Capacity Management

• Capacity is a measure of how much output it can achieve in a given period
• Capacity is a dynamic concept
• Capacity can change. For example if capital equipment is broken or labour is increased
• Capacity need to take account of seasonal or unexpected changes in demand
• Capacity Utilisation is the percentage of a business capacity that is actually being used over a specific period
• Capacity Utilisation

  Actual level of output / Maximum possible output x 100
• Capacity Utilisation is a useful measure of productive efficiency measuring whether a business has unused resources
• Average production costs tend to fall as output rises (Economies of Scale). Higher utilisation can reduce unit costs.
• Businesses usually aim to produce close to full capacity in order to minimise unit costs
• A high level of capacity utilisation is requires if a business has a high break even output due to significant fixed costs of production
• Key costs of capacity are: Equipment, Facilities and Labour.
• Businesses operate below capacity due to: Lower than Expected demand, loss of market share, seasonal variations in demand and recent increases to capacity.
• Dangers of operating at low capacity includes: Higher unit costs, capital tied up in underutilised assets and less likeliness to reach break even output.
• Dangers of operating at High Capacity Utilisation includes: Negative effects on quality, Demotivated workforce and loss of sales.