Capacity Utilisation Flashcards
What is the capacity of an organization?
The maximum output that it can produce in a given period without buying any more fixed assets.
Fixed assets include machinery, factory space, etc.
What factors does capacity depend on?
Capacity depends on:
* Number of employees
* Employee skill levels
* Technology
* Production process
* Amount of investment
Technology includes the type and state of machinery and computer systems.
How is capacity utilisation calculated?
Capacity Utilisation (%) = output / capacity x 100
This formula helps assess how much of the available capacity is being used.
Is 90% capacity utilisation better than 100%?
Yes, 90% capacity utilisation is generally better than 100% capacity utilisation.
High capacity utilisation is preferred, but 100% can lead to operational issues.
What are the drawbacks of 100% capacity utilisation?
Drawbacks include:
* Difficulty in maintaining quality
* Potential loss of customers due to inability to increase output
* No downtime for maintenance
* Stress on managers due to perfection demands
* Inability to temporarily increase output for seasonal demand
* Risk of surplus stock if output exceeds demand
These factors can negatively impact overall business performance.
How can firms increase their capacity when operating close to 100% capacity utilisation?
Firms can increase capacity by:
* Using facilities for more hours
* Implementing two or three shifts
* Working on weekends and bank holidays
* Buying more machines
* Increasing staff levels (permanent or temporary)
* Increasing productivity through reorganization and employee motivation
* Subcontracting work during busy periods
Subcontracting allows firms to meet demand without long-term costs.
What is subcontracting?
Subcontracting (or outsourcing) is when a business uses another firm to do some work on its behalf.
This strategy helps manage unexpected increases in demand.
Fill in the blank: Capacity is the maximum output that an organization can produce without _______.
[buying any more fixed assets]
True or False: High capacity utilisation is always beneficial for a business.
False.
While high capacity utilisation is generally preferred, it can lead to operational challenges.
What can happen if output is greater than demand?
There will be surplus stock hanging about waiting to be sold.
What is the impact of having no downtime at 100% capacity?
If a machine breaks down, it causes delays as work piles up waiting for repairs.
