Every business plan presented to a buyer contains a sentence along the lines of "current production capacity can support the planned growth without significant investment". It is one of the most frequent statements and one of the least verified. The reason is simple: whoever writes it starts from the nameplate capacity of the machines, and whoever reads it has no time to go to the shop floor and count. The difference between the two, however, almost always ends up in the price, or worse, in the cash of the first year after closing.
Where the wrong number comes from
The nameplate capacity of a line is what the manufacturer declares: parts per hour at nominal speed, with the machine running without stopping. Multiplied by shift hours and working days, it gives a reassuring number. The problem is that no line runs like that. It stops for breakdowns and micro-stops, it stops for changeovers, it runs slower than nominal on some products, it produces parts that have to be scrapped or reworked.
The standard way to measure this is OEE, overall equipment effectiveness, which is the product of three factors: availability, meaning how much time the line runs compared with how much it should; performance, meaning how fast it runs compared with nominal speed; and quality, meaning how many good parts come out of the total.
An example with constructed figures
Take a line with a nameplate capacity of 600 parts per hour, on two eight-hour shifts, for 220 working days. Nominal capacity is 2,112,000 parts per year. Suppose that on the shop floor we measure availability of 85%, performance of 90% and quality of 97%.
| Item | Value |
|---|---|
| Nameplate capacity | 600 parts/hour |
| Available hours per year | 2 shifts × 8 hours × 220 days = 3,520 hours |
| Nominal capacity | 2,112,000 parts/year |
| Availability × performance × quality | 85% × 90% × 97% = 74.2% |
| Actual capacity | about 1,567,000 parts/year |
Now suppose that the line currently produces 1,450,000 parts per year and that the business plan forecasts volume growth of 25%, that is 1,812,500 parts.
| Comparison | Utilisation required by the plan |
|---|---|
| Against nominal capacity | 86% |
| Against actual capacity | 116% |
Against nameplate capacity there seems to be headroom. Against actual capacity, the plan asks for 16% more than the line can deliver. The forecast growth cannot happen without an investment, a third shift or a change in organisation, and none of these three is free or immediate.
This is not an extreme case. An OEE of 85% is the value traditionally cited as world class; in small and medium-sized manufacturers, values between 60 and 70% are common, and many companies do not measure it at all.
How to verify it in practice
In a due diligence, capacity is not verified on data sheets but on three cross-checked sources.
The first is data: production records, orders shipped, raw material consumption, machine hours from the ERP if they exist. Comparing parts produced in a year with hours actually worked already gives a first estimate of real OEE, without sophisticated tools.
The second is the shop floor. A day on the line is worth more than ten spreadsheets: you see changeover times, work in progress queuing in front of the bottleneck, machines waiting for maintenance, scrap bins. Often the real constraint is not the main machine but a downstream station, an oven, a manual inspection, one person who is the only one able to perform an operation.
The third is people. The production manager and the maintenance technician almost always know where the limit is, even if it appears in no document. When what they say does not match what the data says, the gap is information in itself.
What it means for the price
The result of the check is not a technical judgement for its own sake. If actual capacity cannot support the plan, there are three possible consequences. The required investment goes into the buyer's cash requirement, and therefore into the price negotiation. Or the business plan has to be revised downwards, and with it any valuation based on future cash flows. Or conditions are written into the contract, for example by linking part of the price to achieving the stated volumes.
For the seller, the reasoning works the other way round. A company that measures its OEE, knows its bottleneck and can demonstrate its capacity with production data presents the buyer with a number that stands up to scrutiny. It is one of the simplest ways not to leave value on the table.
The figures in the example are constructed to illustrate the method and do not refer to any real company.
Sources
- Seiichi Nakajima, Introduction to TPM: Total Productive Maintenance, Productivity Press, 1988. Definition of OEE as the product of availability, performance and quality, and the 85% benchmark.
Lydius Operations works on industrial diagnostics, technical and operational due diligence and corporate transactions for manufacturing companies. The first meeting lasts forty-five minutes and starts from a reading of your latest filed financial statements.
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