Capacity Management

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

• 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.

• 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.

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

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

Actual level of output

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

Maximum possible output

• 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%

• 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.

• 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.

• 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

• 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.

• 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.