How to calculate effective capacity and efficiency

The effective capacity and efficiency are two measures used to evaluate the performance of a company at the level of its production operations, storage or receipt of goods and services in a given period of time.

In itself, effective capacity is a way of expressing the level of use of the company’s installed capacity, that is, what is actually being used compared to the theoretical design of the facilities and equipment.

For its part, the designed capacity, described in the design of the plant and equipment, is often widely used for advertising reasons by most companies, but it rarely corresponds to what is actually used.

It is possible that at some point you need to know what the capacity of a company is, but you only have information about its level of efficiency and its effective capacity.

With these two data it is very easy to find out the theoretical capacity of the business unit that interests you.

We will better understand the concepts of capacity and efficiency and how to combine this data to better understand the degree of operation of a productive unit or business.

What is capacity?

The capacity is the amount of production, storage or transportation company or production line can perform over a period of time.

The capacity of a company is a vital aspect for the success or failure when starting a production project or the provision of a new service.

This capacity will condition its ability to satisfy customer demand and, therefore, its successful permanence in the market where it operates.

In addition, the capacity of a company will determine if its equipment and facilities will remain inactive at a certain time, or if they will be heavily demanded.

The lack or excess of capacity will directly affect production costs, a determining factor in maintaining an ideal profit margin and competitiveness as an organization.

A company with very large facilities can find itself in a situation where parts of equipment and areas are left idle, which increases production costs.

If, on the other hand, your facilities are small and the equipment is not enough, markets or customers may be lost due to not being able to deliver the goods and services they expect on time.

Capacity is conceptualized differently based on what is on paper and what happens in real life.

To this end, economic analyzes define two variants of the term capacity:

1.- Designed capacity: Also called design capacity or projected capacity, it refers to the maximum production that an industrial or productive system can obtain under ideal conditions according to the theoretical specifications expressed in its design.

2.- Effective capacity: It is the capacity that the company shows to have in real life and that is conditioned by the normal operating limitations in all industrial or business activities.

In an ideal world, the effective capacity should equal the designed capacity but this is never the case.

Capacity is not always used 100 percent and the term efficiency is used to measure the relationship between capacity and effective capacity.

What is efficiency in a company or business unit?

Efficiency is a measure that describes the percentage of the capacity of a company or production line that is actually being used in real life.

Achieving 100 percent efficiency means that facilities and equipment are being used to their maximum capacity for production, storage or transportation.

But this is very rarely achieved, as there are many factors that influence the goal of achieving maximum operational and productive efficiency.

To understand what efficiency is, let’s take the example of a motorcycle assembler whose plant is designed and equipped to assemble 50 motorcycles a day, using a staff of 20 workers.

In real life, it is very likely that this figure will never be reached and the average number of units assembled per day will remain close to 35 units.

This can be due to many reasons: problems with human resources, logistics failures, errors in the supply of parts and parts, failures in power and services, etc.

Efficiency can also be affected by financial problems that limit the purchase or payments of related services in the production plant or that generate problems with the personnel working there.

To the logistical, financial or technological problems that can arise at any time, we must add the variability generated by the human factor.

Quality failures that force production to be slowed or stopped while being corrected, as well as lack of equipment and systems maintenance, also affect efficiency.

At the managerial level, efficiency can be affected by poor project planning, which leads to building a plant with more capacity than can be used (or with less than necessary).

Whatever the reality, in every company it is important to determine the percentage of efficiency to adjust its operations and achieve a positive profit margin.

How to calculate the efficiency, capacity and effective capacity of a company?

Operations managers are continuously evaluated according to the efficiency achieved in the area under their responsibility.

For this reason, it is important for them to know in advance what their level of efficiency is with respect to the effective capacity of the company and to make decisions to solve problems.

For example, we have a television factory with a capacity of 60 units per hour and an effective capacity of 40 televisions / hour.

We are going to apply a simple formula, in which (% E) will be the efficiency, (Ce) will be the effective capacity and (C) will be the real capacity.

To know its percentage of efficiency we apply the formula: (Ce x 100%) / (C) =% E

In this case it would be (40 x 100) / 60 = 66.66% efficiency.

Now, suppose we know the efficiency percentage of a company and its effective capacity, but we want to know what its capacity is.

The formula to apply would be (C) = (Ce x 100%) /% E

This would not give (40 x 100) / 66.66 = 60 units

Finally, if you want to know what the effective capacity of the same company is, you should only use the capacity and efficiency data to find out easily:

We use the formula (C x% E) / 100% = Ce,

In this case it would be (60 x 66.66) / 100 = 39.99, which rounded off would be 40 televisions that could be effectively manufactured in one hour.