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Defining 'Capacity' Issues --Dickeson

May 2004
Misunderstanding surrounds the term "capacity" in our industry. Definition of this word has profound consequences for commercial printing. But I'm not sure that we're all singing from the same hymnal when we use that word.

First, we speak of "capacity" in terms of hours of time in production centers. But we don't really mean hours of time—we mean units of throughput. But we don't really mean units of throughput because the length of runs is constantly changing—increasing or decreasing the number and complexity of machine changes.

This increases or decreases the units of throughput that we can predict from a production center. It constantly shifts the amount of wasted raw materials we experience. And, merely increasing or decreasing units of throughput we discover, much to our surprise, doesn't have the expected effect on our profitability as measured by our General Ledger Accounting of profit or loss for a period of time.

We say that our printing industry suffers from over "capacity." Then we mean that we can't increase prices because our dumb competitors will just cut prices to fill the "capacity" of the equipment in which they've foolishly invested. So do we mean units of throughput of cost centers or do we mean our competitive position?

I was involved in a seminar for printing companies many years ago. Representatives of one of the principal accounting firms argued strenuously that "capacity" as used in printing meant "practical capacity"—all the hours in a period of time. (This is 'practical'?)

That meant, he contended, that a week had a "capacity" of 168 hours and a quarter consisting of 13 weeks had a "capacity" of 2,184 hours. I was aghast.

I'd been accustomed to declaring that a week was 120 hours of total capacity (5/24) on our presses and that we used 80 percent (96 hours) of that capacity for charging to jobs. So I was reducing his "practical capacity" to 168 hours and then to 96 hour "usable capacity" hours per week! I've thought a lot about that session over the intervening years.

Seeing the Light

Conclusion: I was wrong and he was right! I came to understand his point. Interest on debt runs 24/7. Rent on the plant runs 24/7. Depreciation and amortization run 24/7. But even more important than interest, rent and depreciation, turnover of inventories, including receivables, is measured to the base 24/7.

That goes to the heart of our profitability according to Goldratt and his TOC (Theory of Constraints) and Ohno and his JIT (Just in Time) theory. Many other businesses such as Wal*Mart and Dell have come to accept these as valid. The faster we turn over our working capital, the closer we get to a cash-to-cash condition, the more money we make!
 

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