Unused Capacity is Gone Forever
by Jay Jacobus
There are many ways for managers to view their discipline and no single way will serve every manager all the time. Rather, successful managers must be able change perspectives at a moments notice. Managers must be able to take one perspective when dealing with employees and a different perspective when dealing with customers. They will need to be able to talk the shop talk, the quality talk, the finance talk, the investor/owner talk, the admin talk, the accounting talk and even the computer talk. With each person they deal with, they must change hats to be able to see that person's point of view and to respond appropriately and intelligently. As they are doing their jobs they may need to know about process control, improvement, resource analysis, purchasing, order entry, calibrations, accounting and engineering as well as planning, scheduling, training, managing and troubleshooting.
The ability to see a different perspective is a strength that most managers have and use effectively, but many times their change in focus happens intuitively. In other words the manager naturally assumes the appropriate perspective for the situation he finds himself in. I advocate changing perspectives, not as a reaction, but as a deliberate technique to discover new ways of thinking and acting.
Companies who hire outside consultants do so for the consultant's ability to bring new insights to old operations. In fact this is an important service that consultants can provide. They can often identify effective procedures which may be unfamiliar to managers. They bring knowledge but they also bring the ability to see uncommon possibilities in the operations they evaluate.
Managers can develop the same awareness by reading and considering new management ideas.
Managers who never think outside the box should begin asking themselves, "How can I look at my operation to uncover possibilities that I am missing?"
One uncommon concept that managers can think about is capacity.
Capacity is the maximum possible output of a resource - a machine, a person, a department, a system, a plant or a company.
In many companies, capacity is never addressed directly. The owners and top management know that they must have enough capacity to fill demand for their products and services, but they do not measure, evaluate and change capacity until productivity fails to meet demand. Then they will take action to provide more capacity. They may or may not analyze capacity before they act.
The manager who wants to learn about capacity should have 2 goals:
He should want to utilize excess capacity when demand is low and
He should want to create capacity when demand goes up.
The shrewd manager may want to consider his excess capacity because the work provided by excess capacity is extremely inexpensive and therefore marketable. If a machine costs $60 an hour to run for 30 hours a week, then how much does it cost to run for another 10 hours? Some people might say $600, but this is wrong. The costs for depreciating (or leasing) the machine, renting the machine's space, paying the machine's share of overhead and paying for machine's maintenance is already taken into account in the 30 hours the machine typically runs. There are costs to running the machine for an additional ten hours but those costs can be inexpensive. The costs include wear and tear on the machine, extra fuel or electricity, material (inputs), profits and labor (however, if the machine is idle for 10 hours a week, labor may also be idle for 10 hours a week. If so, the labor cost is already included in the 30 hours at $60).
Let's say that $1500 a week goes for the machine regardless of whether it is running or not. Let's call this the machine's fixed weekly costs. Then, if the machine runs for 30 hours, the fixed costs on an hourly basis is $50.00 (=$1500/30). The other $10.00 goes for costs that are incurred only if the machine runs.
If the machine runs for 10 additional hours the $1500 fixed expenses stays the same. Only the actual running costs of $100 are incurred. I, as a smart business man, should be able to offer $120 for the unused capacity and the owner of the plant should be happy to make the $20 profit.
Perhaps, in my roll as capacity broker, I might find some other owner that needs capacity to get all his orders out on time. If he is desperate, he might actually be willing to pay more than his usual hourly manufacturing rate. Perhaps I can sell him 10 hours of extra capacity at a price of $65 an hour.
What would happen? He would send me the raw material, tooling, traveler, processing instructions and inspection requirements. He would also send me a purchase order for 10 hours of production in a plant that does same work he does. I would send everything except the purchase order to the plant that sold me their capacity. Instead of the $65 purchase order I would send my own purchase order for 10 hours of capacity at a cost of $12 per hour.
Everyone is happy. The owner with the excess capacity makes $20 more than he would make if the capacity were wasted. The owner with the need for capacity would get his production shortfall covered for only $5 more than his usual hourly costs. I would get $530 for my troubles. Everyone is happy.
The astute reader might be saying, "Why do we need you? You get the majority of the money and do very little."
Yes, that's true but, without me, the exchange of capacity won't ever happen and the two plant owners will be stuck. One will have 10 hours of useless capacity. Since he can't bank capacity, once it's gone it's gone. While $20 is next to nothing, it is better than absolutely nothing. The other owner will acquire 10 hours of needed capacity.
But wait a minute!
Is there another way to look at this situation?
The real message is, "The owner with the unused capacity is being foolish by letting his plant sit idle for 10 hours." He is thinking in the box. Certainly he can do something with the capacity other than sell it to me for $2 an hour profit. Certainly he can make some product of some value that exceeds $2 an hour profit. He can make candles or cupcakes or ball point pens or tee shirts or anything except waste the capacity that he has available to him. I say, "Even if he can't sell what he makes in the short term he should still make something because products can be stored but unused capacity is gone forever."
An alternative message is, "The owner can spend up to $50 an hour to acquire the needed demand at $60 per hour." In other words, the owner should pay salesmen a bonus for new business, he should have a marketing blitz, he should give large incentives for first time buyers, he should donate work/products to charities or he should make sales kits for marketing.
So this is message one: Don't get hung up on $60 an hour just because that is the standard cost for production when your plant is fully employed. When your plant is not fully employed, take whatever work you can get that more than covers your variable costs. Of course if the only work available is less than your variable cost, don't take it. You will be losing money just to keep running.
The message is the same for unemployed executives, "retired" workers, consultants, lawyers, doctors, hotel owners, farmers, salesmen, etc.
The message is different for plant owners with too little capacity. "Congratulations, you have more orders than you can handle." Here are some tips on how to deal with a shortage of capacity.
Identify the bottleneck. The bottleneck is the department, machine or person that is holding up the rest of the plant. Eliminate the bottleneck and productivity will go up.
Use excess capacity in other parts of the operation to temporarily fix the shortage in another part of the operation.
Analyze resources. Is any resource (facility, machine, person) running less then expected (or required). Evaluate. Resolve. (Maximize)
Machines are cheaper than people. Buy or upgrade before hiring new trainees.
Use sub contractors when subcontractors are cheaper than running overtime.
Run overtime only for short term capacity problems.
Add another shift if the increased demand is expected to persist.
Evaluate processing instructions, inspection points, paper flow, computer software, management procedures for redundancies, waste and inefficiencies.
Streamline.
Increase productivity goals.
Ask employees for productivity ideas.
Go to piece work.
Institute process controls - monitor, evaluate, modify
In summary capacity is a good thing but the small business manager must know how to use it and he can start by thinking outside the box.
