Business 2.4.2 Capacity Utilisation

• • The capacity of a business is a measure of how much output it can achieve in a given period
  • Capacity is a dynamic concept: capacity cab change - linked with labour
  • A measure of ‘potential’ or ‘maximum’ output. Not every business will be able to operate to its full potential, and sometimes, a business will find demand so high that it does not have sufficient capacity
• • How Capacity is managed has a direct effect on the performance of a business
  • To be able to meet demand from customers, it needs to have the capacity
  • Having capacity enables orders to be met and revenues generated.
  • A lack of capacity has an effect on business performance - EG, a restaurant will lose sales if customers turn away seeing all the tables full
• What does Capacity Utilisation measure?

  The extent to which capacity is used / utilised during a specific period.

  The proportion ( % ) of a business capacity that is actually being used over a specific period.
• What is the calculation for Capacity Utilisation?

  Current Output / Maximum Possible Output = x 100
• Capacity Utilisation is an important concept because:

  • It is a useful measure of productive efficiency since it measures whether there are idle ( unused ) resources in the business
  • Average production costs tend to fall as output rises, so higher utilisation can reduce unit costs, making a business more competitive
  • A high level of capacity utilisation is required if a business has a high break - even output due to significant fixed costs of production
• Implications of Under - and - Over utilisation of capacity:

  Under:

  • Impact on average / unit costs - main one
  • Motivation
  • Brand image
  • Maintenance and Training
  • Ability to take on new orders

  Over:

  • Impact on average / unit costs
  • Motivation
  • Brand image
  • Inability to take on new orders
  • Quality
• Under Utilisation: Impact on average / unit costs

  Fixed costs don’t change in relation to output, therefore when a business produces less, the fixed costs are spread out over fewer units of output. Subsequently, the average cost / cost per unit will increase
• Under Utilisation: Motivation


  If there is too much spare capacity, workers may become bored or fear for their job security therefore leading to a negative impact on motivation
• Under Utilisation: Brand Image

  EG, If a cafe is always empty, customers may perceive it to be of poor quality
• Under Utilisation: Maintenance and Training

  The business could use the time to train workers or perform routine maintenance that may be difficult during busier periods
• Under Utilisation: Ability to take on new orders

  If the business has spare capacity, then it may be able to take on new orders compared to a business which is operating at 100% capacity utilisation
• Over Utilisation: Impact on average / unit costs

  Operating at full capacity results in lower average costs /unit costs - more competitiveness
• Over utilisation: Motivation


  Workers feel more secure in their jobs but if they are too busy - decreased motivation
• Over Utilisation: Brand Image

  EG, a cafe with a constant full reputation - favourable reputation. However, it will be difficult to book and with customer service with queuing and crowding so customers may go somewhere else
• Over Utilisation: Inability to take on new orders

  Only occurs if the business finds a short - term way to increase capacity ( EG, increasing overtime ) - higher labour costs
• Over Utilisation: Quality


  Workers can make mistakes during the production process due to rushing or being too busy
• Ways of improvement:

  • Reduced capacity
  • Marketing
  • Outsourcing
  • Indirect Methods
• Reduced capacity:


  Will improve capacity utilisation. EG, smaller premises, making staff redundant or selling unwanted or under - utilised assets
• Marketing:


  Allows business to increase sales which leads to increased capacity utilisation
• Outsourcing:


  Delegating one or more business processes to an external provider. This can help a business respond to sudden and unexpected increases in demand
• Indirect Methods:

  EG, if a competitor goes out of business, other businesses in the market may find their capacity utilisation improving
• Why does capacity utilisation matter?

  • Measured the production efficiency since it measures whether there are idle ( unused ) resources in the business
  • Average production cost tend to fall as output rises - so higher utilisation can reduce unit costs, making a business more competitive
  • Businesses usually aim to produce as close to full capacity as possible in order to minimise unit costs
  • A high level of capacity utilisation
• What are the costs of capacity?

  • Equipment - production line
  • Facilities - building rent / insurance
  • Labour - wages and salaries of employees involved in production or delivering a service