Utilization

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Utilization is a statistical concept (Queueing Theory) as well as a primary business measure for the rental industry.

Queueing Theory

In queueing theory, utilization is the proportion of the system's resources which is used by the traffic which arrives at it. It should be strictly less than one for the system to function well. It is usually represented by the symbol ρ. If then the queue will continue to grow as time goes on. In the simplest case of an M/M/1 queue (Poisson arrivals and a single Poisson server) then it is given by the mean arrival rate over the mean service rate, that is,

where λ is the mean arrival rate and μ is the mean service rate. More generally:

where λ is the mean arrival rate, μ is the mean service rate, and M is the number of servers.

In most cases a lower utilisation will mean less queuing for customers but will mean that the system is idle more (which could be considered inefficient).

Rental Equipment utilization

In equipment and tool rental companies, utilization is the primary method by which asset performance is measured and business success determined. In basic terms it is a measure of the actual revenue earned by assets against the potential revenue they could have earned. ^[1] Rental utilization is divided into a number of different calcualtions, and not all companies work precisely the same way. In general terms however there are 2 key calculations: the Physical utilization on the asset, which is measured based on the number of available days for rental against the number of days actually rented. (This may also be measured in hours for certain types of equipment), and the Financial utilization on the asset (referred to in North America as $ Utilization) which is measured as the rental revenue achieved over a period of time against the potential revenue that could have been achieved based on a target or standard, non-discounted rate.

Physical utilization is also sometimes referred to as Spot utilization, where a rental company looks at its current utilization of assets based on a single moment in time (eg Now, 9am today, etc).

Variations in Rental utilization calculations

Utilization calculations may be varied based on many different factors. For example:

• a company with equipment which requires preventative maintenance activities every 2 weeks, may decide that the number of available days in the month is decreased as it will unavailable due to maintenance for 2 days out of each month.
• Some rental businesses give "free days" on rental contract billing processes, for example on a national or public holiday, and therefor the equipment does not earn any money on those days, even though it is physically on rent.
• Some companies charge minimum rates, for example you may rent an excavator for 1 day, but be charged a 3 day minimum. The Physical utilization will therefore be 100% on the day, but the financial utilization is actually 300% as you've earned 3 days revenue for 1 day's work.
• Rental Softwareis normally required to assist management teams in measuring and calculating utilization figures.
• Asset Tracking softwaremay also be important in increasing or managing utilization figures. ^[2]

Profitability in relation to Rental Utilization

Utilization in this context is heavily linked to profitability^[3]. Low physical utilization may be mitigated by keeping rental rates high, high physical utilization normally justifies keeping rental rates lower.^[4] Different types of equipment may also alter the relationship between rates and utilization ^[5].

Equipment or Machine utilization

In production, an increase of utilisation will require more preventative maintenance and more wear and tear on the machine. Sometimes it is more economical to buy new equipment, but increasing the utilisation of the current equipment is usually the most practical. In the case of cellular manufacturing, each product is produced in one area or cell, sometimes requiring more machines and lower utilizations.

Human utilization

Utilisation can be thought of as the percentage that a resource (e.g. cashier, machine, server, inspector) is used. So if an employee has an average service time of 30 customers per hour and customers arrive at 25 per hour, then utilisation is 0.8333. This can be interpreted as "the employee is busy 83.33% of the time."

References

1. ^ http://constructionequipmentdistribution.com/article-detail.cfm?id=10921486 Utilization is key to rental business
2. ^ http://www.qualcomm.com/common/documents/white_papers/QUALCOMM-WP-EquipmentRental.pdf Using technology to improve utilization
3. ^ http://www.cedmag.com/article-detail.cfm?id=10922778 How to improve results
4. ^ http://www.rentalmanagementmag.com/newsart.asp?ARTID=1509 close correlation between utilization and rental rates
5. ^ http://www.rentalpulse.com/article.asp?ARTID=6519 How utilization affects profitability