Types of Capacity

Home >> Throughput Topics

The total capacity at each work center is divided into three parts. The first is productive capacity, which is that portion of the total work center capacity needed to process currently scheduled production. The second part is protective capacity, which is that additional portion of capacity that must be held in reserve to ensure that a sufficient quantity of parts can be manufactured to adequately feed the bottleneck operation. Any remaining capacity is called idle capacity. Only idle capacity can be eliminated from a work center.

If the capacity to be eliminated is protective capacity and not idle capacity, then the constrained resource will not have any inventory on which to work, and must shut down until its inventory inflow can be replenished. Thus, the reduction in capacity in order to cut costs may seem like a reasonable decision in the short term, until such time as a sufficiently large manufacturing problem results in a throughput drop precisely because of the missing capacity. Consequently, cost reduction must be exercised with great care in order to avoid capacity cutbacks.

Podcast

A discussion of throughput concepts is available on Episodes 43 through 47 of the Accounting Best Practices podcast.