Capacity Utilisation

• capacity utilisation?

  measure of level to which a business assets are being used to produce output
• capacity utilisation = current output / maximum possible output x 100
• capacity utilisation compares current ouput to maximum possible output that can be produced using assets
• under-utilisation: if low level of capacity utilisation occurs then business would not be making most of its resources and have increased unit costs
• what happens in under-utilisation?

  • fixed costs are spread over fewer units of output - higher average total costs
  • workers are under-deployed - fear of redundancy
• fixed costs?

  costs which do not vary with the level of ouput
• redundancy?

  where job role is no longer needed by business and worker is dismissed, with compensation
• how does under-capacity provide a business with flexibility?

  • opportunities to engage workers in maintenance tasks
  • business can respond to sudden increases in demand
• over-utilisation: if over capacity utilisation occurs, business won't have flexibility to respond to new orders from customers
• what happens in over-utilisation?

  • staff's under pressure to produce high levels of output
  • staff turnover - overworked staff inclined to leave
  • machinery may breakdown - disrupts production + increases costs
• how does capacity utilisation increase business competitiveness?

  • minimise average total costs
  • workers feel secure in employment
  • busy business attracts customers
• ways to improve capacity utilisation:

  • increase sales: requires more units to be produced
  • outsourcing: taking tasks outside business can increase output
  • reduce capacity: sell fixed assets/reduce staffing level
  • redeployment: move underused resources to where its needed
  • increase usage: encouraging sales when demand is lower
• increasing level of capacity utilisation results in lower unit costs
• to increase capacity utilisation, increase demand and thus output
• capacity?

  measure of how much output it ca achieve in a given period
• key costs of capacity:

  • equipment
  • facilities
  • labour: wages/salaries
• why does capacity utilisation matters?

  • useful measure of productive efficiency - unused resources
  • average production costs falls as output rises
  • businesses produce to full capacity (100% utilisation) to minimise unit costs
  • high level of capacity utilisation required if business has a break-even output to fixed costs of production
• flexibility of capacity is important because it's the ability to adjust to meet changed in demand
• high capacity is better than low
• problems working at high capacity:

  • negative effect on quality
  • employees suffer
  • loss of sales
• business working at more than 100% capacity utilisation:

  • possible in short-term
  • increase workforce hours
  • sub-contract same production activities
  • reduce time spent maintaining production equipment
• problems working at low capacity utilisation:

  • higher unit costs - impact on competitiveness
  • less likely to reach break-even output
  • capital tied up in under-utilisation assets
• why most businesses operate below capacity utilisation<100%?

  • lower than expected market demand
  • loss of market share (competitor gains customers)
  • seasonal variation in demand
  • recent increase in capacity (new production line added)
  • maintenance and repair programmes