Chapter 25: Capacity utilisation and outsourcing

Question 1

Capacity utilisation

Answer 1

The proportion of maximum output capacity currently being achieved

current output level
——————————— X100
maximum output level

Question 2

Outsourcing

Answer 2

Using another business to undertake a part of the production process rather than doing it within the business using the firm’s employees

Question 3

Maximum capacity

Answer 3

The highest level of sustained output that can be achieved

Question 4

Drawbacks to working at full capacity for a long time

Answer 4

Employees may feel pressured due to workload
Regular customers who want more may be left waiting
Machinery working continuously, not allowing maintenance

Question 5

Excess capacity

Answer 5

When the current levels of output are less than the full-capacity output of a business. aka spare capacity

Question 6

How to increase short term capacity utilisation

Answer 6

Maintaining high output levels
Adopting a more flexible production system
Insisting on flexible employment contracts

Question 7

Short-term excess capacity

Answer 7

May be caused by low season demand

Question 8

Long-term excess capacity

Answer 8

Might be caused by an economic recession or technological development which reduce demand

Question 9

Rationalisation

Answer 9

Reducing capacity by closing factories/production units

Question 10

Methods of improving long-term capacity

Answer 10

Rationalisation
Research and development of new products

Question 11

Advantages of rationalisation

Answer 11

Reduces overhead costs
Results in higher capacity utilisation from the remaining production units

Question 12

Disadvantages of rationalisation

Answer 12

Redundancy payments might have to be paid
Workers may worry about job security
Industrial action may be a risk
Capacity might be needed if the economy picks up

Question 13

Advantages of research and development of new products

Answer 13

New products replace old ones, increase competitiveness
If introduced early, new products may prevent rationalisation

Question 14

Disadvantages of research and development of new products

Answer 14

May be expensive
May take too long to prevent cutbacks in capacity
Without long-term plans, new products can be unsuccessful without the right marketing strategy

Question 15

Capacity shortage

Answer 15

When demand for a business’s products exceeds production capacity

Question 16

Methods of reducing long-term capacity shortages

Answer 16

Use subcontractors or outsource supplies
Invest capital in the expansion of production facilities

Question 17

Advantages of using subcontractors or outsourcing supplies

Answer 17

No major capital investment required
Should be quick to arrange
If demand falls, the contract can be ended (flexibility)

Question 18

Disadvantages of using subcontractors or outsourcing supplies

Answer 18

Less control of output quality
This may add to administration and transport costs
Uncertainty and reliability of delivery
Unit costs may be higher due to supplier profit margin

Question 19

Advantages of investing capital in the expansion of production facilities

Answer 19

Increases long-term capacity
Business is in control of quality and delivery times
New facilities should be able to use the latest equipment
Economies of scale are possible
Job security

Question 20

Disadvantages of investing capital in the expansion of production facilities

Answer 20

Capital costs may be high
There may be problems with raising capital
Problems if demand falls for a long period
Takes time to build and equip a new facility

Question 21

Reasons for outsourcing

Answer 21

Reduction and control of operating costs
Increased flexibility
Improved company focus
Access to quality service or resources
Freeing up internal resources for other use

Question 22

Drawbacks of outsourcing

Answer 22

Loss of jobs within the business
Quality issues
Customer resistance
Security
CSR (low-wage countries)

Question 23

Business process outsourcing (BPO)

Answer 23

A form of outsourcing that uses specialist contractors to take responsibility for certain business functions, such as human resources and finance