Defining 'Capacity' Issues --Dickeson

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!

Come to think of it, our GLA (General Ledger Accounting) is on a 24/7 basis, isn't it? Income and Balance Sheet reports are on monthly, quarterly and annual bases, aren't they? Months, quarters and years are made up of 24-hour days, seven days a week. It's a 24/7 world we live in.

The only thing in our business that doesn't run on a 24/7 clock is people. Everything else marches to that 24/7 beat. Our people must have rest, holidays, vacations and sick time.

That's a constraint we must acknowledge, accept and live with. How we handle that human constraint controls our net earnings condition. We can't control the efflux of time. However, we can work "shifts" that modify the human fatigue constraint.

"But we must also have the work—the sales—that fill the time," you say. "What good does it do to have a 24/7 plant operating capacity if you don't have work that will occupy that 24 hours, seven day week?"

Not Just One Answer

Perhaps there are several answers to this. Printing companies have found solutions: 12-hour working days with three and four day work weeks, using less equipment with faster working capital turnover—less plant and faster turns.

So what do we mean when we say "capacity?" I submit that 24/7 is the best we can do. If we choose to operate our plants on a "usable capacity" basis, that's a matter of choice, a judgment call. We make that choice to operate more plant and equipment on more or lesser hours. We'll operate with more debt, rents, overheads and depreciation in proportion to throughput of product.

Let's call it what it is. It's a management policy decision to slow down inventory turnovers—to make less money than optimal.

When we speak of the "capacity" of our printing plant, let's put it in terms relating to a 24/7—practical capacity—basis. The divisor for a day is 24 hours, 168 hours for a week, 2,184 hours for a 13-week quarter, and 8,736 hours for a 52-week year.

If we're operating one eight-hour shift, five days a week, then we're speaking of a capacity operation of 23.8 percent. That's okay if we make that choice consciously. It's a policy decision.

It's Our Decision

When we speak of our industry as having "excess capacity" let's put it in these terms. "We've made a policy determination to operate at this level." That's a decision we've made to accommodate the human fatigue factor. We can change it by another decision tomorrow if we want to, but that's what it is today. We measure it as a percentage of the base 24/7.

It's surprising and a little shocking when we do this. When PIA or NAPL surveys to determine plant earnings, one question that should be asked is: "What is the percentage of capacity at which you've operated during the survey period?" Would we see a difference in results? Would the plants operating closer to the 100 percent level of capacity have greater earnings? What's your guess?

My hunch is that the closer to 100 percent it is, the lower its prices and the greater its earnings will be. It just makes sense.

When we started, I confessed my confusion about what was meant when we used the word "capacity" and that the definition had implications for our industry.

I now agree with the accountant at the seminar years ago. We must use the base 24/7 when we speak of capacity.

—Roger V. Dickeson

About the Author

Roger Dickeson is a printing productivity consultant based in Sylmar, CA. He can be reached via e-mail: rogervd@verizon.net.