Discuss the differences between utilization and efficiency a

Discuss the differences between utilization and efficiency as measures of system performance. Which (if any) is the most useful measure for an operations manager? Why? (Response of at least 200 words please)

(WK5/DQ2)

Solution

Efficiency, is defined as the ratio of Actual Output to Effective Capacity.

Utilization is defined as the ratio of Actual Output to Design Capacity.

Managers should recognize the broader effects capacity decisions have on the entire organization. Common strategies include leading capacity, where capacity is increased to meet expected demand, and following capacity, where companies wait for demand increases before expanding capabilities. A third approach is tracking capacity which adds incremental capacity over time to meet demand.

The two most useful functions of capacity planning are design capacity and effective capacity.

Design capacity refers to the maximum designed service capacity or output rate and the effective capacity is the design capacity minus personal and other allowances.

These two functions of capacity can be used to find the efficiency and utilization.

Capacity refers to a system\'s potential for producing goods or delivering services over a specified time interval. Capacity planning involves long-term and short term considerations. Long-term considerations relate to the overall level of capacity; short-term considerations relate to variations in capacity requirements due to seasonal, random, and irregular fluctuations in demand.

Excess capacity arises when actual production is less than what is achievable or optimal for a firm. This often means that the demand in the market for the product is below what the firm could potentially supply to the market. Excess capacity is inefficient and will cause manufacturers to incur extra costs or lose market share.

Capacity can be broken down in two categories: Design Capacity and Effective Capacity. Product and service factors effect capacity tremendously.

Three key inputs to capacity planning:
1. The kind of capacity that will be needed
2. How much capacity will be needed
3. When will it be needed

To calculate Efficiency and Utilization, there are two basic formulas that can be used:

Efficiency = Actual Output / Effective Capacity x 100%

Utilization = Actual Output / Design Capacity x 100%

Consider the following example:

“A computer repair service center has a Design Capacity of 80 repairs per day. Its Effective Capacity is 64 repairs per day but Actual Output is only 62 repairs per day.”

Efficiency = 62/64 x 100% = 96.875%

Utilization = 62/80 x 100% = 77.5%

There is a big difference between these two numbers.

We often hear much about “improving efficiency” but when Effective Capacity is low relative to Design Capacity, simply relying on Efficiency as an indicator of performance can be a mistake.

In the above example, the manager of the service center should work to increase Utilization.

So, the importance of utilization and efficiency measures depend on the capacity planning.