Capacity

• Capacity is the maximum amount of output achievable if all resources are fully utilised
• Capacity utilisation is a measure of the percentage of output being achieved
• Capacity affects the ability of a firm to match supply to demand
• Capacity utilisation affects whether resources are being used efficiently or whether they are laying idle
• Low capacity utilisation will mean that resources are not being made to work effectively for the business, this will result in high unit costs, but if demand increases they will be able to meet demand
• High capacity utilisation will mean the firm is sweating its assets
• High capacity utilisation may affect quality and cause stress to the resources
• Importance of capacity

  • ability to match supply to demand
  • inverse relationship between capacity utilisation and unit costs
  • image / public perception
  • workforce motivation
  • ability to achieve business objectives
• How to fix under utilisation

  • increase demand
  • downsize
  • lease off spare capacity
• How to fix over-utilisation

  • reduce demand
  • outsource parts of the business' operations
  • increase capacity by investing in more resources
• The actions taken to fix over/under utilisation will depend on

  • business objectives
  • whether the issue is seen as a short term or long term
  • ease with which options could be implemented