Sizing Capacity Cushions:

Average utilization rates should not get too close to 100 %, because that usually is indication for the increasing capacity or decreasing order acceptance so as to ignore declining productivity. The capacity cushion is the amount of stored capacity that a firm maintains to handle sudden variations such like enhance in demand or momentary losses of production capacity. In other words, it measures the amount by which the average utilization lies within 100 percent.

Capacity cushion = 100% - Utilization rate (%)

The cushion size varies from industries to industries. The industries giving more priority to capital investments, i.e. where machines may costs up to millions of rupees each, cushions well under 10 percent are preferred. Fifteen to twenty percent of cushions are considered in the electricity generating units. The organizations such as hotels are less capital-incentive and break even with 30 to 40 % of cushion. The more capital intensive firms like shipping industries, prefers cushions as small as 5 %.

While demand varies, businesses find large cushions to be appropriate. In grocery industries, demand on some days (in the seasons of festivals) of the week is predictably higher than the demand on the other days. Long customer waiting times cannot be acceptable as customers grow restless if they have to wait in a supermarket checkout line for more than a few minutes. Quick customer service needs supermarkets to maintain a capacity cushion large enough to handle peak demand. While the future demands are uncertain, large cushions are beneficial to the organization. Another type of demand uncertainty occurs with a changing product mix. The load may shift unpredictably from one work centre to another as the mix changes, while the demands might be stable. High customization also leads to uncertainty. Large capacity cushion is encouraged by the uncertainty in supply. Capacity frequently comes in large increments, thus expanding even by the minimum amount possible may create a large cushion. Penalty costs for overtime and sub-contracting can create the need for further enhanced in capacity cushions.

The unused capacity costs money, it is the only reason in the favour of the small capacity cushions. In capital incentive firms, minimizing the cushions is vital. Studies mentioned that businesses with high capital intensity attain a low return on investment in equipment makes high utilization less critical. Advantages of having the small cushions are absenteeism, unreliable suppliers, etc.