3.4 Operational Management

Capacity

The capacity of a business is the measure of how much output it can achieve in a given period of time

Capacity utilisation

The proportion of a business’ capacity that’s actually being used over a specific period of time

Capacity utilisation equation

(actual level of output / maximum possible output) x 100

Importance of capacity utitlisation

Any of the following reasons:

-useful measure of productive efficiency (as it measures whether there are idle resources)

-higher utilisation can reduce unit costs, making a business more effective

-aim to produce as close to full capacity as possible in order to minimise unit costs

-high level of capacity utilisation required if there’s a high break even output

Dangers of operating at a low capacity utilisation?

Any of the following:

-loss of new customers/inability to retain current customers

-higher unit costs (impact on competitiveness)

-unlikely to reach breakeven output

-capital is tied up in under utilised assets