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Research Outline

Prepared for Jairek R. | Delivered April 5, 2021

Identifying the Maximum Capacity of a Business

Goals

To understand the steps/formula/strategies used in determining the maximum capacity of a business to help with a business model growth capacity.

Early Findings

  • Capacity management is defined as the process of ensuring "a business maximizes its potential activities and production output—at all times, under all conditions."
  • The capacity of a business calculates how much companies can achieve, produce, or sell within a given period.
  •  Process capacity refers to the production capacity of workers or machines expressed in hours.
  • The process capacity of workers is referred to as human capacity, while that of machines is known as machine capacity.
  • As per Accounting Tools, the capacity of a work center can be categorized into three:
    •  Productive Capacity: This is the amount of work center capacity required to process all production work that is currently stated in the production schedule.
    •  Protective Capacity: This is an additional layer of production capacity that is maintained to provide additional units as needed to keep the bottleneck operation from running out of work.
    •  Idle Capacity: All remaining unused capacity is considered idle. Only this layer of production capacity can be safely eliminated without impacting the ability of a work center to meet all anticipated needs.
  • According to an article published by Your Small Business Growth, one of the easiest ways of determining the maximum capacity of a business is by first, calculating the length of time for a person working around the clock to complete one unit of the service or make one unit of a product. This is referred to as your cycle time.
  • The next step is to multiply the total number of available work hours by the number of employees that complete the production/service process, then dividing the value obtained by the cycle time.
  • The above calculation gives the maximum number of units (maximum capacity) a business could produce.
  • The maximum revenue could be determined by multiplying the maximum capacity by the average price per unit.
  • A second source, Chron, outlined four major factors of consideration when trying to determine a business's maximum capacity. They include;
    •  Potential Output: This is determined by calculating the number of units that can be produced per hour in each stage of the manufacturing process while considering the limitations of the business machinery and staffing process and using the smallest number as the measure of the overall capacity.
    • For example, "if your product goes through three processes, one of which allows you to produce 1,000 units per hour, another that does 900 units per hour and the third that can do 1,200 units per hour, your capacity is 900 units per hour."
    •  Reasonable Downtime: This entails incorporating the downtimes (such as service or maintenance time) of machines used in the manufacturing process or break time for humans when rendering a service.
    • For example, "if you can produce 900 units per hour when your machine is running smoothly but the machine requires 15 minutes of service every four hours, this reduces your capacity. Calculate the fraction of downtime and subtract this fraction of your output to get your full capacity when you consider reasonable downtime. In this case, 15/240 is 0.0625 downtime, so calculate 900 - (900*0.0625) to obtain an output of 843 due to reasonable downtime."
    •  New Purchases: This involves the purchase of new equipment or machinery to substitute for a slow or faulty one.
    •  Manpower: This entails calculating the maximum number of units that an individual worker could produce per hour and multiply the result by the number of workers and the number of hours each person works during the time frame of interest.
    • For example, "if a salesperson could call up to eight potential customers per hour and you have five salespeople each working 40 hours per week. Multiply 8 by 5 by 40 to calculate a full capacity of 1,600 calls per week."
    • Mathematically;
    • Human capacity = actual working hours x attendance rate x direct labor rate x equivalent manpower (it is obtained by converting direct labor hours of actual working hours to the capacity of a worker with normal skills) .
    • Machine capacity = operating hours x operating rate x the number of machines.