Capacity Management

What is capacity?

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

How can capacity change?

• E.g. when a machine is undergoing maintenance, capacity is reduced

• Capacity is linked to labour: e.g. by working more production shifts, capacity can be increased

How is capacity a dynamic concept?

Capacity needs to take account of seasonal or unexpected changes in demand

What are the examples of capacity as a dynamic concept?

• E.g. Chocolate factories need the capacity to make Easter Eggs in November and December before shipping them to shops after Christmas

• E.g. Ice-cream factories in the UK needed to increase capacity during a heat wave quickly

Why does capacity utilisation matter?

• It is a useful measure of productive efficiency since it measures whether there are idle (unused) resources in the business

• Average production costs tend to fall as output rises- so higher utilisation can reduce costs, making a business more competitive

• Businesses usually aim to produce as close to full capacity (100% utilisation) as possible to minimise unit costs

• A high level of capacity utilisation is required if a business has a high break-even output due to significant fixed costs of production

What are the costs of capacity?

• Since capacity is all about the output a business can achieve, it is easy to see what costs are involved in making that capacity available

  • Equipment: e.g production line

  • Facilities: e.g building rent, insurance

  • Labour: Wages and salaries of employees involved in production or delivering a service

Why do most business operate below capacity?

• Lower than expected market demand: A change in customer tastes

• A loss of market share: Competitors gain customers

• Seasonal variations in demand: Weather changes lead to lower demand

• Recent increase in capacity: A new production line has been added

• Maintenance and repair programmes: Capacity is temporarily unavailable

What are the dangers of operating at low capacity utilisation?

• Higher unity costs- impact on competitiveness

• Less likely to reach breakeven output

• Capital tied up in under-utilised assets

What are the problems with working at high capacity?

• Negative effect on quality (possibly):

  • Production is rushed

  • Less time for quality control

• Employees suffer:

  • Added workloads and stress

  • De-motivating if sustained for too

• Loss of sales:

  • Less able to meet sudden or unexpected increases in demand

  • Production equipment may require repair