capacity utilization

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Calculation

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What is Capacity Utilisation

Capacity is the maximum output with the resources currently available

·       the capacity of an organisation is the maximum output that it can produce in a given period without buying any more fixed assets such as machinery or factory space

·       capacity can depend upon the number of employees and how skilled they are

·       it also depends on the technology the business has - what machinery it has, what condition it’s in, what type of computer system it has etc.

·       the kind of production process a business has also affects it capacity

·       the amount of investment is also a factor 

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90% is better than 100%

high capacity utilisation is better than low capacity utilisation, however 100% utilisation has its drawbacks:

·       Businesses must consider all their operational objectives when they plan their capacity usage. Cost isn’t the only thing to think about - it might be not be possible to operate at full capacity and keep quality levels high

·       The business may have to turn away potential customers because it cannot increase output any further

·       there’s no downtime - all the machines are always on, so if one breaks down, it will cause delays as work piles up waiting for it to be fixed there is no time for machine maintenance meaning it can decrease the life time of the machines

·       the business cannot increase output temporarily for seasonal or one off orders

·       there is no margin for error. Everything must be perfect first time, which causes stress to managers. Mistakes are more likely to happen if everyone is working flat out 

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Firms can increase capacity

firms that are operating close to 100% capacity don’t stop accepting orders, they have ways in which they can increase their capacity to meet demand. they best way to do this depends if the increased demand is temporary or long-term

·       businesses can increase capacity by using their facilities for more of the working week, they can have staff working 2-3 shifts in a day and work on weekends and bank holidays

·       businesses can buy more machines, if they can afford them and have staff that are able to use them

·       Businesses can employ part-time or temporary staff in the short term or get their staff to work overtime

·       businesses can increase productivity by reorganising production by relocating staff to busy areas and increase employee motivation

·       if they demand is temporary businesses can subcontract work 

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Subcontracting

·       Subcontracting or outsourcing is where businesses use another firm to do some of its work on its behalf. For example, a supermarket may outsource to a manufacturer to make an own brand washing detergent

·       Companies can subcontract work to other businesses in busy periods. This means they can meet the unexpected increases in demand without increasing their own capacity and having costs of extra staff and facilities all year round

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under utilisation

Low capacity utilisation is called under-utilisation. Its inefficient because it means that a business is not getting use out of machines and its facilities that have been paid for

·       Under-utilisation increases costs because its fixed costs must be spread over fewer unit of output, so unit costs increase

·       Higher capacity utilisation means an increase in the number of units of output without increasing the fixed costs therefore decreasing unit costs

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Firms deal with under-utilisation in two ways

Sometimes firms have too much capacity and not enough demand for their product, which leads to under-utilisation. When this happens, they’ll first try to increase demand, but if this doesn’t work, they need to reduce capacity.

Businesses stimulate demand by changing the marketing mix, for example they can change the price or promotion of the product

Businesses can fill spare capacity by subcontracting work for other firms.

If a business cannot increase demand for their product then it must reduce its capacity by closing part of their production facilities. This is known as rationalisation

Businesses can reduce capacity in the short term by stopping overtime or reducing the length of the working week

Businesses can reduce capacity in the long term by not replacing staff as they retire, making jobs redundant and by selling of factories and equipment

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how capacity needs will change

Demand changes over time, so firms must think about demand in the future as well as current demand

The key to long-term success is planning capacity changes to meet long-term changes in demand. You can use market research to help predict future demand, but it is not 100% certain, there is always an element of risk

Short-term changes in capacity utilisation provides flexibility. Firms should be flexible and temporarily increase existing capacity utilisation if an increase in demand isn’t expected to continue long-term e.g. with seasonal goods like Christmas crackers

Long term solutions end up giving lower unit costs- as long as predictions of demand turn out to be true

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