Chapter 38: Capacity utilization

Capacity utilization

Use that a business makes of its resources

Capacity utilization formula

Capacity utilization = current output/maximum current output * 100

Under-utilization

Position where business is producing at less than full capacity

Negative implications of under-utilization

• Experienced drop in demand ➡ due to increased competition in the market

• Business not making the most of its resources

• Unit costs are not minimized

• Workers are demotivated ➡ operating with too much spare capacity ➡ accustomed to ‘light’ orders ➡ may dislike working harder when business gets more orders

Positive implications of under-utilization

• Business can cope easier with increase in demand

• Less-work related stress

• Workers + managers relaxed and comfortable with workloads

Over-utilization

Position where business is running at full capacity ➡ straining resources

Negative implications of over-utilization

• Causes stress and tiredness to workforce

• Machines may be overworked to breaking point ➡ breakdowns can be expensive

• Business may not be able to respond to increase in demand

• Insufficient time for staff training + maintenance work

Positive implications of over-utilization

• Average costs are lower ➡ fixed costs spread across more units of output

• Helps improve competitiveness and raise profits

• Staff motivation improved ➡ workers feel more secure

• Busy operation improves company’s image

Dealing with capacity under-utilization

• Reduce capacity

• Increase sales

• Increase usage

• Outsourcing

• Redeployment

Dealing with capacity over-utilization

• Increase inventories

• Raise prices

• Outsourcing

• Redeployment

• Acquiring temporary use of resources

• Expansion