capacity utilization

Industrial Engineering Department, Dokuz Eylul University, Turkey
Extent or level to which the productive capacity of a
plant, firm, or country is being used in generation of
goods and services. Expressed usually as a percentage,
it is computed by dividing the total capacity with the
portion being utilized.
Capacity utilization is an
economics concept which refers
to the extent to which an
enterprise or a nation actually
uses its installed productive
capacity. Thus, it refers to the
relationship between actual
output produced and potential
output that could be produced
with installed equipment, if
capacity was fully used.
Production capacity is usually defined in terms of the
following three factors:
 Factors of production that is used in production activities
of company,
 Product which is obtained as result of utilization of
production factors,
 Being of the whole occupations and efforts of production
within a certain period of time,
Consequently, the production capacity is said that
business will bring about the amount of production by
using the factors of production in a rational manner in a
certain period of time.
Three types of capacity are often referred to:
Potential Capacity
Immediate Capacity
Effective Capacity
Potential Capacity
The capacity that can be made available to influence
the planning of senior management (e.g. in helping
them to make decisions about overall business growth,
investment etc). This is essentially a long-term
decision that does not influence day-to-day
production management
Immediate Capacity
The amount of production capacity that can be made
available in the short-term. This is the maximum
potential capacity - assuming that it is used
Effective Capacity
An important concept. Not all productive capacity is
actually used or usable. It is important for production
managers to understand what capacity is actually
Capacity, being the ability to produce work in a given
time, must be measured in the unit of work.
For example, consider a factory that has a capacity of
10,000 " machine hours" in each 40 hour week. This
factory should be capable of producing 10,000
"standard hours of work" during a 40-hour week.
The actual volume of product that the
factory can produce will depend on:
 the amount of work involved in
production (e.g. does a product require
1, 5, 10 standard hours?
 any additional time required in
production (e.g. machine set-up,
 the productivity or effectiveness of the
The capacity utilization rate, also known as the
capacity utilization ratio, is a percentage-based ratio
that applies to the actual productivity of a business or
country. It specifically references the ratio between
true output – what is actually produced, and potential
output – what could be produced.
In general, maximum actual output of a company is
always going to be less than 100% due to the actual
resources. it possesses, human factors including
employee output, machinery limitations and
 Capacity utilization rate reveals how close a firm is
to its best operating point.
 Capacity used
rate of output actually achieved
 Best operating level
capacity for which the process was designed
 During one week of production, a plant produced
83 units of a product. Its historic highest or best
utilization recorded was 120 units per week. What is
this plant’s capacity utilization rate?
Capacity determination is a strategic decision in plant
planning or factory planning. Capacity decisions are
important because:
They have a long-term impact.
II. Capacity determines the selection of appropriate
technology, type of labor and equipments, etc.
III. Right capacity ensures commercial viability of the
business venture.
IV. Capacity influences the competitiveness of a firm.
a) Market demand for a product/service.
b) The amount of capital that can be invested.
c) Degree of automation desired.
d) Level of integration (i.e. vertical integration).
e) Type of technology selected.
f) Dynamic nature of all factors affecting
determination of plant capacity changes in the
product design, process technology, market conditions
and product life cycle, etc.
g) Difficulty in forecasting future demand and future
h) Obsolescence of product and technology over a
period of time.
i) Present demand and future demand both over
short-range, intermediate-range and long-range time
j) Flexibility for capacity additions.
 Growth opportunities of the facility in future,
 the development plans of the facility for the future,
 Scale value of the facility that took place in the economic
 Efficiency, productivity and profitability are targets which
is anticipated by the facility
 Funding opportunities which can be benefited by the
 Technological level and production methods,
 Production Types
 Production quality assurance / security,
 Demand / sales level