Capacity Importance Increasing

• Capacity


  The maximum amount of goods or services a business can produce, deliver, or handle within a given time period
• Capacity examples

  • Car manufacturer has capacity to make 1,000 cars in a week
  • Courier company has capacity to deliver 100 packages per day
  • Fitness center has capacity for 200 members at any given time
• Advantages of increasing capacity

  • Enables the business to meet consumer demand
  • Maximizes revenues
  • Can be a competitive advantage in certain scenarios
• Problems of increasing capacity

  • Higher costs involved in increasing capacity
  • Consideration of impact on shareholders
  • Potential effects on staff motivation, retention, and productivity
• Higher capacity


  Hope for larger revenues than additional costs incurred
• Higher costs


  Impact on shareholders, potentially leading to lower profits and dividends
• Increased capacity


  Potential impact on staff motivation, retention, productivity, and labor cost per unit
• Motivation for Better or For Worse

  Consider the knock-on effects to retention, employee retention, productivity, impact on labor cost per unit, and financing the increase in capacity
• Increase in capacity

  Knock-on effects to retention, employee retention, productivity, impact on labor cost per unit
• Financing the increase in capacity


  Consider if you have the cash, retained profits, need to take out a loan, or sell/issue shares for equity
• Taking out a loan

  Impact on gearing ratio
• Capacity utilization and capacity are slightly different concepts
• Increase in capacity by 10

  If sales increase by only five percent, there is a fall in capacity utilization
• Falling capacity utilization


  Impacts on business efficiency, higher average cost per unit, competitive disadvantage
• Falling capacity utilization

  Increased flexibility of the business
• High capacity utilization


  Staff may be overworked, affecting morale and motivation
• Flexible capacity


  Ability to increase or reduce capacity quickly based on demand
• Flexible organization


  Optimizing capacity utilization, efficiency, and average cost per unit
• Zero hours contract


  Enables business flexibility and optimization of capacity utilization