CIE As Level Business | 4.3 Capacity Utilisation & Outsourcing

Capacity Utilisation

The proportion of maximum output capacity currently being achieved.

Formula for *rate of capacity utilisation*

(Current output level / Maximum output level) x 100

Advantages of *undercapacity utilisation* (name 2)

- Can *easily increase production* if needed as the business is not working at full stretch.

- Spare time can be used for *important jobs* (i.e. checking and fixing machinery) that would otherwise be overlooked.

Disadvantages of *undercapacity utilisation* (name 2)

- *Higher unit costs* as fixed costs are spread over fewer units of output.

- *Lower morale* as workers may have fears of redundancy when under-employed.

What are the ways to increase capacity utilisation?

1. *Increase customer demand* through marketing.

2. *Make better use of staff and equipment* through planning and scheduling.

3. *Accept more orders, even at lower profit margins*

4. *Produce for other businesses* using spare capacity.

5. Launch products or services *at different times of year* to spread demand and avoid quiet periods.

6. *Close under-used parts of the business*

Outsourcing

Using another business to undertake a part of the production process rather than doing it within the business using the firm's own employees.

Advantages of *outsourcing*

1. *COST SAVINGS*

—> Reduced hiring, training, maintenance and management costs.

2. *ACCESS TO SPECIALISED SKILLS*

—> External specialists provide resources, knowledge, and expertise.

3. *INCREASED FLEXIBILITY*

—> Can scale operations based on demand fluctuations.

4. *FOCUS ON CORE COMPETENCIES*

—> Businesses can concentrate on their core competencies where they can add value.

Disadvantages of *outsourcing*

1. *QUALITY CONTROL*

—> Harder to ensure consistent quality.

2. *LOSS OF CONTROL*

—> Must select reliable partners to protect their interests.

3. *DATA SECURITY AND CONFIDENTIALITY*

—> Sharing sensitive info outside of the business introduces risks.