Capacity Utilization Notes
Under-utilization of Capacity
Causes:
Drop in demand (seasonal variations, increased competition, changing trends).
Technical or staffing issues.
Excessive initial capacity (e.g., building too large a factory).
Advantages:
Ability to easily increase production to meet sudden demand increases, leading to satisfied and loyal customers.
Reduced stress for staff due to less pressure to work hard.
More time available for maintenance and training.
Disadvantages:
Inefficient due to higher cost per unit output compared to high capacity utilization.
Demotivated staff due to being underworked and potential job insecurity.
Negative brand image (e.g., empty restaurant).
Over-utilization of Capacity
Causes:
Unexpected surge in demand (seasonal variations, decreased competition, changing trends).
Insufficient initial capacity (e.g., inadequate planning for higher demand).
Advantages:
More efficient as fixed costs are spread over more units of output, resulting in lower average cost per unit, increased competitiveness, and higher profits.
Potential for higher pay for workers due to overtime.
Disadvantages:
Demotivating for staff due to overwork, leading to tiredness, accidents, defects, and absences.
Inability to respond to sudden demand increases, potentially turning away customers and damaging the brand image.
Reduced time for training and maintenance.
Overcoming Under-utilization
Reduce capacity (relocating, redundancy, leasing assets, rationalization).
Increase sales (adjusting the 4Ps of marketing).
Increase usage (e.g., cutting prices at off-peak times).
Outsource operations to another business.
Redeploy staff/resources to more needed areas.
Balance seasonal demand.
Overcoming Over-utilization
Increase stock (finished goods for rise in demand).
Raise prices (dependent on Price Elasticity of Demand (PED)).
Outsourcing (have other businesses make your product).
Redeploy staff/resources to busy areas.
Hire temporary staff.
Expand business (long-term solution).
Balance seasonal demand.
Rationalization
Definition: Reducing capacity to become more efficient, increasing flexibility but potentially increasing maintenance/storage costs.
Outsourcing
Definition: Asking other businesses to undertake some of its operations/activities.
Resolving Capacity Issues - Factors to Consider
Whether demand is temporary, seasonal, or permanent.
Volatility/unpredictability of demand.
Flexibility of workforce.
Nature of product (e.g., shipbuilding vs. staffing at a 7/11).
Capacity and Capacity Utilization
Capacity: The maximum amount of output a business can produce.
Capacity Utilization: How much capacity is actually being used.
Full Capacity: 100% of the available capacity is being used.
Capacity Utilisation Formula
Capacity\ Utilisation = \frac{Current\ Output}{Maximum\ Possible\ Output\ (Capacity)} \times 100
$$(\frac{
Rationalisation
Deactivating/storing /preserving equipment/production facilities for later use reduce operating costs and maintenance costs.
Increased flexibility = ability to respond/adapt to changes in demand.
Outsourcing additional notes
*Flexibility, cost-saving, Competence, Improvement