1. Capacity Utilisation

2. Capacity Utilisation Defined:
The proportion of maximum output capacity currently being achieved
Dependent on?
Machinery and equipment
Technology
Number and skills of it’s employees

3. The CAPACITY UTILISATION of a firm is:
the % of capacity which is being used.
Capacity Utilisation
= Actual level of production x 100
Capacity
e.g. company capable of producing 3,500 units but actually produces 2,800 is working at ……
2,800 / 3,500 x 100 = 80%

4. Capacity Utilisation and Average Fixed Costs
What should happen to AFC if the Capacity Utilisation is running high?
The AFC will be spread over a larger number of units, being more cost effective to a business
How does it look for a business to run at full capacity?
How do consumers respond to products that are hard to come by?
How does it reflect on the reputation of the business?
What is the impact on the workers of this situation?

5. Optimum is slightly below 100% at 90% - Why?
Need to be able to accommodate short term changes – some “slack” is needed where the other 10% can be used! …
Breakdowns
Urgent orders
Demand ALWAYS varies over the year
Staff problems (e.g. flu epidemics, sicknotes! etc)
Unforseen events (Snow in the UK last winter! Leaves on the lines for British Rail!)

6. Dangers at working at 100% capacity are ...
Staff pressures – no room for error by workers or supervisors! Scheduling has to be strict (consider production and service scenarios!)
Quality could go down – pressure of production and no room for rework
Staff morale/motivation drops – resulting in illness and time off = inefficiency
Unhappy customers – not able to meet any additional orders – will look elsewhere for all products
Machines under maintained or overworked produces breakdowns – unreliability for the future

7. Excess Capacity Definition:
The current levels of demand are less than the full capacity output ... Spare Capacity
- high unit fixed costs
You will need to consider if the spare capacity is a short term or a long term situation, because this will have an impact on how you deal with it!

8. Short Term Excess Capacity
So, what can be done? Stockpile! Keep high stocks and still produce at full capacity until demand increases again BUT - expensive what if sales don’t recover? Alter production systems – be more seasonal BUT – skilling, resources and materials – do you have the flexibility to do this? Change Contract of Employment – flexible working BUT – unreliable staff and low motivation

9. Long Term Excess Capacity
So, what if there is a long term fashion change? What if there is a major technological development from rivals? What if there is a recession? How will a business try to raise demand to meet capacity? Marketing Mix analysis? or consideration for RATIONALISATION What implications will rationalisation have? Cost savings (perhaps? – redundancy payouts might be needed!) Industrial Relations ... What we discussed last week ... No staffing for surges in demand Low staff morale – insecurity of jobs (Maslow) Poor PR?

10. Ways of reducing capacity?
Selling off parts of production area
Changing to a shorter working week
Laying off workers
Transferring resources to another area.
Ways of increasing capacity
Building or extending factories
Asking staff to work longer hours
Recruiting new staff.

11. So, what if there is a LONG TERM capacity shortage? …
Firstly, what might the reasons be? Why can’t you produce enough to satisfy demand? Faulty machine that can be repaired next month? No drastic action is needed But, if the company has been working to 100% capacity and needs to be able to meet an increase in demand, what are the options?

12. Option 1 … Outsource No capital investment needed Quick to arrange
Flexibility – just end and start contracts
Quality could drop – no control
Additional costs? Admin/tranportation
Reliability of delivery
Will unit costs be lower than “in house”? Suppliers want to make a profit too!

13. Option 2 … Invest! Expand or Capex
Long Term capacity abilities
Control
Newest methods/machinery
Economies of Scale
Costs
Where will the funds come from?
Future economic climate
Time to sort out – customers are fickle!

14. Evaluating the options …
The precise cause of the capacity issues is important ... It could indicate the solutions that are available to the business Are the products outdated? Is there a recession? The TIME of any likely excess capacity is also important – short term or long term implications will have different solutions Weigh up advantages and disadvantages of the options available APPLY to the situation or case study Consider other EXTERNAL factors - uncertainty of economy, market, changing fashions, competitors moves etc... Outsourcing? Advantageous or not to the case study? Cost Benefit Analysis (BPO? Business Process O’soucing)

15. Methods of Production Inputs Job Production Flow Production
Labour Intensive V
Capital intensive
Choose
method
Capital
intensive
Labour
intensive
Job Production
Single unit
Made to order
Flow Production
Mass output of
A standard product
Batch Production
Group made together
Batches vary
Choice depends on
Scale of
demand
Customer
needs
Company
goals
Relative costs of
labour & capital
Nature of
product