Managing capacity post-lockdown
What is production capacity?
Manufacturer. If your company is a manufacturer, its production capacity is likely to include machinery plus skilled operators and their managers. It may also include its transportation, e.g. a fleet of refrigerated trucks. If you can make it but can’t deliver it, then it isn’t a sale.
Service provider. If your company is in the service industry, e.g. a consultancy, then its production capacity will be the number of trained people it employs to do the consulting or delivering the service. If demand for services is down, then this will result in fewer billable hours.
The three capacity categories
Productive. This is the capacity needed to make, do or deliver on current order levels. You should not be attempting to make cuts to this.
Non-productive. This is the capacity that is in use but not producing saleable goods or services. This is the capacity needed for maintenance, making spares, re-work, etc. Although non-productive capacity can be managed, it should not be eliminated.
Idle. Idle capacity is the remaining amount of capacity left in a company after productive capacity and non-productive capacity have been stripped out. It’s only the costs associated with this idle capacity that you should look to identify and cut.
Tip. Start by calculating the existing level of capacity in your business in the three different areas.
Example. Acom has 20 machines capable of producing 1,000 finished items each over a month. The pre-coronavirus monthly run rate of orders was 15,000 items. Bottlenecks ran to 1,000 items. Productive capacity was therefore 15 machines (15,000 items/1,000 items per machine month). Protective capacity for bottlenecks was one machine. Idle capacity was four machines (20 - 15 - 1).
How many orders? To understand the required capacity levels of each form of asset you will now need information from the sales department. Explain the purpose of the exercise so any forecasts are realistic. Next, build the order levels into your spreadsheet so that you understand maximum and minimum requirements as far into the future as possible. Tip. Work with the sales and production directors to establish the level of orders that need to be met and, therefore, how much productive and non-productive capacity is needed. Orders can be broken down into confirmed, certain, possible and therefore overall forecast. Compare this with the company’s total capacity to identify where cuts can be made in the idle capacity.
Bumpy ride
The different forms of capacity in your business will range from being very variable, e.g. stocks of raw materials to fairly variable, e.g. employees, to fairly fixed, e.g. large machines, to fixed, e.g. factory space. This will influence your ability to flex capacity.
Tip 1. Your analysis will demonstrate capacity shortfalls or excesses. Use this insight in meetings with production, warehousing and distribution as well as sales.
Tip 2. When reducing capacity take care not to eat into the protective capacity, otherwise bottlenecks could result in lost output and sales.
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