17. Capacity Utilisation Flashcards
What is capacity
Maximum amount of output produced using current employees and machinery
What is capacity utilization?
About the use that a business makes of its resources
If business is unable to increase capacity it is said to be running at full capacity (100%)
However operating at less than full capacity would have space, unused or surplus capacity
In some cases, the business choose to operate at less than full capacity to be more flexible in meeting unexpected demand or to reduce workload on staff and machinery
How do you calculate capacity utilization
Capacity utilization = current output/max possible output x 100
What are the implications of underutilization
Business may be underutilizing if it has experienced a drop in demand due to increased competition in the market eg. Seasonal demand
What are the disadvantages of capacity underutilization?
Business will be making the most of its resources
Too much spare capacity will affect workers motivation
What are the advantages of underutilization?
Business able to cope with sudden increase in demand
Customers go to rivals that are able to deal with demand fluctuations
Less work related stress as managers and workers will be more relaxed —> decrease rate of absence
What are the implications of capacity overutilisation
If a business is running to full capacity because average cost is lower
However might be over utilizing its resources, meaning resources will be stretched uncomfortably
What are the disadvantages of capacity over utilization?
Pressure of constantly working at full capacity can put strain on some resources —> machines may be overworked to breaking point
Causes stress and tiredness to workforce, possibly increasing risk of accidents/absence
If a business is using flow production techniques, breakdowns on a production line can be enormously expensive
Not able to respond to increase in demand
What are the advantages of capacity over utilization ?
Lower average cost , will help improve competitiveness and raise profit
Staff motivation might be good -> if workers feel secure in their jobs
Opportunities to increase people’s earnings by doing overtime
How do you deal with capacity underutilization?
Reduce capacity
Increase sales
Increase usage
Outsourcing
Redeployment
How does reducing capacity help deal with capacity underutilization?
Getting rid of resources business can do without eg.
Reduce staff by making people redundant
Sale of unused fixed assets using sale and leaseback
Move to smaller premises
How does increasing sales help deal with capacity underutilization?
If they sell more output they’ll have to produce more = ^ capacity utilization
Might need to spend on promotion to increase sales
How does increasing usage help deal with capacity underutilization?
Provide incentives (might include discounts to encourage customers to buy more)
How does redeployment help deal with capacity underutilization?
If a business has too many resources in one part of the business, may be able to deploy them in another part
How does outsourcing help deal with capacity underutilization?
When there is high level of capital equipment with lower utilization rates the business can outsource the work by hiring another business to do it —> reduces cost
How are the advantages of using outsourcing to help deal with capacity underutilization?
- specialist business operate more efficiently than business with little knowledge of industry
- negotiate lower prices
- take on outsourcing contract for other business
How do you deal with capacity over utilization?
Increase inventories
Raising prices
Outsourcing
redeployment
Acquiring temporary use of resources
Expansion
How does increasing inventories help deal with capacity over utilization?
Future surges in demand can be prepared for by building up stocks
Disadvantage: only helpful if a business has spare capacity during normal operating period
How does outsourcing help deal with capacity over utilization?
Business is DOING outsourcing. When working at full capacity, business can outsource work to other business in order to keep up with demand.
Might be good approach if there’s a temporary surge in demand
How does raising prices help deal with capacity over utilization?
Higher prices due to increase in demand might reduce demand so pressure on production resources is reduced
Disadvantage: risky because too many customers might find cheaper alternatives and never return
How does redeployment help deal with capacity over utilization?
Switch resources from a building site where there is less pressure to a building site with fast approaching completion deadline
How does acquiring the temporary use of resources help deal with capacity over utilization?
If a business cannot deal with the problem by encouraging its own employees to work overtime, may be possible to take on temporary staff to help out
Disadvantage: production is capital intensive, might be difficult
How does expansion help deal with capacity over utilization?
Rising demand will continue, it can expand the scale of its operation
By extending current premises or relocating to larger buildings
