Capacity Management and Outsourcing 25

These flashcards cover key concepts related to capacity management and outsourcing, providing essential questions and answers for exam preparation.

What is maximum capacity in a business context?

The total possible level of sustained output a business can achieve in a given time period.

What happens when a business produces at maximum output?

It experiences a fall in capacity utilization.

What is capacity utilization?

The proportion of maximum output capacity currently being achieved.

How is capacity utilization calculated?

Capacity utilization is the current output level divided by the maximum output level, multiplied by 100.

What are the effects of low capacity utilization?

It leads to higher unit costs and can significantly affect profit margins.

What are some drawbacks of operating at full capacity?

Employees may feel pressured, machinery may become unreliable due to lack of maintenance, and regular customers might be turned away.

What does it mean to operate at under capacity?

It indicates that resources are not fully utilized, leading to inefficiencies and higher unit costs.

What is a capacity shortage?

It occurs when demand for a product exceeds the current output or production capacity.

What must management analyze when there is a capacity shortage?

The cause of excess demand and the time period it is likely to last.

What are options for a business facing a capacity shortage?

Increase the scale of operation, outsource work, or keep existing capacity and manage demand.

What is the advantage of using subcontractors or outsourcing?

No major capital investment is required, and it offers flexibility.

What is rationalization in the context of capacity?

Organizing resources to increase efficiency and potentially reducing capacity by cutting overheads.

What is excess capacity?

It exists when current levels of demand are less than the full capacity output of a business.

Define subcontracting.

Paying another business to undertake part of the functions required to produce a product or service.

What is outsourcing?

Using another business to handle part of the production process rather than using the firm's own employees.

What are some benefits of outsourcing?

Reduction and control of operating costs, increased flexibility, and access to specialist services.

What can be a disadvantage of outsourcing?

Quality issues and potential job losses within the business.

What is Business Process Outsourcing (BPO)?

A method of subcontracting various business-related operations to third-party vendors.