Profitability & Cost Management Shared Interest Group

From Waste to Worth: Why Capacity Management Is the Missing Link in Profitability Models

By Pedro San Martín, Principal at Asher | PwC Interamericas

It started with a blank stare...

In a steering committee meeting at a manufacturing conglomerate in Monterrey, I asked:
"What’s your current capacity utilization rate?"

The COO blinked. “Are we talking machines, people, or plants?”
That single question exposed a blind spot I’ve seen across industries—from healthcare in Bogotá to logistics in Panama: companies are building profitability models without first understanding their capacity baseline. It's like trying to optimize a race car's fuel efficiency without knowing how much fuel it holds—or how many cylinders are firing.

That’s why Total Capacity Management by McNair and Vangermeersch is not just relevant. It’s revelatory.

Key Questions for Strategic Leaders

1. How does poor capacity visibility erode profitability, even in high-revenue models?

2. What types of capacity (theoretical, practical, strategic) should cost systems account for?

3. Why must profitability models integrate operational, tactical, and strategic capacity perspectives?

4. What frameworks exist to identify, measure, and manage capacity cost-effectively?

1. Capacity Blind Spots Undermine Profitability

Concept: Unused or idle capacity represents waste—financial, operational, and strategic.
Insight: The book reveals that every cost estimate has a built-in capacity assumption. If that assumption is wrong, so is the profitability analysis.
Evidence: Companies during the New Deal era, backed by the U.S. government’s NIRA program, hid idle capacity costs in product pricing, leading to distorted profit signals that endured for decades.
Example: In one Latin American telecom case, equipment utilization was at 48%, but fully loaded costing spread the overhead as if it were 95%, inflating perceived margins.
Application: Profitability models must segregate and explicitly report excess capacity costs. Otherwise, we’re just polishing insufficient data.

2. Not All Capacity Is Created Equal

Concept: McNair & Vangermeersch differentiate among theoretical, practical, and normal capacity—and their treatment in cost systems.
Insight: Choosing the proper baseline is not an accounting technicality; it’s a strategic decision.
Evidence: The authors’ fieldwork with firms like Caterpillar and Texas Instruments shows that adjusting for product mix and activity patterns can recover up to 12% in margin through more accurate overhead allocation.
Example: A CPG client in Colombia shifted from "normal" to "practical" capacity for internal decision support and saw a 37% improvement in cost attribution accuracy.
Application: Align your profitability model’s denominator with reality—not aspiration. Don’t manage from an Excel sheet; manage from the plant floor.

3. Capacity Must Be Managed Across Timeframes

Concept: Capacity management operates at three levels—operational (short-term), tactical (mid-term), and strategic (long-term).
Insight: Most profitability systems fixate on operational metrics (like uptime or headcount), ignoring how strategic capacity decisions—like automation or workforce design—reshape cost structures.
Evidence: The book traces how capacity management evolved from its strategic roots in the 1920s into a purely compliance-driven accounting focus after the 1950s, only now regaining relevance due to global cost pressure.
Application: Build your profitability engine like a tricycle: if you leave the strategic wheel flat, the other two can’t carry you far.

4. Practical Frameworks Exist—Use Them

Concept: The book outlines 12 capacity cost management models, from Gantt Idleness Charts to ABC-integrated capacity variance models.
Insight: Organizations don’t need to reinvent the wheel—they need to choose the right one for their terrain.
Example: A Latin American energy firm implemented the CUBES model (Capacity Utilization Benchmarking for Enterprise Sustainability) and reclassified 14% of their “fixed” costs as recoverable through better scheduling.
Application: Don’t wait for ERP vendors to solve this. Your finance and operations teams can start with a spreadsheet and a whiteboard.

Capacity is not just about machines. It’s about promises made—and broken—to your customers.
—Adapted from Chapter 1, Total Capacity Management

Conclusion: Capacity Is the Canvas of Profitability

As McNair and Vangermeersch write: “Managing capacity is truly a movable feast... bringing a company into close proximity with every major business issue.”
In the age of AI, automation, and agile operations, capacity isn’t just an input. It’s the substrate on which value is created—or lost.

If you’re serious about designing profitability models that reflect reality—not fantasy—I strongly recommend Total Capacity Management. It’s not light reading. But it’s foundational thinking.

Pedro San Martín
can be contacted at psanmartin@asheranalytics.com

Further reading

• McNair, C.J., & Vangermeersch, R. (1998). Total Capacity Management: Optimizing at the Operational, Tactical, and Strategic Levels. CRC Press.

• Johnson, H.T., & Kaplan, R.S. (1987). Relevance Lost: The Rise and Fall of Management Accounting. HBS Press.

• IMA. (1996). Statement on Management Accounting 4Y: Measuring the Cost of Capacity.