Capacity & Utilization

Capacity & Utilization

ELI5

Capacity is how much you CAN make. Utilization is how much you’re ACTUALLY making.

Pizza shop example:

• Your oven fits 10 pizzas at once (that’s your CAPACITY)
• Tonight you’re baking 7 pizzas (that’s your UTILIZATION)
• Utilization = 7 ÷ 10 = 70%

Is 100% good? NOT ALWAYS!

Place	Good Utilization	Why?
Emergency Room	30-40%	What if 10 ambulances arrive at once?!
Fire Department	20-30%	Can’t predict fires — need ready trucks!
Movie Theater	50-80%	Tuesday matinee = empty, Saturday = full
Train	80-90%	Same commuters every day = predictable

Simple Rule:

• Predictable demand → higher utilization OK
• Unpredictable demand → keep spare capacity!

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Mention in the Slides

Capacity: “The ability to hold, receive, store, or accommodate” [Chapter 5, Slide 4]

Business Definition: “In business, viewed as the amount of output that a system is capable of achieving over a specific period of time” [Chapter 5, Slide 4]

Capacity Utilization Rate: “A measure of how close the firm is to its best possible operating level” [Chapter 5, Slide 7]

Strategic Capacity Planning: “Determining the overall level of capacity-intensive resources that best supports the company’s long-range competitive strategy” — Facilities, Equipment, Labor force size [Chapter 5, Slide 6]

Enrichment

Capacity Types

Type	Definition	Formula
Design Capacity	Maximum output under ideal conditions	Theoretical maximum
Effective Capacity	Maximum output under normal operating constraints (maintenance, breaks, defects)	Design Capacity - Allowances
Actual Output	What is actually being produced	Always ≤ Effective Capacity

Capacity Utilization Rate

Formula: Utilization = Capacity Used ÷ Capacity Available

Interpretation:

• 100% = Operating at full capacity

• 100% = Overtime, overuse (unsustainable)

• <50% = Significant idle capacity

Strategic Implications:

• High utilization = Lower unit cost (fixed costs spread over more units) but less flexibility
• Low utilization = Higher flexibility but potentially wasteful

Best Operating Level

The output level that minimizes average unit cost:

• Too low: Fixed costs spread over few units = high cost per unit
• Too high: Overtime, equipment stress, quality issues = high cost per unit
• Just right: Economies of scale without overextension

Capacity Utilization and Service Quality

The relationship is CONTEXT-DEPENDENT:

Context	Optimal Utilization	Rationale
Emergency Room	30-40%	High uncertainty, high stakes — must have capacity for emergencies
Fire Department	20-30%	Cannot predict demand, but response time is critical
Commuter Train	80-90%	Predictable demand, can manage peaks
Postal Sorting	70-85%	Predictable volumes, automation reduces variability
Manufacturing	75-85%	Balance efficiency with maintenance and flexibility

Concept

Term	Definition	Relationship
Capacity Cushion	Reserve capacity to handle sudden demand	100% - Utilization Rate
Economies of Scale	Cost per unit decreases as volume increases	Drives high utilization strategy
Diseconomies of Scale	Cost per unit increases at very high volumes	Limits optimal utilization
Focused Factory	Factory specializes in narrow product mix	Achieves better utilization through focus

Examples

From Slides:

• Capacity Planning: A company determining facilities, equipment, and labor force size to support long-range competitive strategy [Chapter 5, Slide 6]
• Utilization Measurement: Measuring how close the firm is to its best operating level to assess efficiency [Chapter 5, Slide 7]

Enriched Examples:

• Restaurant Example:

  • Design capacity: 200 seats × 2 turnovers/night = 400 customers/night
  • Effective capacity: 200 seats × 1.5 turnovers (considering meal time, kitchen capacity) = 300 customers/night
  • Actual: 240 customers/night
  • Utilization = 240 ÷ 300 = 80%

• Semiconductor Fab:

  • Design capacity: 50,000 wafers/month (ideal conditions, no downtime)
  • Effective capacity: 42,000 wafers/month (maintenance, setup time)
  • Actual: 38,000 wafers/month (demand constraints)
  • Utilization = 38,000 ÷ 50,000 = 76% (vs. design) or 38,000 ÷ 42,000 = 90% (vs. effective)

• Hotel:

  • Design capacity: 500 rooms × 365 nights = 182,500 room-nights/year
  • Industry average utilization (occupancy): 65-70%
  • At 70%: 127,750 room-nights sold
  • At 90%: Would require turning away groups, overworking staff, maintenance backlog

Essay Angle

An essay might ask you to analyze optimal utilization for a given service operation or to explain the capacity-service quality relationship. Framework: (1) define capacity and utilization, (2) identify the service characteristics (uncertainty, stakes, customer contact), (3) recommend optimal utilization range with justification, (4) discuss trade-offs between efficiency and service quality.

MCQ Watch-outs

• Two Utilization Calculations: Can calculate vs. Design Capacity (theoretical) or Effective Capacity (realistic). MCQs may give both and ask which to use.
• Service vs. Manufacturing: In services, capacity is time-perishable (empty hotel room tonight can’t be sold tomorrow). In manufacturing, capacity can create inventory.
• Optimal ≠ 100%: Optimal utilization depends on context. Emergency services need low utilization; predictable services can handle high utilization.

Memory Aid

CAPACITY = Can Accommodate, Plan Appropriate, Increase Yield In Targeted Capacity

Utilization = “Used over Can”

• Used (actual output)
• over
• Can (capacity available)

Context Matters for Services:

• High Stakes + High Uncertainty = Low utilization optimal (ER, Fire)
• Low Stakes + Predictable = High utilization acceptable (Train, Postal)

Sources

Chapter5.pptx [Slide 3-8, 17-18]