Capacity utilization

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What is capacity utilization?

Capacity utilization is a measure of how much of an organization's resources it is using. It's calculated by taking the total amount of available capacity and dividing it by the maximum possible output for that resource.

Where is capacity utilization used?

Businesses, manufacturing, and production teams use capacity utilization. They all measure it to ensure they are using their resources efficiently and to know how much energy they're consuming relative to what could be consumed if their entire system was working at total capacity.

How do you calculate capacity utilization?

To calculate capacity utilization, you need to know the following:

Your level of output (i.e., how many units were produced)
Your level of capacity (i.e., how many units could have been produced)

For a business to calculate its capacity utilization, it must know its production capabilities and the time it took for those products or services to be made. You can calculate your company's current capacity utilization by using this formula:

Capacity utilization

Available resources ÷

Maximum possible output

× 100%

For example, if you have 100 employees who can each produce 10 bottle caps daily, but you're only using 50% of their productivity (5 bottle caps per employee), your capacity utilization would be 50%.

What are the benefits of tracking capacity utilization?

Capacity utilization can determine if an organization is expanding or contracting. It also helps you determine if your business is profitable and how efficiently you use resources.

What is the capacity utilization rate?

The capacity utilization rate is the percentage of time that a product or service is being used. It's a measure of how efficiently a business uses its resources, and it can also be used to determine how well companies use their employees.

For example, if your company has 100 employees working full time at an average salary of $50K per year, they have invested $5 million in human capital. The question becomes: How much value are these members creating? If your company has 50 employees who can produce $10 million worth of revenue per year while working 40-hour weeks (including overtime), then this would indicate that your workforce is operating at 80% capacity utilization - meaning that you're getting 20% more output from the same amount of input.

How do you increase the capacity utilization rate?

One way to increase your capacity utilization rate is to invest in new equipment and preventive maintenance for this equipment. The more efficient your machines and tools, and the more upkeep you do on them, the better they'll be at doing their job and helping you meet production demand.
Another way to increase your capacity utilization is by hiring more workforce. This seems obvious enough, but many teams need to pay more attention to the long-term value of hiring more workers. Increasing headcount can increase productivity without investing too much in new technology.
Lastly, a good approach to increase your capacity utilization is by bridging a close working relationship between maintenance and production teams. Some organizations even set weekly meetings for these two teams to review production metrics (i.e., production volume). If something can be done faster or more efficiently, these teams can work together so that everyone gets what they need when they need it (and no one has any complaints). You can also reduce waste and inefficiencies by tracking which parts of each process take longer than others. Once these bottlenecks are identified and eliminated, everything becomes easier for everyone involved.

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Capacity utilization tells you how your resources are being used

Capacity utilization is a valuable metric that tells you how much of an organization's resources it uses. This can be helpful when deciding whether or not it makes sense for your company to expand its operations by buying more equipment or hiring more employees.