4.3 CAPACITY UTILIZATION AND OUTSOURCING

• Capacity utilisation


  The proportion of maximum output capacity currently being achieved
• Calculating capacity utilisation


  Rate of capacity utilisation = Current output level / Maximum output level x 100
• High capacity utilisation


  Average fixed costs will be spread out over a large number of units, so fixed costs will be relatively low
• Low capacity utilisation


  Fixed costs will have to be borne by fewer units, so unit fixed cost will rise
• Benefits of 100% capacity utilisation


  • The business can claim how successful it is, gives employees a sense of security and pride
• Drawbacks of operating at full capacity for a long period


  • Staff may feel under pressure due to workload, no slack time for production scheduling mistakes, regular customers may be turned away, machinery may break down due to lack of maintenance
• Excess capacity


  Spare capacity, when current levels of demand are less than the full capacity output of a business
• Low capacity utilisation


  Leads to high unit fixed cost
• Options to solve short-term excess capacity


  Maintain high output levels but add to stock, adopt a more flexible production system, offer flexible employment contracts to staff
• Rationalisation


  Reducing capacity by cutting overheads to increase efficiency of operation, such as closing a factory or office department, often involving redundancies
• Cutting capacity too much


  May cause an unexpected upturn in demand to be unable to meet, and lead to staff redundancies and low worker motivation
• Evaluating options for excess capacity in the short term


  Consider marketing solutions such as cutting prices or entering overseas markets
• Evaluating options for excess capacity in the longer term


  Find out the exact cause that made the existing products less competitive, such as promotional campaigns by rivals, products not fulfilling customer needs, or general recession in demand
• Capacity shortage


  When the demand for a business's products exceeds production capacity
• Outsourcing


  Using another business (a third party) to undertake a part of the production process rather than doing it within the business the firm's own employees
• Major reasons for outsourcing

  • Reducing and controlling operation cost, increased flexibility, improve company focus, access to quality service or resources, freed-up internal resources
• Potential drawbacks of outsourcing

  • Loss of jobs within the business, quality issues, customer resistance, security issues
• Outsourcing is a global trend that will continue in the future, as it can save cost and improve efficiency, but there is a risk of failure
• Companies should do a cost-benefit analysis of the outsourcing decision, and determine what their core activities are that must be kept within the direct control of the business