Production capacity

The production capacity is the capacity that a productive unit has to produce its maximum level of goods or services with a series of available resources. For its calculation, we take a certain period of time as a reference. This indicator is widely used in business management. Since, if a production unit is producing below its production capacity, this unit is not being exploited at its maximum performance.

If we want to obtain increases, as well as decreases, in production capacity, these are linked to investment or divestment processes. In other words, if we want to increase the production capacity in a factory, the company must invest in a new machine that has the capacity to produce more.

Finally, we must bear in mind that production capacity is always measured taking into account an optimal use of resources, as well as the possession of productive means under normal operating conditions.

Difference between production capacity and production volume

These two concepts should not be confused. When we talk about production capacity, we are talking about the maximum amount of goods and services that a production unit can produce, under normal operating conditions, as well as optimal use of resources. On the other hand, the volume of production measures the amount of goods and services that a productive unit has been able to produce with available resources and, not always under normal operating conditions.

In this way, while the production capacity measures the maximum level of production that a production unit can achieve, the production volume measures the result that has finally been produced with the different production units. In other words, the production volume is not necessarily equal to the production capacity, since the production unit may be operating below its maximum performance level, obtaining a lower production volume, in contrast to its production capacity.

In business management, it is very useful to know the two facts. In this way, if we know the volume of production and its production capacity, we can know how much production units are ceasing to produce in scenarios in which production volumes do not reach their production capacity. It is enough to subtract the production volume and the production capacity.

Difference between production capacity and optimal production capacity

These two concepts should not be confused either. In many scenarios, production capacity measures the maximum level of production per productive unit, using all available resources under favorable operating conditions. However, on many occasions, production units cannot sustain their maximum level of production in the long term, while demand does not always require production at its maximum capacity.

For this, the concept of optimal production capacity is used. That is, the maximum level at which a productive unit can produce, in a sustainable way in the long term. That is, under normal conditions, which is the maximum level at which a productive unit can produce sustainably over a long period of time. This concept, in the same way, is very useful in business management, since we do not always have the capacity to have our production units at their maximum performance, sustaining that performance in the long term. Any event could cause a production stoppage, incurring severe problems for the company.

Production capacity planning

As we said, the production capacity must always be measured in a certain period of time. That is, when we want to make a planning or know what the production capacity has been, we must take into account the time factor. In this way, production planning is done in the same way. If we want to plan production, we must specify the level of production capacity of the different production units at an optimal performance for the company.

For this, production planning is done from different time points, which are:

• Short term (less than 6 months)
• Medium term (between 6 and 18 months)
• Long term (from 18 months)

Now, to carry out production planning in the different opticians, we must bear in mind that the production capacity in the long term always conditions the capacities in the short and medium term, which may require a series of processes adaptation to achieve the objectives set by the company.

In this way, if we want to plan production, we must take into account a series of factors:

• Forecast of expected demand.
• Identification of the necessary capacity to satisfy the demand.
• Identification of alternatives in cases of not being able to satisfy it.
• Evaluation and decision making.

In this way, we can carry out a production planning that determines the good performance of the company in the different planned deadlines.

What factors condition the production capacity?

The production capacity of a productive unit is always conditioned by a series of factors. These factors determine the possibility of producing more or less in a limited period of time.

Therefore, we can classify these conditioning factors into two categories:

• Internal factors.
• External factors.

Among the internal factors that can condition production capacity, it is worth highlighting:

• Equipment and maintenance.
• Installations.
• Distribution of the production plant and the production process.
• Available resources.
• Entrepreneurship.
• Quality control systems.
• Management of jobs.
• Worker management.
• Product or service design.
• Financial resources.

On the other hand, among the external factors that could condition production capacity, it is worth highlighting:

• Institutional framework.
• Political environment.
• Legislation and current regulation.
• Union collective agreements.
• Company agreements.
• Provider capacity.
• Economic environment.
• Business competition.
• Relationship with credit institutions.

These internal and external factors must always be taken into account, since they condition our production capacity, as well as the operation of the company.

How is the production capacity calculated?

If we want to know what the production capacity of a productive unit is, the formula for the calculation is quite simple. The way to do it would be, in the first place, calculating the number of hours per productive unit that we have available. That is, if we have an 8-hour workday in which we have 10 production units, the total number of production hours is 80 hours.

Second, we must measure the production capacity for a product, based on the productive unit and the available hours. That is, we must divide the production capacity for an item by the number of hours available, thus obtaining the daily production capacity. In other words, suppose that each productive unit takes 1 hour to manufacture one unit of the good or service. For the calculation we must divide the number of hours available (80) by the time it takes to produce a unit of production to produce a unit of product or service (1). Thus, we would obtain the daily production capacity.

In the example, the daily production capacity would be 80, since we have 80 hours of production per day, while each unit manufactured takes, on average, 1 hour to produce.

Third, and much simpler. If we want to measure the monthly production capacity of the production units, it is enough to take the daily capacity obtained in the previous step and multiply it by the working days that we have in the month. In the same way, it would be done to calculate the annual production capacity, since we should multiply by the number of days worked in a year.

Later, with these data, we could already obtain another series of indicators such as the production volume or the efficiency rate. That is, if we know that the daily production capacity is 80 units, if we are producing 40, we can know that the utilization rate is 50%. In other words, the production volume would be operating at 50% in relation to its production capacity.