Capacity Management

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  • Capacity Management
    • Capacity can change...
      • If a machine needs maintenance
      • If there are more/less people working shifts
    • Capacity
      • Capacity of a business is a measure of how much output it can achieve in a given period
      • Capacity utilisation is percentage of a businesses capacity that is actually being used over specific period of time
        • Formula:          actual level output / maximum possible output x 100
    • Why capacity utilisation matters?
      • Useful measure of productive efficiency - measures idle resources
      • Higher utilisation can reduce unit costs
      • Aim to produce full capacity to minimise costs
      • If business has high break even point it is required
    • Costs of capacity
      • Equipment e.g. production line
      • Labour e.g. wages, salaries
      • Facilities e.g. building rent
    • Why do business operate below capacity?
      • Lower than expected market demand e.g. change in customer taste
      • Loss of market share e.g. competitors gain customers
      • Seasonal variation demand e.g. weather changes lead to lower demand
      • Recent increase in capacity e.g. new production line added
    • Dangers operating at low capacity
      • Higher unit costs - impact on competition
      • Less likely to reach break even output
      • Capital tied up in under-utilised assets
    • Can a business work more than 100% utilisation?
      • Can in short term
      • Increase workforce hours e.g. extra shifts, overtime
      • Sub-contract production activities e.g. assembly of components - quality, ethical, brand image
      • Reduce time spent maintaining production equipment e.g. healthy and safety, replacement
    • Problems working at high capacity
      • Negative effects on quality - rushed production, quality control
      • Employees suffer - added workload, de-motivation
      • Loss of sales - unable to meet sudden increases in demand, equipment may require repair


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