How to get the most for your money
During slow periods, manufacturers scale back production by idling machines or shuttering plants. Reducing costs means cutting capacity, which shrinks your potential for profits and can leave you hurrying to catch up when demand returns.
Rather than focusing solely on cost cutting, look instead to optimize your capacity. A capacity utilization approach can balance operating expenses with product demand, trimming only unnecessary costs and identifying where additional resources are needed.
Utilization steadily dropping
Calculate capacity utilization by dividing your company’s actual output by its potential output, taking into account the number of workers, facilities, machinery and other capital outlays that contribute to productivity. A manufacturer’s average capacity utilization rate typically rises when the economy is vibrant and falls when the economy is anemic, making it a good indicator of the manufacturing sector’s general health.
According to the federal government’s latest data, the average capacity utilization rate among manufacturers is 69%. That figure is higher than during the throes of the recession, but is part of a larger trend of declining manufacturer capacity utilization. For comparison, the average capacity utilization rate in the late 1960s was 89%.
Balance is important when it comes to capacity utilization: Too-high utilization can leave plants struggling to keep up with demand and lead to price inflation, while too-low utilization means businesses are squandering their investments. Many financial experts suggest that manufacturers should aim for 80% utilization, meaning the average manufacturer today needs to boost its figure.
Balance capacity and expenses
To increase your capacity utilization, review your production-related expenses and determine whether they make sense as a whole. If you have enough workers and plant space to produce 20% more product, but outdated machinery is holding you back, for example, it may be worth upgrading that equipment to boost productivity. Conversely, if you’ve been forced to reduce your workforce because of the recession, it may be time to downsize to a smaller facility or consolidate multiple locations under one roof.
Before undertaking significant changes, make sure you’re not cutting items that you’ll need to replace if you increase production in the future. Restarting a plant, for example, often requires a hefty outlay of time and resources for training and other start-up costs. Other strategies for boosting utilization, such as bringing component suppliers or other previously outsourced functions in-house, can also backfire if you don’t carefully compare all costs to potential revenues.
Don’t forget demand
In addition to streamlining expenses, it’s just as important to examine the other side of the equation: sales. Even though dwindling demand has sparked the recent drop in capacity utilization, savvy manufacturers are finding ways to increase their market share.
One vital step is to diversify your customer base, which keeps demand steadier during uncertain times. Next, brainstorm new ways to market your products and connect with potential customers, such as revamping product lines or freshening up advertising campaigns.
All in alignment
Aligning demand with expenses takes careful consideration, but the work pays dividends when done correctly. By moving your capacity utilization to where it should be, you can help your manufacturing company weather the economy’s valleys and increase your chances for long-term profitability.