Chapter 25: Capacity utilisation and outsourcing Flashcards
Capacity utilisation
The proportion of maximum output capacity currently being achieved
current output level
——————————— X100
maximum output level
Outsourcing
Using another business to undertake a part of the production process rather than doing it within the business using the firm’s employees
Maximum capacity
The highest level of sustained output that can be achieved
Drawbacks to working at full capacity for a long time
Employees may feel pressured due to workload
Regular customers who want more may be left waiting
Machinery working continuously, not allowing maintenance
Excess capacity
When the current levels of output are less than the full-capacity output of a business. aka spare capacity
How to increase short term capacity utilisation
Maintaining high output levels
Adopting a more flexible production system
Insisting on flexible employment contracts
Short-term excess capacity
May be caused by low season demand
Long-term excess capacity
Might be caused by an economic recession or technological development which reduce demand
Rationalisation
Reducing capacity by closing factories/production units
Methods of improving long-term capacity
Rationalisation
Research and development of new products
Advantages of rationalisation
Reduces overhead costs
Results in higher capacity utilisation from the remaining production units
Disadvantages of rationalisation
Redundancy payments might have to be paid
Workers may worry about job security
Industrial action may be a risk
Capacity might be needed if the economy picks up
Advantages of research and development of new products
New products replace old ones, increase competitiveness
If introduced early, new products may prevent rationalisation
Disadvantages of research and development of new products
May be expensive
May take too long to prevent cutbacks in capacity
Without long-term plans, new products can be unsuccessful without the right marketing strategy
Capacity shortage
When demand for a business’s products exceeds production capacity
Methods of reducing long-term capacity shortages
Use subcontractors or outsource supplies
Invest capital in the expansion of production facilities
Advantages of using subcontractors or outsourcing supplies
No major capital investment required
Should be quick to arrange
If demand falls, the contract can be ended (flexibility)
Disadvantages of using subcontractors or outsourcing supplies
Less control of output quality
This may add to administration and transport costs
Uncertainty and reliability of delivery
Unit costs may be higher due to supplier profit margin
Advantages of investing capital in the expansion of production facilities
Increases long-term capacity
Business is in control of quality and delivery times
New facilities should be able to use the latest equipment
Economies of scale are possible
Job security
Disadvantages of investing capital in the expansion of production facilities
Capital costs may be high
There may be problems with raising capital
Problems if demand falls for a long period
Takes time to build and equip a new facility
Reasons for outsourcing
Reduction and control of operating costs
Increased flexibility
Improved company focus
Access to quality service or resources
Freeing up internal resources for other use
Drawbacks of outsourcing
Loss of jobs within the business
Quality issues
Customer resistance
Security
CSR (low-wage countries)
Business process outsourcing (BPO)
A form of outsourcing that uses specialist contractors to take responsibility for certain business functions, such as human resources and finance
