Innovating to Improve Capacity Utilization

Ramu I.


For any business, one of the worst things that can happen is for expensive plants and machinery to sit around not being fully utilized because this can cost a great deal of money. However, the optimal utilization of capacity can be hindered by many factors such as the shortage of materials, the lack of adequately trained personnel and supply chain bottlenecks, rendering capacity optimization never as easy or straightforward as it sounds. Nevertheless, in order to maximize return on the investment in your production facilities, it is absolutely essential to utilize capacity as efficiently as possible.

Planning and Optimizing Manufacturing

Planning and scheduling in some detail can often help in making the most of your resources such as plant and machinery, materials and people. Drawing up contingency plans can help you to react almost instantaneously to any changes required in production (caused, for example, by unexpected shifts in demand or in the availability of resources) so that you can continue to produce goods as optimally as possible in new circumstances.

It is almost always possible to maximize efficiency at every stage of production from the raw material stage to the dispatch of finished products. Real-time information on capacity utilization can help you to analyze production performance at any level you choose, from entire plant to single machine, and to identify any improvements that you can see.

Maximizing Capacity Utilization via Business Model Innovation

Many of the more interesting start-ups in recent years are based on maximizing capacity. Many of these high-tech start-ups operate by coordinating demand for capacity with sources of underutilized capacity. For example, AirBnB gives people the opportunity to rent out space that they do not use, helping them to increase the capacity utilization of their houses. Uber allows drivers the opportunity to rent out time that they do not use thereby increasing the capacity utilization of their cars.  Can technology and some of these new and innovative business models be developed or leveraged by your firm to maximize capacity utilization in low demand times?

Some firms on the other hand are completely (re)structured in order to maximize capacity utilization.  One example of this is Southwest Airlines, which has been consistently profitable for more than four decades. The airline industry lives or dies on occupancy or capacity utilization.  From the beginning, Southwest's driving force has been the fact that for every minute their airplanes and staff were not utilized, it was costing them money without generating any revenue. The system that they designed to meet their utilization objectives included eliminating the hub and spoke model, which resulted in cascading delays, getting rid of meals to cut down on extra time required on the ground and using only one type of aircraft to minimize delays due to maintenance.  Sometimes tweaking your business model can also be a way to maximize capacity utilization.  This is especially helpful in industries that are PP&E (plants, property and equipment) intensive such as hotels, airlines, rental companies, hospitals, etc.

The Limits to Increasing Capacity Utilization

Capacity utilization should be high enough to keep costs at a minimum but not so high that there is absolutely no flexibility in responding to growth opportunities or fluctuations in demand. Generally speaking, these problems start to arise above a level of about 85% capacity. In other words, lower utilization levels create the opportunity for increasing output in the future. High utilization levels limit the downside risk by reducing costs but also limit the upside gains from fulfilling increased demand.

At the end of the day, capacity utilization maximization is a method for increasing profitability that businesses in industries even outside of manufacturing can take advantage of. The science of increasing the efficiency of a plant, an airplane, a house or even a car is a field that isn't new, but there's still plenty of room to grow and new opportunities to exploit.