4.2 - Analysing operational performance

• Capacity


  Maximum Output with the Resources Currently Available
• Capacity


  • Depends on the number of employees and how skilled they are
  • Depends on the technology the business has what machinery it has, what state it's in, what kind of computer system it has, etc.
  • Depends on the kind of production process the business uses
  • Depends on the amount of investment in the business
• Capacity utilisation


  How much capacity a business is using
• 90% Capacity Utilisation is better than 100% Capacity Utilisation
• High capacity utilisation


  • Better than low capacity utilisation
  • However, 100% capacity utilisation has drawbacks:
• Drawbacks of 100% capacity utilisation

  • Businesses have to consider all their operational objectives when they plan their capacity usage. Cost isn't the only thing to think about it might not be possible to operate at 100% capacity and keep quality levels high.
  • The business may have to turn away potential customers because it can't increase output any more.
  • There's no downtime machines are on all the time. If a machine breaks down, it'll cause delays as work piles up waiting for it to be fixed. There's no time for equipment maintenance, which can reduce the life of machinery.
  • There's no margin of error. Everything has to be perfect first time, which causes stress to managers. Mistakes are more likely when everyone's working flat out.
  • The business can't temporarily increase output for seasonal demand or one-off orders.
  • If output is greater than demand, there'll be surplus stock hanging about waiting to be sold. It's not good to have valuable working capital tied up in stock.
• Businesses should plan production levels to achieve almost full capacity utilisation
• Firms with High Capacity Utilisation

  • Can Increase their Capacity
• Ways to increase capacity


  1. Use facilities for more of the working week

  2. Buy more machines, if they can afford them (and the staff needed to operate them)

  3. Increase staff levels in the long run by recruiting new permanent staff. In the short run they can employ temporary staff, part-time staff, or get their staff to work overtime

  4. Increase productivity by reorganising production by reallocating staff to the busiest areas, and increase employee motivation

  5. Subcontract work to other businesses in busy periods
• Subcontracting (or outsourcing)


  When a business uses another firm to do some work on its behalf
• Under-Utilisation


  Low capacity utilisation
• Under-utilisation is inefficient because it means a business is not getting use out of machines and facilities that have been paid for
• Under-utilisation


  Increases unit costs
• Higher capacity utilisation


  Increase in the number of units output without increasing the fixed costs
• Firms deal with Under-Utilisation


  1. Increase demand

  2. Reduce capacity
• Businesses stimulate demand


  • Change the marketing mix (e.g. change promotion, price, distribution)
  • Subcontract work for other firms
• Businesses reduce capacity


  1. Close part of production facilities (rationalisation/downsizing)

  2. Stop overtime, reduce working week, allocate staff to other work, not renew temporary contracts (short-term)

  3. Not replace staff as they retire, make staff redundant, sell off factories or equipment (long-term)
• Demand changes over time, so firms must think about demand in the future as well as the current demand
• The key to long-term success is planning capacity changes to match long-term changes in demand
• Market research can help predict future demand, but it's not 100% certain - there's always an element of risk
• Short-term changes in capacity utilisation provide flexibility
• Long-term solutions end up giving lower unit costs as long as predictions of demand turn out to be true