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Faizan
In operations and production management, it is important to optimize capacity utilization. Among other things, proper use of production capacity can reduce per-unit costs, minimize waste, maximize product quality and enhance revenue. Balancing these sometimes competing interests can be a challenge for even the most experienced management, so making staff aware of related issues can improve planning and the decision-making process.
Production Capacity
Simply put, production capacity is the maximum amount of output a production center can produce in a given amount of time. There are many reasons for reduced production capacity, including so-called bottlenecks, which limit the rate of production. These come in various forms, including complex or delicate production procedures, supply chain problems (no sense in rushing through current materials when new inventory is difficult to obtain), and cost escalation, such as with overtime or safety concerns. Thus, managing capacity utilization to maximize output while avoiding costly bottlenecks is a priority of optimization.
Cost Allocation
Capacity utilization can have a tremendous impact on profits due to cost allocation. In general, the greater number of units produced means there are less fixed costs per unit, such as overhead items like insurance, advertising, rent and administrative. Also, shipping costs per unit may be reduced, because a truck delivery, for instance, may be a flat fee regardless of the amount of product in the load. Accordingly, maximizing production can reduce per unit costs, improving the product's profitability.
Product Quality
Despite its benefits, production volume is not without its drawbacks. In general, as production volume increases toward the maximum, there is a decrease in product quality as evidenced by an increase in the rate of defects, waste, and spoilage in the products and of their input materials. Thus, the incidence of these quality-related losses should be determined and a financial analysis should be prepared so that management may make informed decisions about whether the costs associated with these quality control problems are warranted by fulfilling additional orders, or should be avoided with a more moderate rate of production.
Profitability Analysis
In a production profitability analysis, it is important to consider the many variables involved in production and sales, including sales volume forecast, cost of storing or transporting leftover (excess) goods, accurately forecasting unit sales prices, and estimating spoilage (theft). For established businesses, profitability analysis may be somewhat routine due to experience and prior business history, but with particular business opportunities, such as special occasions, events, and fashion trends in which there is no tomorrow, there is much less predictability. Thus, the capacity optimization priorities are different, and the risks of overproduction and low quality could be dramatically outweighed by the magnitude of the short-term opportunity.
Production Capacity
Simply put, production capacity is the maximum amount of output a production center can produce in a given amount of time. There are many reasons for reduced production capacity, including so-called bottlenecks, which limit the rate of production. These come in various forms, including complex or delicate production procedures, supply chain problems (no sense in rushing through current materials when new inventory is difficult to obtain), and cost escalation, such as with overtime or safety concerns. Thus, managing capacity utilization to maximize output while avoiding costly bottlenecks is a priority of optimization.
Cost Allocation
Capacity utilization can have a tremendous impact on profits due to cost allocation. In general, the greater number of units produced means there are less fixed costs per unit, such as overhead items like insurance, advertising, rent and administrative. Also, shipping costs per unit may be reduced, because a truck delivery, for instance, may be a flat fee regardless of the amount of product in the load. Accordingly, maximizing production can reduce per unit costs, improving the product's profitability.
Product Quality
Despite its benefits, production volume is not without its drawbacks. In general, as production volume increases toward the maximum, there is a decrease in product quality as evidenced by an increase in the rate of defects, waste, and spoilage in the products and of their input materials. Thus, the incidence of these quality-related losses should be determined and a financial analysis should be prepared so that management may make informed decisions about whether the costs associated with these quality control problems are warranted by fulfilling additional orders, or should be avoided with a more moderate rate of production.
Profitability Analysis
In a production profitability analysis, it is important to consider the many variables involved in production and sales, including sales volume forecast, cost of storing or transporting leftover (excess) goods, accurately forecasting unit sales prices, and estimating spoilage (theft). For established businesses, profitability analysis may be somewhat routine due to experience and prior business history, but with particular business opportunities, such as special occasions, events, and fashion trends in which there is no tomorrow, there is much less predictability. Thus, the capacity optimization priorities are different, and the risks of overproduction and low quality could be dramatically outweighed by the magnitude of the short-term opportunity.
Posted in: Products & Brands
