Types of capacity
/What is Capacity?
The capacity of a work center is its maximum output level. At the level of an entire business, it is the maximum level of output that an organization can sustain to provide customers with goods or services. There are three ways to categorize capacity, as noted next.
Productive Capacity
Productive capacity is the amount of work center capacity required to process all production work that is currently stated in the production schedule. This equipment should be the newest and best-maintained, to ensure that scheduled production can be completed on-time.
Protective Capacity
Protective capacity 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. This can be fine-tuned to ensure that a business has invested in just enough extra capacity to keep the bottleneck operation running. Beyond this point, it may be cheaper to outsource any additional production work on the rare occasions when it is needed.
Idle Capacity
All remaining unused capacity is considered to be idle capacity. Only this layer of production capacity can be safely eliminated without impacting the ability of a work center to meet all anticipated needs. However, idle capacity should not be eliminated if there are occasional spikes in demand, since the extra capacity will be needed to deal with them. It is generally not cost-effective to eliminate idle capacity anyways, since the associated equipment tends to be the oldest and most run-down, and so has the least market value if you were to sell it.
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The Impact of Capacity on Management Decisions
If management decides to reduce the capacity of a work center, and the result is a reduction in protective capacity, it is likely that the bottleneck operation will eventually run out of material inputs, and so will stop production. The result is a decline in the throughput of the entire manufacturing facility that relates to the bottleneck operation, and therefore a reduction of total company profits.
Thus, any decision to reduce work centers should first consider the type of capacity that is to be eliminated, and how the reduction can impact the throughput of the business. In many cases, the cost reduction to be achieved does not offset the risk of reduced throughput.