Capacity Utilisation - Full, Under And Over Utilisation Flashcards
Capacity definition
the MAXIMUM TOTAL LEVEL OF OUTPUT OR PRODUCTION that a business can produce in a given time period
a company producing at this level is said to be producing at full capacity
CU definition
the % of a FIRM’S TOTAL POSSIBLE PRODUCTION LEVEL thats being reached
if a company is large enough to produce 100 unitys a week but is actually only producing 92 = 8% CU
capacity management
concerned with the usage of the resources of a business
involves trying to get the most effective and efficient usage from the present capacity and anticipating and planning future capacity requirements
they need to manage: SPARE CAPACITY/UNDER-UTILISATION +
CAPACITY SHORTAGE
- factory space
- machines available
- amount of raw materials at hand
- amount of labour available
- IT capacity within a business
under- utilising capacity
EXCESS OR SPARE
firm’s OUTPUT IS BELO MAXIMUM POSSIBLE OUTPUT
= represents a waste of resources or spare capacity
= organisation is spending unnecessarily on its fixed assets
whats the ideal
90% is a sensible CU target
gives business flexiblity to have:
- machine downtime and maintenance
- now overwork and stress workers
- give flexibility to meet sudden ordersand deal with emergencies
this spare capacity also means:
- under-utilised resources
- higher average unit costs
whats capacity shortage
when a firm’s capacity is NOT LARGE ENOUGH TO DEAL WITH THE LEVEL OF DEMAND for its products
disappointed customer + loss of sales
what causes spare capacity
- competition taking their customers
- poor product
- incorrect marketing and advertising
ext:
- seasonal demand
- economy potentially being in a recession
- fall in demand for products
- over-investment in non-current assets
formula for capacity utilisation
actual/current production level
________________________ X 100
maximum possible output
how to achieve full/high capacity
- increasing the demand for the products you produce
^^^^^^ marketing dept campaigns to increase demand so more goods will need to be made but you also run the risk of going over full capacity = need more investment - reduce capacity - improve efficiency by cutting the scale of operations
^^^^^^ ‘MOTHBALLING’ some capacity is kept but taken out of usage (stored ready to be used when economy gets better)
^^^^^ productive capacity is also reduced - econmic climate for demand is reduced - producing different extra products with the same resources
^^^^^ produce other goods or variations to increase output and reach full capacity
full capacity constraints
- level of competition within the market in relation to the size of the market
^^^^ less likely for full to be obtained if all competitors are competing for the little consumers they have - stage of product in product lifecycle
^^^ if demand is declining then full is unlikely - if the product is seasonal
^^^^ demand will be lower it certain times and production levels will be below full capacity - new alternatives have entered the market
^^^^ reduced demand with new options and choice available, lower level of production - outsourcing
^^^^ reduce the capacity utilisation - increased capacity
^^^^ reduce the ability to reach full capacity especially if too much investment has taken place
why under-utilisation/spare is bad?
- fixed costs arent spread over many units = high cost per unit
- probably not benefitting from EOS
- possibly waste
- staff under-utilised for motivation and employment
- no opportunities for bonuses/overtime
- demand isnt high enough > not selling enough > not enough profit
- bad for most stakeholders as its a sign of a FAILING BUSINESS
is 100% full capacity utilisation good
in the short term!!!
depends on the scernario though
= football match once a week for 1hr 30 mins
in the long term = involves turning away customers/additional orders and competitors gain
why?
- overcrowding and pressure
- downtime is needed
- maintenance time is needed, changing production methods, training
- quality issues as work is rushed
= ideal CU is therefore dependable
how can a firm operate above 100% capacity/full capacity
- additional work hours for employees
- subcontract work + outsource (agencies)
solutions to manage capacity utilisation
INCREASING DEMAND
- marketing, 4ps in marketing mix, degree of competiton, stage in product lifecycle, seasonal, product variations, obsolense
REDUCING CAPACITY
- cut supply, try again in 3 years time due to ‘mothballing’ = a drastic approach, alter staff hours, ‘down-scaling’
managing too high or too low CU
too low = then raise demand, reduce supply (capacity)
too high = then raise supply, reduce/spread out demand
