capacity management

• What is capacity?

  The capacity of a business is a measure of how much output it can achieve in a given period.
• Why Capacity is Important

  In order for a business to be able to meet demand from customers, it needs to have the capacity to do so. Having capacity enables orders to be met and revenues generated.
• Costs of Capacity

  Equipment: e.g. production line

  Facilities: e.g. building rent, insurance

  Labour: wages and salaries of employees involved in production or delivering a service
• what is capacity utilisation?

  Capacity utilisation measures the extent to which capacity is used during a specific period.
• Capacity Utilisation calculation

  (Actual output / potential output) x100
• Why is capacity utilisation important

  • 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

  • Businesses usually aim to produce as close to full capacity (100% utilisation) as possible in order to minimise unit costs

  • A high level of capacity utilisation is required if a business has a high breakeven output due to significant fixed costs of production
• Reasons Why Businesses Operate Below Full Capacity

  Lower than expected market demand

  A loss of market share

  Seasonal variations in demand

  Recent increase in capacity

  Maintenance and repair programmes
• Drawbacks of High Capacity Utilisation

  • There is less time for productive equipment and facilities to be maintained and repaired, which may increase the likelihood that they break-down in the future;

  • Employees involved in production are out under greater stress and pressure which can be counter-productive if, for example, they become demotivated or it contributes to an increase in absenteeism

  • Customer service may deteriorate if, for example, customers have to wait longer to be served or to receive their product
• Options to Increase Capacity

  • Increase workforce hours (e.g. extra shifts; encourage overtime; employ temporary staff)

  • Sub-contract some production activities (e.g. assembly of components)

  • Reduce time spent maintaining production equipment