Definition of capacity in industry

Capacity of a facility is its limiting capability to produce an output over a period of time. Thus the annual capacity of a 2 wheeler firm is say 7lacs scoters annually. It means the production is limited to this productive capability over a period of one year. The capacity however is subjected to intensiveness of use of the facilities. It is possible to enhance capacity by working for more days or more hours. Temporarily capacity can be increased to meet additional demand by these methods.

Imagine a transformation process having many sub-processes, each of them inter- linked. Here the capacity’s limit is determined by the capacity of that sub process which produces the least. If we want to upgrade the capacity we can do so by balancing equipment to create a better balance amongst the sub processes. The concept of capacity is thus invariably connected with the weakest link in the chain. This means that even when capacity is fully utilized in terms of the definition of capacity, there may be individual processes that may remain underutilized. In many cases, processes are partly manual and partly mechanical. Technology in many cases is indivisible.

Capacity has something to do with making in-house or buying or subcontracting from outside. We can buy certain components or even the entire production from elsewhere, when we do not have in-house capacity.

Process industries have an initial licensed capacity sanctioned by the government. At the time of installing the plant, the capacity that is installed is called installed capacity. When production is observed over a period of time, the highest rate is established by trial. It is called the rated capacity.

Various names and adjectives are associated with capacity. Installed capacity is determined on the basis of capacity as indicated by suppliers of plant and machinery in their technical quotations. We come across terms like normal capacity, expected capacity, practical capacity and ideal capacity. In power generation, we hear about de-rated capacity. In accounting parlance, budgeted capacity is a common term.

Normal capacity is calculated when normal conditions prevail and the enterprise works on a normal level of activity. It covers activity sufficient for meeting average sales demand over a period that is long enough to cover seasonal/cyclical variations. Practical capacity represents the maximum level of activity at which an enterprise can realistically operate at full efficiency. Estimated capacity is essentially for a short period for the next year. Ideal capacity indicates the maximum number of operating hours that would be available without taking into consideration stoppages. Budgeted capacity is more like estimated capacity, but is estimated for the budget period. Capacity is de-rated in conditions in which technically specified capacity can no longer operate.