Almost anywhere I wander in the industry in these last weeks, the topic of capacity utilization keeps coming up. Using the Federal Reserve's data, the nearly 25-year decline (with some brief rises along the way) in capacity utilization is rather clear. It's practically a meaningless measure, as the industry has had significant periods of high profits during the utilization decline, such as in the late 1990s. During the 1980s, utilization continued its decline as the industry invested in new presses to address the process color and digital prepress revolution, increasing volume and profits. The burst of utilization in the 2006-2007 period in the chart below was a period of sub-par profitability, even though utilization was at the same levels that produced significantly higher profits (about 2x to 3x!) ten years earlier. Even recently, profits have increased and the utilization rate is the lowest it's been on the chart.

There are lots of reasons why capacity utilization can't be used on its own to judge the success of the industry or to describe the industry condition. First of all, it just measures whether or not your shop floor is busy. It does not include any consideration of the value of what is produced or the unit cost of that production. Want high capacity utilization rates? Buy old, unproductive equipment. In that case, the slow production rate will increase utilization, but output will be lower and less profitable. Secondly, utilization measures do not include the effect of the market prices of competitive alternatives which are playing a greater factor in profitability than utilization.

Rather than focusing on utilization, it's much more important to understand breakeven points for each unit of equipment installed, as well as the overall breakeven levels for the company (and separate divisions). There must be constant efforts to drive that point down, along with parallel efforts to increase the distance between the breakeven point and revenue levels. Capacity utilization is a blunt and flawed tool that can lead to poor decisions. Rigid adherence to capacity utilization measurements can mislead managers, causing them to expend too much effort producing unprofitable goods with great efficiency. I've never understood the fascination with capacity utilization, and I hope that this discussion helps managers turn their attention to more appropriate and rewarding activity measures.