What does capacity utilization measure?

Capacity utilization is a critical metric in operations management that determines how much of a manufacturing facility's total potential output is being used at a given time. It is calculated by taking the actual output and dividing it by the maximum possible output, then expressing this as a percentage. A higher capacity utilization rate indicates that a company is effectively using its resources, leading to greater efficiency and potentially lower costs per unit.

The focus on the percentage of total capacity used allows businesses to assess their operational efficiency and identify areas for improvement. For example, if a plant has a capacity utilization rate of 85%, it means that it is operating at 85% of its full potential. This metric aids in decisions regarding scaling operations, workforce management, and resource allocation.

While other options such as efficiency of production methods and labor productivity are important factors in overall operations management, they do not directly reflect the ratio of actual output to potential output in the context of capacity utilization. Similarly, the rate of inventory turnover provides insight into how quickly inventory is sold or used, which is related but not synonymous with measuring capacity utilization.