Chapter 23 Capacity utilisation Flashcards
What is Capacity utilisation?
Capacity utiliation is the proportion of maximum output capacity currently being achieved.
How to calculate capacity utilisation?
current output level X 100
__________________
maximum output level
What happens when capacity utilisation is at a high rate?
When capacity utilisation is at a high rate, average fixed costs will be spread out over a large number of units – unit fixed costs will be relatively low.
What happens when capacity utilisation is low?
When capacity utilisation is low, average fixed costs will be spread out over a fewer number of units – unit fixed costs will rise.
Advantages of full capacity?
1 Average fixed costs will be at their lowest level and this should help to lift profits
Disadvantages of full capacity?
1 Staff may feel under pressure due to the workload and this could raise stress levels
2 Regular customers who wish to increase their orders will have to be turned away or kept waiting for long periods
3 Machinery will be working flat out and there may be insufficient time for maintenance and preventive repairs
What is Excess capacity?
Excess capacity exists when the current levels of demand are less than the full capacity output of a business – also known as spare capacity.
What happens with low levels of capacity utilisation?
Low levels of capacity utilisation lead to high unit fixed costs – so what options do firms have when attempting to reduce excess capacity? Before this question can be answered, the time factor needs to be considered.
Dealing with short-term excess capacity what are the options?
Option 1. Maintain output and produce for stocks
Option 2. Introduce greater flexibility into the production process:
1 part-time or temporary labour contracts
2 flexible equipment that can be switched to making other products
3 short-term working, e.g. all staff on three-day week.
Dealing with short-term excess capacity: Option 1. Maintain output and produce for stocks advantages?
1 no part-time working for staff
2 job security for staff
3 stocks may be sold at times of rising demand
Dealing with short-term excess capacity: Option 1. Maintain output and produce for stocks disadvantages?
1 unsuitable for perishable stocks or those that go out-of-date quickly
2 stockholding costs can be very substantial.
Dealing with short-term excess capacity: Option 2. Introduce greater flexibility into the production process Advantages?
1 production can be reduced during slack periods and increased when demand is high
2 avoids stocks build-up
Dealing with short-term excess capacity: Option 2. Introduce greater flexibility into the production process disadvantages?
1 staff may be de-motivated by not having full-time, permanent contracts
2 fully flexible and adaptable equipment can be expensive.
Dealing with long-term excess capacity what are the options?
Option 1. Rationalise existing operations and cut capacity, e.g. by closing factories/offices
Option 2. Research and development into new products
Dealing with long-term excess capacity: Option 1. Rationalise existing operations and cut capacity advantages?
1 reduces overheads
2 higher capacity utilisation
Dealing with long-term excess capacity: Option 1. Rationalise existing operations and cut capacity disadvantages?
1 redundancy costs for staff payments
2 capacity may be needed later if economy picks up or if firm develops new products.
Dealing with long-term excess capacity: Option 2. Research and development into new products advantages?
1 will replace existing products and make business more competitive.
2 if introduced quickly enough, might prevent rationalisation and the problems associated with this.
Dealing with long-term excess capacity: Option 2. Research and development into new products disadvantages?
1 may prove to be expensive
2 may take too long to prevent cutbacks in capacity and rationalisation.
How to overcome long-term capacity shortage problems, what are the options?
Option 1. Use subcontractors or outsourcing of supplies, components or even finished goods
Option 2. Capital investment in expansion of production facilities
How to overcome long-term capacity shortage problems: Option 1. Use subcontractors or outsourcing of supplies, components or even finished goods advantages?
1 no major capital investment is required
2 offers much greater flexibility than expansion of facilities – if demand falls back, then the contracts with other firms can be ended.
How to overcome long-term capacity shortage problems: Option 1. Use subcontractors or outsourcing of supplies, components or even finished goods disadvantages?
1 less control over quality of output may add to administration and transport costs
2 may be uncertainty over delivery times and reliability of delivery
How to overcome long-term capacity shortage problems: Option 2. Capital investment in expansion of production facilities advantages?
1 long-term increase in capacity
2 firm is in control of quality and final delivery times
3 new facilities should be able to use latest equipment and methods.
How to overcome long-term capacity shortage problems: Option 2. Capital investment in expansion of production facilities disadvantages?
1 capital cost may be high
2 problems with raising capital
3 increases total capacity, but problems could occur if demand should fall for a long period
4 takes time to build and equip a new facility.
Outsourcing: what is Capacity shortage?
A capacity shortage occurs when the demand for a business’s products exceeds production capacity.
Outsourcing: what is Outsourcing?
Outsourcing means using another business (a ‘third party’) to undertake a part of the production process rather than doing it within the business using the firm’s own employees.
Outsourcing: what is Business-process outsourcing?
Business-process outsourcing is a form of outsourcing that uses a third party to take responsibility for certain business functions, such as HR and finance.
What are the major reasons for outsourcing?
1 Reduction and control of operating costs 2 Increased flexibility 3 Improved company focus 4 Access to quality service or resources 5 Freed-up internal resources
Explain how Outsourcing Reduces and control of operating costs?
It could be cheaper to ‘buy in’ specialist services as and when needed than employing expensive specialists that might not be fully used at all times.
Explain how Outsourcing Increases flexibility?
By removing departments from the staff payroll and buying in services when needed, fixed costs are converted into variable costs.
Explain how Outsourcing Improves company focus?
By outsourcing ‘peripheral’ activities, the management of a business can concentrate on the main core aims and tasks of the business.
Explain how Outsourcing allows Access to quality service or resources
Many outsourcing firms employ quality specialists that small to medium-sized businesses could not afford to employ directly.
Explain how Outsourcing can Freed-up internal resources
If the HR department of an insurance company is closed and the functions bought in, then the office space and computer facilities could be made available to improve customer service.
What are the potential draw backs to out sourcing?
1 Loss of jobs within the business
2 Quality issues
3 Customer resistance
4 Security
Explain how Outsourcing affects the Loss of jobs within the business?
This can have a negative impact on motivation. Workers who remain directly employed by the organisation may experience a lack of job security.
Explain how Outsourcing creates quality issues?
Internal processes will be monitored by the firm’s own quality-assurance system. This will not be so easy when outside contractors are performing important functions.
Explain how Outsourcing creates Customer resistance ?
Overseas telephone call centres have led to criticism about inability to understand foreign operators
Explain how Outsourcing creates security risks?
Using outside businesses to perform important IT functions may be a security risk?
