Capacity Utilisation

• Capacity


  Maximum output in a given time period
• Capacity Utilization


  Percentage of maximum output being used in a given time period
• Formula for calculating capacity utilization

  Actual output divided by capacity (maximum output) times 100
• Capacity Utilization in different industries

  • Hotel: 75%
  • Factory: 50%
  • Consultancy: 80%
• Higher capacity utilization is better than lower capacity utilization

  Higher efficiency, less waste, lower unit costs
• Higher capacity utilization suggests higher efficiency as more resources are being used at one particular time, leading to less waste and potentially lower unit costs
• High capacity utilization is especially important for businesses with high fixed costs to bring down average unit costs
• Lower unit costs due to higher capacity utilization can lead to the ability to charge lower prices, increasing demand, and revenue
• Higher capacity utilization can impact other functional areas like marketing and human resources


  Low capacity utilization may negatively affect reputation, morale, and staff turnover
• There are times when low capacity utilization may be preferred over high capacity utilization
• Staff turnover may be higher with higher capacity utilization
• There are times when you might want to have low capacity utilization
• Reasons for wanting low capacity utilization


  • Suggests spare capacity
  • Provides operational flexibility
  • Allows coping with unexpected or expected demand
  • Helps adjust to new trends or seasonal fluctuations
  • Anticipates growth in the market
• Spare capacity can improve the quality of products
• Improving product quality with spare capacity

  1. Production is not rushed

  2. More time for quality control (QC)

  3. Possibility to build a quality assurance (QA) process

  4. Space to upkeep factors of production
• Training and upskilling staff with spare capacity

  1. Time for training and upskilling

  2. Improving staff quality for client interactions
• Upkeeping machinery with spare capacity

  1. Repairing, servicing, and ensuring durability of machinery

  2. Extending machinery lifespan
• Reducing or increasing capacity is a strategic decision
• Reasons for reducing capacity

  • Stable demand throughout the year
  • Not in a growing market
  • Unnecessary spare capacity
• Reducing capacity is known as rationalization
• Rationalization for reducing capacity

  1. Increasing efficiency by reducing scale through redundancies or production size reduction

  2. Possibly selling factories or machinery
• Ways to increase capacity

  • Hiring more staff
  • Getting more machinery or a new factory
  • Outsourcing parts of operational processes
• Increasing capacity can lead to higher efficiency