Capacity Utilisation

A firms productive capacity is the total level of output or production that it could produce in a given time period. Capacity utilisation is the percentage of the firms total possible production capacity that is actually being used. Capacity utilisation is calculated as follows: Capacity utilisation (%) = Actual output per month (or per annum) x 100% ___________________________________________________ Maximum possible output per month (or per annum) For example, if a firm could produce 1200 units per month, but is actually producing 600 per month, its capacity utilization is as follows: Capacity utilization % = 600 units per month x 100% 1200 units per month = 50% Financial implications A firms level of capacity utilization determines how much fixed costs should be allocated per unit, so as a firms capacity utilization increases, the fixed costs (and therefore also, total costs) per unit will decrease. For example, if the firm above had fixed costs of 12,000 per month, the fixed costs per unit would be 20 per unit at 50% capacity utilization, but only 10 per unit at 100% capacity utilization. It therefore follows that a firm should be most efficient if it is running at 100% capacity utilization. However, if a firm is running at full capacity, there are a number of potential drawbacks: There may not be enough time for routine maintenance, so machine breakdowns may occur more frequently and orders will be delayed It may not be possible to meet new or unexpected orders so the business cannot grow without expanding its scale of production Staff may feel under excessive pressure, leading to increased mistakes, absenteeism and labour turnover If the factory space is overcrowded, work may become less efficient due to the untidy working conditions It may be necessary to spend more on staff overtime to satisfy orders, increasing labour costs

NB these drawbacks are not to be confused with diseconomies of scale, which can arise from a firm operating on a larger scale e.g. by opening a larger factory. See separate revision note on economies of scale. In general, businesses would feel most comfortable at something between 80 to 90% capacity utilization because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out maintenance and training. A firm that has just invested in major new facilities in

anticipation of major growth could take some time before reaching a good level of utilization, so it is important to consider sales trends when discussing capacity utilization. Causes of under-utilization of capacity There are a number of reasons why a firm might be experiencing low capacity utilization, including the following: New competitors taking market share or causing over-supply in the market Fall in market demand due to changes in consumer tastes or fashion Unsuccessful marketing one or more aspect of the marketing mix may simply mean that the firm is not successful Seasonal demand this is especially apparent in the tourist industry where firms like hotels and leisure parks are full in the summer but see much lower utilization at other times of the year

Exam hint: In examination questions on this subject, look for clues as to the root causes of underutilization so that you can assess whether it is a long term problem or not, and what the firm could do to remedy the situation Problems arising from low capacity utilization Higher fixed costs per unit mean reduced profitability; if prices were raised to cover these costs, this would probably lead to reduced sales unless the product was price inelastic Spare capacity can portray a negative image, particularly in a business where it can be seen that it is no longer busy such as a shop or a health club - signifying loss of popularity Staff can become bored and demoralized if they dont have as much to do, especially if they fear losing their jobs

Benefits of low capacity utilization Low capacity utilization is unlikely to be desirable in the long term as the higher unit costs will make it difficult to compete. However it is not all bad news and possible short term benefits include: A firm may have more time for maintenance and repairs and for staff training, to prepare for an upturn in trade There may be less stress for employees than if they were working at full capacity The firm can cope with new orders; firms in expanding markets may expect to have low utilization whilst they build their sales

Capacity Leveling in Plant Maintenance and Service Management

Uses
In Plant Maintenance and in Service Management you can use the functions of capacity leveling to schedule the work at work centers. The objective is to utilize the capacity which is made available by the individual work centers as efficiently as possible, given that the requirements change daily.

Prerequisites

Presupposed knowledge If you want to implement capacity leveling for plant maintenance or service management effectively in your company, then you need to know about the following subjects: Work center in plant maintenance and in service management (see Capacity Leveling in Plant Maintenance and Service Management: o o o o Customizing To make optimal use of capacity leveling you must make settings in Customizing for plant maintenance and service management. The system administrator generally makes the settings. You can find information on settings in Customizing necessary for carrying out capacity leveling in MRP and MPS in Settings and profiles for capacity leveling. Messages Orders Routings Preventive maintenance plans work centers)

Process Flow
1. In plant maintenance and service management capacity requirements arise from measures to be taken in the form of maintenance orders. The limited available capacity of the work centers must be compared with capacity requirements which have been generated by a request and dispatched. 2. When the planner has entered the required work center in the operation of the maintenance order and has scheduled and saved it, the capacity requirements requested are dispatched to the work center. This means that the work is only "provisionally" assigned to this work center. 3. Because of the large number of orders that are required both due to ongoing maintenance and service and regular maintenance, it is often impossible to achieve uniform utilization of all available maintenance work centers directly when creating orders. Generally, more capacity is planned for some work centers than is available, while other work centers have remaining available capacity. To achieve uniform utilization, the planner must regularly carry out capacity leveling. 4. For capacity leveling the planner chooses one of the capacity planning tables and uses the following capacity leveling functions among others: Explanation Function Dispatching The maintenance planner can take individual operations/splits from among the operations/splits that have not been dispatched and dispatch them to specific planning periods at a work center. When dispatching the maintenance planning defines that the maintenance measures are to be carried out by the work center and thus reduces the available capacity at the work center. The dates of the dispatched operations/splits are not changed if the order is

rescheduled! The maintenance planner can also dispatch operations to another work center than the one originally specified in the operation.

Splitting

The maintenance planner can, if necessary, split operations. That means that he can specify the following for every individual operation: The operations are to be processed by several people, if necessary in specific time periods. The operation is to be processed by a single person at specific times.

Deallocating

On the planning table the maintenance planner can deallocate individual operations from certain planning periods for a maintenance work center. By deallocating he reverses the dispatching of the execution of maintenance tasks by the maintenance work center. He can reschedule the deallocated operations by dispatching them to another planning period.

Changing an Order

The maintenance planner can specify during capacity planning on the planning table that data in the maintenance task or service order must be changed and he can make these changes.

Displaying the available capacity

The maintenance planner can display on the capacity planning table an overview of the available capacity for a work center over several planning periods. On the planning tables you can find this function under Goto Capacity Display capacity.

Changing the available capacity

The maintenance planner can change the available capacity of a maintenance work center in the individual planning periods on the capacity planning table. On the planning tables you can find this function under Goto Capacity Display capacity.

Importance:
Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, "capacity" is the maximum amount of work that an organization is capable of completing in a given period of time. The main purpose of the capacity planning is Reduce cost and improve productivity

The real issues involve a number of things, including: correct methodology for capacity planning; network design and cost considerations; and organizational and budget considerations.

Why Capacity Factor Matters to Energy Production One topic that is often overlooked when comparing the pros and cons of various energy sources is capacity factor (CF). CF is a measure of the performance of a power source over time as a percentage of its full power potential. A power plant with a 50% capacity factor would operate at 100% power 50% of the time. Conversely, a plant that operated at 50% power 100% of the time would also have a CF of 50%.

The Grid Needs Stability

Capacity factor is important not only because it reflects the performance of a generating station, but also because a higher capacity factor represents a more stable power grid. Imagine what happens to the grid when a natural gas turbine shuts down. The demand, or load, on the grid remains the same, but that power has to come from somewhere, i.e. another generator. Power plants with a high capacity factor are valuable because they are reliable enough such that they rarely strain the grid. Consequently a power supply with a low capacity factor would most likely require redundant and diverse backup systems to ensure that power is not interrupted during periods of low/no generation. So what are the capacity factors of the various energy choices? According to the US Energy Information Administration (EIA), in 2007 the capacity factors were as follows: Combined Cycle Natural Gas Plant11.4% Oil13.4% Hydroelectric36.3% Renewables (Wind/Solar/Biomass)40% Coal73.6% Nuclear91.8% As you can see, capacity factor varies considerably.

Expensive Fuels, Intermittent Sources, Equipment Failures

Most gas turbines sit idle during normal load condition due to the high cost of natural gas. During the peak of summer when air conditioners are running, demand (and cost) rises and the turbines fire up to cash in on the valuable power. Otherwise, it is not cost effective to run the turbines. 2009 numbers are not yet available, but it is likely that with the decline in the price of natural gas, the CF would increase. The US currently gets more than half of its electricity from coal fired plants. At 73.6% CF, coal represents reliable base load generation. Base load refers to those power plants that are expected to operate 24/7. The missing 26.3% is primarily due to equipment problems caused by the aging and lack of maintenance on the nations coal fired plants. You will notice that renewables manage just a 40% CF. While wind, solar, and biomass have the obvious environmental benefits and low/no fuel related cost, the intermittent nature of a low capacity factor means that backup generation capabilities are required to be in standby. This tends to be the expensive, and carbon emitting natural gas, or the more expensive additional wind and solar generation with massive arrays of batteries to store that extra power for the 60% timeframe when there is nothing being generated. Without base load generation, renewables alone would result in an unreliable power grid with devastating consequences for the country.

Reliable Nuclear Energy

Nuclear far exceeds any other source in capacity factor. In 1979, when the Three Mile Island event occurred, the average capacity factor of the nations nuclear plants was at 58.4%. At that time, regulations on the maintenance of safety equipment were far more lax resulting in frequent unplanned shutdowns. After the TMI event, the Institute of Nuclear Power Operators was formed and tighter standards were put in place. Now, with an absolute intolerance for unexpected equipment failures, nuclear plants around the country are operating at better capacity than ever before despite the ongoing aging of the nuclear fleet. Also improved over the year was the organization of refueling outages. Every two to three years, a reactor must shut down to refuel approximately half or one third of the fuel in the reactor. In the 1970s and 1980s, refueling took months on end as there

was little prior experience to draw from. In 1990, the average duration of a refueling outage was 104 days. Now, a reactor can be refueled safely, quickly, and efficiently such that the average duration is just 38 days with many plants doing the job in considerably less time. The resulting improvement in the capacity factor of nuclear power plants since 1990 alone has supplied 230 billion kilowatt hours of added electricity every year making nuclear power the most reliable source of electricity available today.
capacity factor, plant factor

Capacity factor is a value used to express the average percentage of full capacity used over a given period of time. For example, a generating facility which operates at an average of 60% of its normal full capacity over a measured period has a capacity factor of 0.6 for that period. Capacity factor can apply to an individual generating unit or any collection of generating units. Plant factor refers to the capacity factor of an entire generating facility including all available generating units.

Capacity Development Process The diagram below shows UNDPs articulation of the cyclical nature of the capacity development process. The capacity development process, including capacity assessment and definition of capacity development strategies, is integrated into the planning and programming process at the level of MDGbased strategies, poverty reduction strategies as well as UN Common Country Assessments and UNDAFs. This process is prescriptive in nature, as it is embedded in UNDPs Results Management Guide. 2.2 Capacity Assessment Framework The Capacity Assessment Framework is composed of three dimensions: Points of Entry: UNDP recognises that a countrys capacity resides on different levels enabling environment, organisation and individual and thus needs to be addressed across these levels. A capacity assessment team selects one level as its point of entry, and may zoom in or zoom out from that level as needed. (Capacity assessments at the individual level are generally conducted within the context of an organisational assessment; as such, they are not addressed in detail in the Practice Note on Capacity Assessment or this Users Guide.)

 Core Issues: These represent the issues upon which UNDP is most often called to address. Not all of these issues will necessarily be analysed in any given assessment, but they provide a comprehensive set of issues from which a capacity assessment team may choose as it defines its scope: 1) leadership; 2) policy and legal framework; 3) mutual accountability mechanisms; 4) public engagement; 5) human resources; 6) financial resources; 7) physical resources; and 8) environmental resources. The issue of a human rights based approach serves as an overlay on 4 United Nations Development Programme, May 2007 any capacity assessment (it can either overlay all selected cross-sections or act as a stand-alone core issue). Cross-Cutting Functional Capacities: Specific functional capacities are necessary for the successful creation and management of policies, legislations, strategies and programmes. UNDP has chosen to prioritise the following functional capacities, which exist at all three points of entry and for all core issues: 1) engage in multi-stakeholder dialogue; 2) analyse a situation and create a vision; 3) formulate policy and strategy; 4) budget, manage and implement; and 5) monitor and evaluate. Capacity Development Strategies The formulation of capacity development strategies is based on the findings of a capacity assessment. These capacity development strategies may be applied to address capacity needs in a variety of sectors, and are predicated on integrated approaches to development: Institutional Reform and Incentives Leadership Capacities Education, Training and Learning Accountability and Voice Mechanisms 3. Benefits of the Default Capacity Assessment Methodology 5

United Nations Development Programme, May 2007 Many capacity assessment methodologies, frameworks and tools are used by development practitioners. Using the default Capacity Assessment methodology may benefit users in a variety of ways: Provides a comprehensive view of the issues that could be addressed in a capacity assessment Brings rigor and a systematic method to determining future capacity needs and assessing existing capacity assets Creates a common language to facilitate discussion among potentially disparate parties Provides a structure for discussion about the scale and scope of the capacity assessment exercise and about expectations of the capacity development effort more generally Provides a method for generating quantitative as well as qualitative data to support the development of a capacity development action plan Makes sense of complex development situations, when it is not always obvious where best to intervene to promote capacity development Improves the consistency, coherence and impact of the work of UNDP Increases the ability to share experiences