Capacity utilisation

• Capacity

  Maximum Output with a given period without buying any more fixed assets (machinery, factory space, etc.)
• Capacity

  • Depends on the number of employees and how skilled they are
  • Depends on the technology the business has (machinery, computer systems, etc.)
  • Depends on the production process the business uses
  • Depends on the amount of investment in the business
• Capacity utilisation


  How much capacity a business is using
• Drawbacks of over-utilisation

  • Businesses have to consider all their objectives, not just cost
  • May have to turn away potential customers
  • No time for equipment maintenance
  • No margin of error, mistakes more likely
  • Can't temporarily increase output for seasonal demand
  • Surplus stock if output greater than demand
• Ways to increase capacity


  1. Use facilities for more of the working week

  2. Buy more machines

  3. Increase staff levels permanently or temporarily

  4. Increase productivity (reallocate staff, increase employee training)

  5. Outsource work to other businesses
• Firms can outsource work to other businesses in busy periods to handle unexpected increases in demand without increasing their own capacity
• Under-Utilisation


  Inefficient and increases Unit Costs
• Increase in unit costs

  Firm needs to increase prices
• Increasing prices

  Firm becomes less competitive, which may reduce sales
• Negative brand image from underutilisation

  • A supermarket didn't use all of the shelving space it had, then the empty shelves may give customers a negative impression of the supermarket
• Benefits from underutilisation

  • Firm may be able to accept new orders from increases due to seasonal demand
  • Organising machine maintenance and staff training could be easier
• Increasing demand


  • Change the marketing mix (promotion, price, distribution)
  • Accepting outsourced work from other firms
• Reducing capacity

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

  2. Stopping overtime or reducing working week

  3. Not renewing temporary contracts

  4. Not replacing staff as they retire

  5. Making staff redundant

  6. Selling off factories or equipment
• 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 some risk
• Firms should be flexible and temporarily increase existing capacity utilisation if an increase in demand isn't expected to continue long-term
• Temporary solutions end up giving lower unit costs for seasonal goods, goods heading towards decline in their life cycle, and one-off special events