The first step to improving profitability is increasing revenue. This often requires more resources, more capacity….often a risky and expensive step. Every business’ first question should be: How can we better use our existing resource capacity? This sounds obvious, but it is really a tough question. Let’s consider a few issues:
How many employees readily admit they aren’t busy?
How many managers will admit they have idle capacity?
Do your information systems regularly identify idle capacity at a detailed resource level?
Can you remember the last time anyone in your company was rewarded for admitting to having idle capacity?
Ideally, every manager and employee should strive to do their work faster and better…and anticipate being rewarded for that achievement. However, too often being seen “not busy” results in negative recognition and unpleasant consequences; rather than reward and positive questions about the innovations and improvements that enabled the “idle” state were achieved, and how they can be replicated more widely.
The concept of capacity is often very confused. From an internal management point of view, all owned resources are available 7x24x365, and leased/hired resources are available for the full period of the agreement. (Practices like practical capacity, budgeted capacity, etc. often obscure this reality.) Capacity is employed in one of three ways:
Productive – Doing what you hired or acquired the resource to do.
Non-Productive – Essential or required activities such as training, maintenance, etc. which should be optimized.
Idle or Excess – No work or demand for the resource, or the time has been place “off-limits” by management or law.
Idle/Excess time is often “forgotten”. An office building with limited or no use outside of normal working hours is simply “the way it is”. But a little thought will provide examples of where that situation has been challenged – for example, many consulting firms have a “hoteling” reservation system for desk space, or meeting spaces are often rented to evening/night schools.
Another often confusing idea is the nature of capacity costs which often differs from their use.
Capacity Provision Costs: Once you hire or acquire a resource a certain set of costs often begin. For example: Employees - minimum hours/salary, insurance/benefit expenses, required training expenses, etc. Equipment – depreciation/capital preservation allowance, fixed maintenance, building space, etc. These costs are unavoidable when the resource is idle, but should they be “charged” to a specific output or customer? Isn’t that distorting? Doesn’t assigning or allocating this cost hide an opportunity to make decisions about idle capacity?
Capacity Use Costs: These are the costs or expenses incurred from using the resource productively. For equipment: electricity, maintenance tied to use, etc. For people: consumable supplies, travel expenses, etc. These costs are clearly tied to productivity and can be assigned logically to specific outputs and customers.
Every business has the opportunity to improve profits by understanding its capacity use and making good decisions about idle/excess capacity. It takes good capacity information, logical thinking about the benefits and costs of the resources, and the right organizational culture.