Are you at full capacity, what more can you achieve?
One of the initial operational strategies with a client is to establish the businesses current capacity and assess what it can achieve in its current guise. Building capacity isn't about merely asking the question, are you busy, or could you be busier? Because ultimately, that is what every business aspires to.
We can all be 'headless chickens', so we need to benchmark capacity against the output represented in our current statistics. Understanding the production and service capabilities of a business requires a considered and concise breakdown of individual departments within the company, no matter their size or importance.
All enterprises sell or market an abundance of services or products. Each product or service requires a gross and net margin; this will undoubtedly vary across the ranges, as will the allocation of overheads unless they are costed as a simple percentage. There are many factors to consider when calculating your capacity; the following are a few questions I asked when discussing the issue with a prospective client who worked in the packaging and logistics industry so that I could establish their current capacity and create a summary calculator for them ongoing, results attached:
- How many staff do you currently employ?
- What is your current packaging capacity?
- What is your current product mix?
- How long, in seconds, does it take to pack each item?
- What are your operational days per week?
- What are your operational hours per day?
- How many products do you currently pack per day?
- How long are your teams break times each day?
- How many packaging lines do you currently operate?
- What are the values of each packaged item?
Therefore, to establish the real capacity, we need to understand in detail the contributing factors and ask probing questions. Once defined, how do we increase it? What improvements can be made within the existing infrastructure to improve capacity, increase turnover, and maximise profitability?
What is capacity utilisation, and why is it so important?
The capacity utilisation rate compares the actual output with the potential production of the business. Defined as the percentage of total capacity achieved in a given period. It is an essential business concept because;
- Used as a measure of productive efficiency to define the potential of a business now and in the future
- While output rises, average production costs tend to fall. The outcome is a higher capacity utilisation, reducing unit costs to make the business more competitive and profitable
- All firms need to establish their current capacity and potential. Once this is understood, a company can learn and adapt to achieve more. In turn, it will have a significant impact on the bottom line.
To put this all into context, I use an example of a business I have coached recently. The company is a relatively small service-based firm. Its previous years turnover was £190,000. With the correct focus, the existing current levels of staff, equipment and infrastructure could generate a turnover of £250,000. Therefore, decreasing overheads as a percentage, increasing margins and net profitability. The business was running at 76% (Capacity Utilisation Rate) of its capacity on gross margins of 80%. Consequently, an increase of £60,000 in turnover would generate a minimum of £48,000 in additional gross profits for this particular client, without increasing costs.
Reduced productivity is undoubtedly a significant concern. Political uncertainty has created a lack of infrastructural investment over the last three years. Accompany that with a continuous decline in our manufacturing base and reduced skills; creating the perfect scene for low productivity. Comparing our economic output to countries such as Germany and Japan only highlights the UK's continued decline in productivity.
As business owners, our responsibilities for increasing efficiencies and maximising our output creates a collective responsibility to the countries overall GDP. However, that contribution can be improved dramatically. We can learn from our businesses current performance, putting in place goals to increase the capacity based on analytical facts. Improving productivity and maximising capacity not only impacts positively on our own companies, but it also contributes collectively to national prosperity.
If you would like to find out about the potential of your business, I have a range of tools that will establish your actual capacity and help you to achieve growth moving forward.
Do you want to work out your businesses capacity now?
I have created a Capacity Calculator tool that can be used for all businesses. This particular version which is available on the 'download' button below was devised for the packaging company I mentioned in the article to demonstrate how increased efficiency and capacity could impact positively on the business.
The financial rewards of increased capacity are there for all businesses to explore. Download the 'Capacity Calculator' now...
If you need help to complete your Capacity Calculator, please get in touch with me using the form below. If you have managed to complete your Capacity Calculator; I welcome your feedback.
Good luck increasing the capacity in your business!