Manufacturing involves a series of processes from designing the process itself to strategies, resource allocation, and workforce duties, to production & post-production steps. For efficient manufacturing and optimized production, the plants need to monitor a number of metrics including production capacity utilization.
Capacity utilization is a crucial metric that determines the ratio between the actual output and the maximum potential output of a manufacturing unit. It is expressed in percentage. In simpler words, it’s the determination of how efficient you have been in leveraging your resources and optimizing your production.
Manufacturers and businesses need to strictly monitor this KPI. On the contrary, if not properly observed and followed after, the consequences can be dreadful.
And these aftereffects of ignored capacity utilization are our topic in this article, so let’s start without further ado.
Ignoring Production Capacity Utilization: Top 10 Issues
Here’s an exclusive list of the issues that might hamper your growth as a manufacturer if capacity utilization is ignored.
1. Lost Revenue & Profit Drain:
Every percentage counts! Even a slight dip in capacity utilization for larger manufacturers turns out to be devastating. According to a recent study, large manufacturers operating below 75% experience a whopping revenue drop of 10% as compared to others operating at peak efficiency.
This translates to a profit squeeze, making it challenging to invest in innovation and growth. And not to forget, these are the essential ingredients for staying ahead in the game.
Still not clear? Let’s think of it this way! Picture a million-dollar production line that operates at 70%. This underperformance and ignoring capacity utilization will make it leave thousands of dollars on the table.
This whopping gap in revenue can otherwise be used in many useful ways like fuel expansion, technology upgrades , or upskilling your workforce— all crucial forlong-term success of the business and achieving competitive advantage .
2. Cost Creep:
Remember, lower production doesn’t always mean lower prices. In large-scale manufacturing, there’s always a hidden cost , commonly known as “Fixed Costs.” These refer to expenses like rent, salaries, and equipment depreciation which are not dependant on the number of units produced. And as a matter of fact, these can’t be avoided, no matter how much you produce.
So, here’s the catch! If you spread these fixed costs over a smaller output or produce less in other words, the cost per product shoots up and will be higher than your competitors. And this is the dreaded fixed cost trap.
How to avoid it? Simple! By optimizing capacity utilization, manufacturers can avoid this trap. This will help them keep their fixed costs under control while ensuring their products remain competitive in the market.
3. Resource Graveyard: Underutilized Resources, Wasted Potential:
Think of a production line buzzing with activity, but only at 60% capacity. What will happen if 20 skilled workers stand idle while ten state-of-the-art machines gather only dust? These are the consequences of neglecting capacity utilization. It leads to a resource mismatch where highly skilled staff, cutting-edge machinery, and valuable property go unused.
As a result, inefficient overloads burden the manufacturers. They pay for unutilized resources, from the workforce to machinery and unused spaces. It’s more like a leaking bucket, continuously dripping money lost forever!.
Optimizing capacity utilization can alleviate this leak and find the optimum level for average cost per unit.. It allows manufacturers to determine the exact utilization rate and ensure all the resources are working in collaboration. This translates into smoother production, jit resource allocation, timely management, increased revenue, and happy customers.
4. Quality Conundrum: Risks & Concerns:
Rush jobs in complex manufacturing are a recipe for trouble. The pressure to meet the deadlines intensifies when plants operate below capacity. Even a 2022 Havard Business School Study reveals a link between low capacity utilization and higher defect rates.
So, shortcuts usually lead to serious consequences. For example, imagine a plastic injectable manufacturing unit operating at 60% capacity. The pressure to meet the demands with unutilized resources may result in a faulty batch and other problems, with a bad reputation being the most lethal one.
Here, the takeaway is clear! Optimizing the manufacturing capacity utilization ensures a smooth production flow, resulting in qualitative products, satisfied customers, and a better brand reputation.
5. Workforce Discontent & Growing Turnover:
A demotivated workforce has always proved a drain on performance for organizations. Underutilized capacity in manufacturing leads to a domino effect. Bored, demotivated employees experience reduced productivity, and absenteeism, ultimately leading to an increased turnover.
This situation not only disrupts the workflow, it also creates slots for training and recruitment, which ultimately shoots the costs.
When capacity utilization is optimized, the environment fosters and boosts productivity, reduces turnover, and creates a win-win situation for both the manufacturer and the workforce.
6. Opportunities Slipping Away: unable to Meet the Market Demand:
The manufacturing landscape is constantly evolving and, in fact, expanding at a phenomenal rate. New opportunities, larger orders, and sudden breakthroughs are no more unusual.
Inefficient capacity utilization in large-scale manufacturing units can cripple responsiveness to market shifts. A sudden surge in demand may leave under-optimized facilities scrambling, leading to loss of opportunities and customer dissatisfaction.
This will also hand competitors a golden opportunity to scale, hindering the former’s long-term growth.
7. Supply Chain Snags:
Think of rippled and disconnected supply chains and their effect if the capacity utilization isn’t as per expectation. Downstream businesses face shortages, delaying their production, and potentially damaging the supplier’s reputation.
Remember, this is a domino effect that disrupts the entire manufacturing- delivery ecosystem.
Let’s assume an electronic plant, making parts operate at 55% capacity. This under capacity can cause a delay in production lines, parts shortage, impacting deliveries, unsatisfied customers, and a huge ripple effect across the entire industry.
8. Environmental Concerns:
Environmental concerns have grown bigger than ever before and the best part is: they’re looked up to in every field. Running below capacity during manufacturing creates a double whammy for the environment. A higher impact on the environment per unit good is observed when a plant runs below capacity, remaining under-resourced.
Businesses which operate furnaces or plants utilizing fossil fuels are at high risk of creating an environmental ripple when operating at a lesser capacity utilization wasting valuable resources and emitting more carbon emissions.
9. Talent Drain:
Underutilized capacity handicaps manufacturers particularly when seizing top talent. SInce innovations are occurring almost every day, manufacturers need to create challenging jobs for talented people, which becomes less and less r in the stated situations.
Ambitious workforce and professionals yearn for challenging opportunities for their upskilling and growth, which underperforming plants can’t offer, resulting in a hindered operational level and reduced efficiency overall.
Blind Spot: Lack of Visibility & Control:
Imagine a toy factory unaware of its capacity. It can’t pinpoint bottlenecks or optimize production, leading to missed opportunities and hindering strategic growth decisions.
Blindspot on capacity cripples big manufacturers. Ignoring it hinders visibility into production processes, making it hard to identify inefficiencies, anticipate challenges, and plan for the future. Resource allocation, production planning, and investment strategies all suffer.
Conclusion:
Production capacity utilization is a crucial KPI, which can create major issues if ignored. The list of top 10 issues caused as a result of this under capacity are listed above. Manufacturers need to keep an eye on capacity utilization for prompt and swift business growth and enhance overall efficiency.
