When John Wiley & Sons ask me to write Essentials of Capacity Management, my first thought was, “Who would want to read a book about capacity?” I had written Explicit Cost Dynamics to create a mathematical and philosophical basis for cash flow models and other concepts I subsequently developed and am sharing with you in this book. Explicit Cost Dynamics had, what I perceived to be, a hole in my explanation of the mathematical model. I compare this hole to dark matter with physics. For a long time, physicists said it was there, that the math supported it, but they struggled proving it. The math told me there was something there. I hadn’t defined it clearly, but the math was very clear and suggesting it was there. In the book, I called this black box “resources.”
As I began to write Essentials, I realized these resources were just capacity. I began to define capacity as all things purchased in anticipation of use. This includes space, labor, materials, equipment, and information technology, what I called capacity entities. Over time, however, I began to think there was more than one type of capacity; that the five “entities” mentioned in Essentials did not tell the whole story. When you have someone for eight hours, that time and that cost are fixed. However, what is created during that eight hours may vary. One person may have different output levels on different days, just as two people can have different outputs levels on the same day. This led to the creation of and distinction between input capacity and output capacity. Capacity, as defined in Essentials, transformed into input capacity, and output was defined subsequently as what input creates. This is described in the next chapter.
I sometimes refer to input capacity as static capacity.1 The term represents the transaction associated with buying the capacity that you hope to use—what you are truly paying for in anticipation of use. There are a few key attributes of input capacity:
1. There is a cash transaction involved.
2. What you pay is determined by how much you buy and the price you pay for the amount you bought.
3. The cost is independent of how it is used.
With the various types of input capacity, space, labor, equipment, information technology, and materials, you pay for what you have. The terms of payment may vary, of course, but the fact remains that there is a transfer of money to have the capacity available for your use.
Cost Determined by What is Purchased
The second common attribute of input capacity is that you pay based on how much you buy. If you lease 10,000 ft2 of office space, the price for that is determined and agreed upon, and you get the 10,000 ft2. Similarly, if you buy 500 linear feet of paper or one week of someone’s time, there is a single price for that single amount purchased.
The only way the cost of capacity changes for you is when you buy a different amount of capacity, you buy it at a different price, or both. This is shown in Exhibit 12.1.
Exhibit 12.1 It is important to understand how costC changes with capacity. To reduce costs, you must either buy less or buy cheaper. Think about buying gas. The less you buy at once or the cheaper the price, the lower the cost for that transaction. In this Exhibit, on the left, you can see that the more you buy, the more you will spend. On the right, when you can buy the same amount of capacity at a cheaper price, you can reduce costC
The Cost is Independent of Use
In math, two things are independent when a dependent variable, what is on the vertical or Y-axis, does not change with the independent variable, what is on the horizontal or X-axis. This can be represented as a straight horizontal line (Exhibit 12.2). For example, with long-distance calls, the price depended on time. Time is independent; it is whatever it is. However, price depends on how long the call was. There is a direct relationship between the cost and how long the call was, as shown in Exhibit 12.3.
Exhibit 12.2 There is no change to the cost incurred for local service based on call length. This suggests there is no relationship between the two. They are mathematically independent
Exhibit 12.3 Unlike local calls, there is a direct relationship between the cost you incur and the amount of time you speak. The reason is simple. When you buy minutes, the more minutes you buy, the more expensive it is for you. With local calls, you aren’t buying minutes, hence the lack of a change
However, with input capacity, there is no direct relationship between cost and use. How much you pay for space is determined by how much you bought and not what you choose to do with it, as shown in Exhibits 12.4 and 12.5.
Exhibit 12.4 Notice how input capacity behaves the same way as access to local phone service. The number of people using the space does not affect what is paid for the space. Hence, to calculate a cost per person would require a relationship that does not exist
Exhibit 12.5 Similar to Exhibit 12.4, the number of offices or, abstractly, the number of anything that represents the use of space has no effect on cost. Hence, the idea about being space efficient and using space more effectively does not, itself, affect cash
These attributes of input capacity are critical to understand. It is for these reasons that accounting struggles to create a cost for output. All calculated costs, costsNC, have to be created by assigning capacity costs to what you create from it. This is because there is no mathematical relationship between what you buy, input capacity, and how it is used. Recall, the lack of a relationship between local service and the cost of a phone call. More on this later. Now, on to output capacity.
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1In the early stages of developing these ideas, static was chosen because attributes such as price and quantity did not change. Later, I realized that this static capacity was the same as input to a process – what I start with or use to create output, hence the name input. I use both in conversation depending on the context.