Capacity Management

All you need to know on capacity including information on capacity utilisation, how to use capacity efficiently and other ways to match supply to demand.

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  • Created by: GeorgeB16
  • Created on: 16-02-16 11:25


The capacity of a business is a measure of how much output it can achieve in a given period.

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Examples of Capacity

  • A fast-food outlet may be able to serve 1000 customers per hour.
  • A call centre may be able to handle 10,000 calls per day.
  • A football stadium may not be able to seat any more than 45,000 fans at each match.
  • A car production line may be able to complete 50,000 cars per year.
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Capacity is a Dynamic Concept

  • Capacity can change such as:
    • When a machine is having maintenance - capacity is reduced
    • Capacity is linked to labour so working more production shifts can increase capacity
  • Capacity needs to take into account seasonal or unexpected changes in demand:
    • Chocolate factories need capacity to make easter eggs in November and December before shipping them to shops after Christmas.
    • Ice-cream factories in the UK need to quickly increase capacity during a summer heat wave.
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Capacity Utilisation

The proportion (%) of a business' capacity that is actually being used over a specific period.

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Capacity Utilisation Formula

Capacity utilisation is expressed as a percentage and is calculated using this formula:

Actual level of output

             ---------------------------------------    x100

Maximum possible output

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Capacity Utilisation Example

  • A company manufactures computers and is able to produce 50,000 computers per month. In the most recent month however, actual output was only 37,000 computers.
    • Capacity utilisation = (actual output / potential output) x 100
    • = (37,000 / 50,000) x 100
    • 74%
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Why Capacity Utilisation Matters

  • It is a useful measure of productive efficiency as it measures whether there are unused resources in the business.
  • Average production costs tend to fall as output rises so higher capacity utilisation can reduce unit costs, making a business more competitive.
  • Businesses usually aim to produce close to 100% in order to maximise efficiency and minimise unit costs.
  • A high level of capacity utilisation is necessary if a business has a high break even output because of significant fixed costs of production.
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Why Most Businesses Operate Below 100% Capacity Ut

  • Demand lower than expected due to a possible change in customer tastes
  • A loss of market share as competitors gain customers
  • Seasonal variations in demand due to weather changes leading to lower demand
  • Recent increases in capacity like a new production line being added
  • Maintenance and repair programmes making capacity temporarily unavailable.
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Dangers of Operating at Low Capacity Utilisation

  • Higher unit costs impacting on competitiveness
  • Business will be less likely to reach break even output
  • Wasted capital will be tied up in under-utilised assets
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Can a Business Work at More Than 100% Capacity Uti

  • Possible in the short term.
  • A company can increase workforce hours such as offering extra shifts, encouraging overtime or hiring temporary staff.
  • Sub contacting of some production activities such as assembly of components.
  • Reducing time spent maintaining production equipment.
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Problems Working at High Capacity

  • Possible negative impact on quality as production is rushed and there is less time for quality control.
  • Employees may suffer due to added workloads and stress and possilbly de-motivating if sustained for too long.
  • Loss of sales may occur as the business is less able to meet sudden or unexpected increases in demand and production equipment may need repairing causing delays.
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