Capacity utilisation Flashcards
Capacity utilisation
the proportion of maximum output capacity currently being achieved
current output level / maximum output level x 100 = rate of capacity utilisation
- determining operational efficiency
Excess capacity
exists when the current levels of demand are less than the full capacity output of a business, also known as spare capacity
Rationalisation
reducing capacity by cutting overheads to increase efficiency of operations, often involving redundancies
Full capacity
when a business produces at maximum output
Capacity shortage
when the demand for a business’s products exceeds production capacity
Outsourcing
using another business to undertake a part of the production process rather than doing it within the business using the firm’s own employees
Business-process outsourcing
a form of outsourcing that uses a third party to take responsibility for certain business functions
Capacity utlisation – impact on average fixed costs, advantage
- when utilisation is at a high rate, average fixed costs will be spread out thin – fixed costs become low
- 100% capacity utilisation = lowest possible fixed costs
- job security for employees
Capacity utilisation – impact on average fixed costs, disadvantage
- low motivation levels due to workload
- customers cannot increase orders, losing long-term clients
- machinery working 24/7, no time for maintenance
Solving short-term excess capacity
- maintain output and produce for stocks
adv:
- no part-time working for staff
- job security for staff
- stocks can be sold at times of rising demand
- job security for staff
disadv:
- increase storage costs
- demand may not increase as expected – goods have to be sold at discounted price - introduce more flexibility into production
adv:
- production can be varied according to demand levels
- other products can be produced that may follow a different demand pattern
- avoid build-up of stock
- reduce storage costs
disadv:
- reduce worker motivation
- expensive equipment
- increase training costs
Evaluating the options of operating at full capacity
- increasing production capacity
- cost of expansion
- source of finance for expansion
- how long the expansion will take
- future demand levels - keep existing capacity, more outsourcing
- importance of work
- whether the business can give up control over the work
- quality assurance - keep existing capacity
- cost of other options
- future demand levels
- whether quality will be compromised
- whether staff can cope with increased workload
- whether firm can meet future unexpected orders
- whether machines can be serviced sufficiently
Solving long-term excess capacity
- rationalisation
ADV:
- reduces overheads
- higher capacity utilisation
DISADV:
- redundancy costs for staff payments
- low capacity and disappointed customers in high demand season
- loss of job security
- possibility of industrial action - research and development into new products
ADV:
- increased business competitiveness
- if done quick, can avoid rationalisation disadvantages
DISADV:
- expensive
- may take too long to prevent cutbacks in capacity and rationalisation
- requires long-term planning to be effective, not good for time crunch
Capacity shortage, advantage and disadvantage
ADV:
- no wastage
- low costs bc operated at 100% capacity utilisation
DISADV:
- lost sales
- customers not satisfied, reduces future sales
How to deal with long-term capacity shortage
- outsourcing supplies
ADV:
- quick to arrange
- no major capital investment
- offers much greater flexibility (able to end contracts if demand falls back)
DISADV:
- less control over quality of output
- high transport and administration costs
- unreliable delivery times - expansion of production facilities
ADV:
- long term increase in capacity
- in control of quality of product and delivery times
DISADV:
- high capital cost
- increases total capacity, but problems could occur if demand should fall for a long period of time
- time consuming to build new facility – customers impatient during high demand
Reasons for outsourcing
- shortage of capacity
- reduction and control of operating costs
- access to quality service or resources that are unavailable internally
- freed-up internal resources (e.g. less office space
