What’s capacity of an organisation
The maximum output a business can produce in a given period without buying anymore fixed assets (machinery, factory, space etc)
What does capacity depend upon
- Number of employees and how skilled they are
- What technology the business has
- Kind of production process used
- Amount of investment in the business
What’s capacity utilisation
The formula (%)
How much capacity a business is using
Current output / maximum possible output X100
Increasing utilisation too much can lead to over-utilisation
What is over-utilisation
When a business operates at 100% capacity utilisation
What’s the drawbacks of operating at 100% capacity utilisation
- Hard to operate at 100% capacity utilisation, and keep quality levels high
- May have to turn away customers as it can’t increase output anymore
- No downtime- machines are on all the time. If a machine breaks, work piles up waiting for it to be fixed. Also, no time for maintenance, which can reduce life of machinery
- Can’t temporarily increase output for seasonal demand
Firms with over-utilisation (100% capacity utilisation) can Increase their capacity by doing what
- Buy more machines
- Employ More staff, or get staff to work overtime
- Can outsource their work to other businesses during busy periods. Meaning they can meet unexpected increases in demand without increasing their own capacity and having the costs of extra staff and facilities all year round
What’s low capacity utilisation called
Under-utilisation
Why’s under utilisation inefficient
Because it means a business is not getting good use out of machines and facilities that have been paid for
Why might unit costs increase due to under-utilisation
Because fixed costs have to be spread over fewer units of output, so unit costs increase. Could result in increase in prices, meaning less competitive, resulting in reduced sales and profit
Why might staff motivation decrease due to under-utilisation
May be long periods when there’s not enough work for them to do. There’d be less need for supervisory roles compared to if capacity utilisation was higher, meaning less opportunity for promotion, which could also reduce motivation
What’s 2 benefits of under-utilisation
- Firm may be able to accept new orders. E.g. from increases due to seasonal demand
- Organising machine maintenance and staff training could be easier
What’s the 2 ways a business deals with under-utilisation
Either:
1) Increase demand
2) Reduce capacity
How can a business increase demand to try fix under-utilisation
- Changing their marketing mix. E.g. change the promotion of the product or change its price or its distribution
What can a business do to its capacity to reduce under-utilisation
- Fill spare capacity by accepting outsourced work from other firms. Better to make goods for a competitor and make money than it is to leave machinery doing nothing
- If a business can’t increase demand, may have to close part of production facilities to reduce capacity. This is called rationalising (or downsizing)
- Businesses can reduce capacity in short term by stopping overtime or reducing length of working week
- Businesses can reduce capacity in long term by not replacing retired staff, making staff redundant and by selling off factories and equipment
The key to long term success is planning capacity changes to match long term changes in demand
How can this be done
Use market research to help predict future demand, however it’s not 100% certain