Sweating assets: Extracting capacity you didn’t know existed
The discussion in the management committee had been mired in specifics of tonnage needed in different markets, line maintenance schedules, availability of tools and fine tuning of process parameters. Putting an end to the discussion, the managing director asked, “Who can tell me our actual capacity?” No one in the room had an answer. It turned out that the question was a challenging one for this billion dollar company.
Factories, companies, industries and nations track capacity utilization. In India, FICCI tracks capacity utilization by industry every quarter. While the levels have been steadily rising over the past three quarters, the actual levels have quite a bit of leeway. Automotive and capital goods manufacturers are hovering around 70% utilization, while for the FMCG and food industries, utilization is over 80%. To increase asset productivity, the first two industries will have to sweat the inventory assets, while the latter are going to have to squeeze out additional capacity even as they prepare for future growth through investments.
What is the true capacity of a plant? Every manufacturing professional knows that rated capacity depends on what product is being manufactured. Run time variations can lead to differing capacity output depending on the product mix. So, while a line may produce 20 tons per shift of one product, another might lead to an increased production of 23 tons per shift.
Moreover, the engineering capacity, or rated capacity, is a theoretical number assuming no downtime. It does not take into account the realities of scheduling, maintenance, switch-overs, absenteeism and shortages. Therein lies the opportunity to increase output from the same equipment.
By doing a detailed exercise, the company mentioned earlier identified opportunities that allowed it to increase production by over 25% of the then prevailing ‘standard’. This was done without any significant investment in equipment and could be executed very quickly. Releasing extra capacity obviously helps financial measures. ROCE (return on capital employed) improves and the unit cost of the product decreases. But often the time factor is even more significant. To create new capacity takes time, usually from weeks to months.
In the case in point, the company eliminated the need to set up two whole plants, by measuring capacity more rigorously and tightening up on operational controls. Imagine the saving in cost and more so in the time and effort involved in land acquisition, project execution, recruitment and training of labor.
In another case, a rapidly growing garment manufacturer had a bottleneck in the warehouse operations. Packaging to meet orders was complex because of the mix of styles and sizes that needed to be shipped to each customer. The operational staff was looking for increased capacity to deal with the growth. In the urban center they were based in, this would have been an expensive proposition. By reworking methods, providing some very simply, low-cost tools, the productivity of the warehouse was boosted by a factor of 5x, with a capacity to move up to 7x! The company could get on with the business of making and selling garments, rather than scouting for warehouse space and dealing with the complexity of two warehouses.
The same capacity release can work on specific departments. One auto component client was facing a bottleneck in their incoming inspection area. Again the request was for more space and more people to deal with increased volumes. However, a combination of layout design, automation and training allowed them to meet the increased demand and more in two weeks’ time!
The ability to understand and manage capacity can have a big impact on time to market, ROCE and margins.