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2.4.2 Capacity utilisation

A) Capacity utilisation

Capacity utilisation – measures the extent to which the productive capacity of a business is being exploited.

Capacity utilisation = Current output/Maximum possible output x 100

 

B) Implications of under and over utilisation of capacity

Implications of over utilisation of capacity:

  • Maintenance – By working at over capacity it will mean that there will not be enough time for the machines to be properly maintained. As a result of this, there it may result in the businesses machines breaking down on a regular basis. This is likely to impact the business negatively, for example, they may have to delay orders while they are fixing the machines. This may lead to a loss of reputation.
  • Inflexibility – By working at over capacity it means that the business has no room in order to increase output further with their current factors of production. As a result of this, they are likely to be unable to meet any new or unexpected orders. This may result in customers being unhappy and therefore a loss of reputation.
  • Staff – By working at over capacity staff are likely to be put under excessive pressure. This is likely to cause an increase in the amount of mistakes that staff make as well as them becoming unhappy. As a result of this, the business is likely to suffer high absenteeism rates as well as high labour turnover.
  • Costs – In order to work at over capacity, businesses are likely to have to pay for staff to work overtime to meet orders made. This is likely to cause costs to increase thus reducing their profit margins.

Implications of underutilisation of capacity:

  • Inefficiency – By not producing at maximum capacity it may mean that the business is unable to full exploit economies of scale. As a result of this, the business is likely to experience an increase in their average costs.
  • Flexibility – By not producing at full capacity it allows the business some slack. This means that if new or unexpected orders were to be demanded the business would be able to increase their current output and match the increase in demand.
  • Loss of market share – If the business is operating at less than full capacity then it is likely to result in a reduction in the sales of the business. As a result of this, their percentage market share is likely to decrease.

Ways of increasing capacity utilisation

  • Increase workforce hours – Staff could be encourage to work overtime or temporary staff could be employed thus increasing the businesses current output.
  • Outsource some of production – by outsourcing some of the production process it allows the business to increase its current output.
  • Reduce machine maintenance – This will reduce the time at which machines are not producing goods. Therefore, although it may be unsustainable, in the short run output will increase.

 

C) Ways of improving capacity utilisation:

  • Competitors exiting the market – This is likely to result in an increase in demand for the current business’s goods/ services. This is because customers of competitors that have exited the market will switch over to businesses that are still in the market. This will allow the business to increase its current output in order to match the increase in demand. As a result of this it is likely to improve their percentage of capacity utilisation,
  • Balancing seasonal demand – Businesses could balance their seasonal demand by reducing their inputs e.g. staff in periods of low demand then increasing them again when demand increases. This will cause potential output to fall as current output does (low demand) and potential output to increase as current output does (high demand). This will allow the business to work at a higher percentage of capacity utilisation throughout the year.
  • Improved marketing – By increasing marketing when in periods of low demand, it is likely to result in an increase in demand. This will help to increase current output thus increasing the percentage of capacity that is being utilised.
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