Chapter 5 PRODUCTIVITY ANALYSIS
5.3 Production Capacity Utilization
Production capacity utilization gives a useful description of the economic situation of a firm. The Bureau of Economic Analysis and the Federal Reserve Board regularly report the capacity utilization of U.S. businesses, indicating their economic performance (Garfalo and Malhorta 1997). Capacity utilization is the ratio of actual production to the maximum production level achievable during normal operating conditions. Normal operating conditions refer to a normal work week, the use of normal equipment, and normal down time due to repair and maintenance duties (Garfalo and Malhorta 1997).
A sample of 21 contractors who provided at least some weekly productivity data between 1990 and 1996 was used to analyze capacity utilization by computing the ratio of the median weekly production to the 75th percentile value. This method is similar to the method used by LeBel (1996) to calculate capacity utilization and meets the requirements of the above definition. Capacity utilization ranged from 66 to 97 percent. The inter-quartile range for the sample of contractors spanned from 83 to 89 percent of their available capacity, with a median value of 86 percent.
Contractor 102’s 1996 production was the year with the lowest capacity utilization (Figure 5.3). He was able to increase production dramatically in 1996 when conditions allowed but was also able to “hunker down” during periods when weather or quota limited production. These production swings caused the 75th percentile to be much higher than the median, and therefore, capacity utilization suffered.
Contractor 002’s 1995 production marked the year with the highest capacity utilization (Figure 5.5). This contractor was able to keep production remarkably stable during 1995 and 1996, allowing him to narrow the space between the median and the 75th percentile, which enabled the contractor to use practically all of his production capacity.
A sample of 16 contractors who provided complete weekly production data from 1990 to 1996 were used to assess yearly trends in capacity utilization. Wilcoxon signed rank tests were used to test for statistically significant differences. There were no major changes in capacity utilization from 1990 to 1996, but there were some interesting trends present.
Capacity utilization appeared to have dropped, and became less variable in 1994 through 1996, compared to the previous years. The median capacity utilization levels dropped 1-2 percent from 1993 to 1996 (Figure 5.10). Also the 1-25th and 75th percentile values seemed to have tightened around the median from 1993 to 1995. Capacity utilization increased from 1995 to 1996, as evidenced by increases associated with the 75th
percentile, 25th percentile, and the median values. This suggests that quotas put an low ceiling on production, causing capacity to increase, which is another indicator of the productivity drop in 1996 discussed in section 5.2.2.
Figure 5.10. Median, 25th, and 75th Percentile Levels for Yearly Capacity Utilization.
80%
1990 1991 1992 1993 1994 1995 1996
Year
Capacity Utilization 25th Percentile
Median 75th Percentile
5.4 Summary
Productivity variability, quarterly and yearly productivity trends, and production capacity utilization were analyzed in detail. The contractors providing weekly production
information were classed as upwardly elastic, downwardly elastic, or inelastic depending on their ability to increase, decrease, or to maintain a relatively constant level of
production.
Upwardly elastic contractors accounted for 12 of the 20 contractors in the sample. These contractors were all well-equipped and geared for moderate to high production. Each of these contractors had the ability to increase production under favorable operating
conditions.
Downwardly elastic contractors accounted for 3 of the 20. These contractors all operated at relatively low production levels and could withstand periods of low production more readily than the upwardly elastic contractors.
Inelastic contractors accounted for 5 of the 20. Each of these contractors had well-established businesses. They were able to maintain relatively stable levels of production, as evidenced by their low coefficients of variation. Four out of the 5 contractors
primarily harvested company-owned pine plantations; all worked in well-managed wood supply systems.
Quarterly and yearly production data were analyzed to determine if productivity trends were present. Results from Kolmogorov-Smirnov tests indicated that quarterly
productivity levels within years were not significantly different. Only 1994 and 1995 had significantly different quarterly production levels. The first, second, and third quarter production in 1994 was significantly less than that of the fourth quarter. In 1995, third-quarter production was significantly higher than first-third-quarter production. These
differences all occurred when BMP’s were beginning to be implemented, and before many of the contractors adjusted their operations. It is also possible that the procurement
force made an increased effort to build winter inventories, in the third and fourth quarters, to account for reduced winter production.
Analysis of yearly productivity information revealed a general upward trend in
production levels between 1990 through 1995, before dropping off in 1996. Production levels for 1990 and 1991 were statistically lower than the other years, and 1995 was statistically higher. The years 1992 through 1994, along with 1996, were not statistically different in the analysis and therefore can be considered to be in the same population.
The characteristics and the trends of the productivity data will be extremely helpful in analyzing and understanding the efficiency scores.
The production capacity utilization was measured for all contractors providing at least one year of weekly data from 1990 through 1996. Capacity utilization was measured by taking the ratio of actual production to the production capacity the contractor could reach under normal operating conditions. The median weekly production was considered the actual production, and the 75th percentile was considered the production capacity for each contractor.
The inter-quartile range for the sample of 21 contractors ranged between 83 percent and 89 percent of their available capacity, with a median value of 86 percent. The contractor with the lowest capacity utilization only used 66 percent of his available production capacity, while the highest contractor used 97 percent of his available capacity.
A sample of 16 contractors providing complete weekly production data from 1990 to 1996 were used to look at trends capacity utilization. There were no major changes in capacity utilization over the period, but there were some interesting trends present.
Capacity utilization appeared to have dropped and became less variable in 1994 through 1996, compared to the previous years. The median capacity utilization levels dropped 1-2 percent from 1993 to 1996; the 1-25th and 75th percentile values seemed to have tightened around the median from 1993 to 1995. Capacity utilization increased from 1995 to 1996, which could be another indicator of the productivity drop in 1996.