3.4.3 - Efficiency, capacity and lean production

Matching capacity to demand

Capacity is valuable only when the business can use it to supply output that customers want at an acceptable cost and quality.

When a business has spare capacity, it may be able to accept extra orders without buying another building or machine. More output spreads existing fixed costs over more units, potentially lowering average cost. A gym, for example, may admit additional members during quiet hours while paying the same lease cost. However, unused capacity still involves costs: rent, maintenance and finance may have to be paid even when equipment is idle.

Managers can raise utilisation by attracting demand at quiet times, accepting subcontracted work, adjusting the product mix or reducing downtime. A hotel may offer lower weekday prices to increase room occupancy, but the lower price must still contribute towards costs and must not unnecessarily displace full-price demand. Making unwanted goods simply to keep machines busy creates inventory costs rather than a useful efficiency gain.

At very high utilisation, extra orders may cause queues, overtime, rushed work and reduced maintenance time. Breakdowns or absence then have a greater impact because little spare capacity remains. A service business may deliberately retain spare appointments for urgent customers. This costs money but can support reliability and a premium service position.

When demand exceeds capacity, short-term responses include extra shifts, overtime, temporary staff or outsourcing some work. These need supporting resources: extra staff will not solve a bottleneck if the only machine is already fully occupied. Longer-term expansion, such as a new facility, can remove the constraint but takes time, finance and confidence in future demand. Reducing or mothballing capacity may be appropriate if demand falls permanently, but reopening it later may be costly.

The best utilisation level therefore depends on demand variability, service promises, the cost of idle resources and the consequences of delay. Efficient use of capacity does not mean operating every resource at its maximum all the time.

Improving efficiency and labour productivity

Efficiency concerns making effective use of resources with minimal waste, while labour productivity measures output per worker or labour hour.

They are related but different. If workers produce more usable units per hour, the labour needed for each unit may fall. Yet the saving can be offset by costly machinery or more wasted materials. A firm can improve material efficiency by reducing offcuts while leaving output per worker unchanged. It should consider the whole process rather than equate one productivity figure with overall efficiency.

Training can help workers use equipment accurately and resolve faults sooner, reducing rework and waiting. Better job design, engagement and motivation can improve effort and suggestions for improvement. A well-designed layout reduces unnecessary movement; balancing stages reduces queues and idle time. Preventive maintenance avoids unplanned interruptions, and reliable inputs prevent a production line waiting for supplies. Investment in suitable equipment can remove repetitive or slow tasks.

Illustrative case: a furniture workshop finds its skilled assemblers waiting for cut components. Hiring more assemblers may raise payroll without raising output. Improving the cutting stage or organising deliveries between stages can instead increase output from the existing workforce. Identifying the bottleneck matters more than applying a fashionable improvement everywhere.

Improvements have difficulties. Training uses time before its benefits arrive; people may resist changes or fear job losses; new layouts interrupt production. Pressure to increase output can reduce quality and safety if incentives reward quantity alone. Differences in products also distort comparisons: one complex customised table cannot fairly be compared with one simple standard stool as though they require identical effort.

Managers should measure useful output, total resource cost, quality and employee consequences before and after a change. A sustained productivity gain usually requires complementary resources and cooperation, not simply an instruction to “work faster”.

Lean production, Just in Time and Just in Case

Lean production seeks to remove activities and resources that do not add value for the customer.

Waste includes defects, unnecessary movement, waiting, excess processing, unwanted production and avoidable inventory. A lean business investigates the cause: correcting a recurring cutting error avoids both scrap and the later work spent on faulty components. Small continuous improvements and employees' practical suggestions can gradually improve the process. Lean does not mean cutting every cost regardless of the effect on customers or workers.

Just in Time (JIT) arranges for inputs to arrive and output to be produced when needed, keeping inventory low. Reliable schedules, good quality, fast information sharing and dependable suppliers are essential. A food retailer receiving frequent small deliveries can reduce storage, spoilage and money tied up in stock. Low inventory can also expose recurring process failures rather than conceal them behind a large reserve.

Just in Case (JIC) holds inventory to protect against uncertain demand or supply interruption. For example, a repair firm can use buffer stock to continue serving customers while it awaits a delayed delivery of an important spare part. The protection has costs: storage, insurance, cash tied up, damage or obsolescence. A reserve does not eliminate every possible shortage, particularly if the wrong items are held.

JIT can lower inventory costs and free cash, but late or defective deliveries may stop production quickly. Frequent deliveries can create transport costs and environmental trade-offs, depending on distances, load sizes and routing. JIC can make service more resilient but is especially costly for perishable or rapidly changing products. Suppliers may also struggle if a powerful buyer demands very frequent deliveries with little notice.