and excess capacity.*Activation* is defined as the use of non-constraint resources to produce above the rate required by the system constraint, in this context a bottleneck capacity.*Budgeted capacity* is the volume and mix of throughput on which financial budgets were set, for the purpose of establishing overhead absorption rates for calculating standard costs of products, expressed in standard hours. This really should be called *budgeted load*.

## Course section 14.1: Subsections and their intended learning outcomes

##### 14.1 Fundamentals of Capacity Management

Intended learning outcomes: Produce an overview on capacity, work centers, capacity determination, and capacity management techniques.

##### 14.1.1 Capacity, Work Centers, and Capacity Determination

Intended learning outcomes: Explain the determination of rated capacity as the product of theoretical capacity, capacity utilization, and work center efficiency. Produce an overview on other capacity definitions and their relationship to each other, such as demonstrated capacity, productive capacity, protective capacity, excess capacity, idle capacity, and activation.

##### 14.1.2 Overview of Capacity Management Techniques

Intended learning outcomes: Differentiate between infinite loading and finite loading. Identify the characteristics of algorithms for sufficient overall capacity planning flexibility and little overall capacity planning flexibility. Produce an overview on techniques for infinite loading and for finite loading.