Complete the
starter
Learning Objectives
• Lesson 1:
• Understand the concept of capacity
• How capacity is calculated
• Lesson 2:
• Over- utilization of Capacity
• Under-utilization of Capacity
Why is it Important?
• The single most important concept
related to Capacity Utilisation is fixed
costs per unit.
• The closer a firm gets to capacity
utilisation (100%), the lower the amount
of fixed costs carried by each unit of
output.
Operational Targets
• Quality targets – ( no more than 1 in 100
customers to complain)
• Capacity utilization targets (working
towards 85% and 95% of it maximum
possible capacity)
• Unit costs ( keeping the average cost per
unit at below £1.99, in order to keep
selling price down)
Capacity Utilisation
Capacity Utilisation is the proportion of
maximum possible output that is currently
being used.
• A football stadium is at full capacity
when all seats are filled. It has 100%
capacity utilisation.
• A factory that can produce 20,000 units a
week but is only producing 15,000 units
has a 75% capacity utilisation.
How is Capacity Utilisation
Measured?
Current Output
Maximum possible output
x100
The
firm can
make will
depend
Theamount
level ofaoutput
achieved
when
a
on:
firm is making full use of its buildings, its
machinery and labour is MAXIMUM
• the amount OUTPUT.
of buildings it has
• the
technology
it has
( machinery)
The
firm
is said to be
working
at ‘ Full
Capacity’ or ‘Capacity Utilisation’
• the quantity and quality of labour
•
In 2002/03 Tesco introduced a number of cost
saving measures.
•
One measure was to try to increase the amount of
stock carried by each lorry.
•
The average lorry can carry a maximum of 26
pallets of stock.
•
During 2002/03 the average load increased from
22.5 pallets to 24 pallets per trip
a) Calculate the capacity utilisation at the beginning of 2002/03
Capacity Utilisation (%) = Actual output (per period of time) x 100
Maximum possible output (per period of time)
= 22.5 x 100 = 86.5%
26
b) Calculate the percentage of spare capacity at the end of 2002/03
Capacity Utilisation (%) = Actual output (per period of time) x 100
Maximum possible output (per period of time)
= 24 x 100 = 92.3%
26
Spare capacity = 7.7%
Kate’s Cupcakes……
You are a business consultant and Kate
has asked for your advice – read the
case study and answer the questions
that follow!!
Be Prepared to feedback to the rest of
the group…………
And now the end is near……..
• Write two questions on capacity utilisation
– one relating to a calculation and one
that links with theory
• Swap these questions on your table –
answer and mark
NEXT STEPS….
What do you need to do now to
consolidate your learning? Are there any
areas you will need to go over? Do you
need any support?
Home work
• Capacity revision guides
• suggestions….
New competitors
or new products
entering the
market
Fall in demand for
the product due to
changes in taste
or fashion
Unsuccessful
marketing
CAUSES OF
UNDER-UTILSATION
OF CAPACITY
Seasonal demand
Over-investment
in fixed assets
A merger or
takeover leading
to duplication of
many resources
and sites
Impact of Under-Utilisation of
Capacity
Disadvantages
• Firms have a higher
proportion of fixed costs per
unit
• These higher costs lead to
either lower profits or
increased prices which
could reduce sales
• Spare capacity can portray
a negative image
• With less work to do
employees may become
bored and demoralised
Advantages
• Spare capacity means
there is more time for
maintenance and repair of
machinery, training and for
improving systems
• May be less pressure and
stress for employees
• Allows a company to cope
with a sudden increase in
demand
Ways of achieving full capacity
utilisation
SUPPLY
DEMAND
DEMAND
•If have spare capacity
can attempt to improve
the marketing mix to
increase demand
•If have high demand
charge a higher price
SUPPLY
•If have spare capacity may follow a
policy of rationalisation (cutting the
scale of operations)
•If a firm is capable of producing 200
units but actually produces 96 units its
capacity utilisation is 48%. If it
rationalises and halves it capacity to
100 units it has a much more efficient
capacity utilisation at 96%
Ways of achieving full capacity
utilisation
Ways of reducing capacity
Ways of increasing capacity
•Selling off all or part of its
production area
OPPOSITE
•Changing to a shorter
working week or shorter day
•Asking staff to work longer
hours
•Laying off workers
•Recruiting new staff
•Transferring resources from
another area
Building or extending factories
How to get towards Full
Capacity Utilisation
• Increase demand
– more promotion, price cutting or move your
product into growth sectors
• Cut Capacity
– if you factory and labour is capable of
producing 10,000 units a week, but there is
only demand for 4,500 there will be a
temptation to cut capacity to 5000 – maybe
get rid of nightshift
Risk of Operating at 100% for
Long
• Rising demand can only be met by
competitors because you are flat out at
100% and do not have the labour,
buildings or machinery to produce more.
• The risk that you will not have the time to
service machinery, train staff, change or
improve production methods.
The production ideal, therefore is a
capacity utilisation of around 90%
Why and How to Change
Capacity 1
• Firms may find themselves with excess
capacity if demand for their products
slows down.
• Unless the demand is just a short term
glitch, a firm will seek to reduce its
maximum capacity.
• The process is called ‘Rationalising’
Why and How to Change
Capacity 2
• Rationalising - polite way of saying
‘redundancies’
• Machinery, Labour, Buildings –
something has to be reduced
• Sold or leased out or in terms of a high
labour workforce - redundancies
A solution?
• Flexible staffing?
Why and How to Change
Capacity 3
• When demand is low and output needs
to be low a company will identify a core
of key staff and assets that allow it to
operate at low capacity.
• Extra production, when required, can be
added through the use of temporary
staff, rented machinery and premises, or
even through the use of sub contracting.