1. Starter: Stock Control Key Terms
Look at the key terms below, define them and then draw and label a stock control chart.
Key Term
Defined
Buffer Stock
Stock Rotation
Lead Time

2. Starter: Stock Control Key Terms
Look at the key terms below, define them and then draw and label a stock control chart.
Stock Levels
Time
Minimum Stock Level (eg 100 units)
Maximum Stock Level (eg 300 units)
Re-Order Level (eg 200 units)
Jan
Feb
Mar
Apr
100
200
300
Key Term
Defined
Buffer Stock
Stock Rotation
Lead Time
This is the minimum level of stock a business wants to hold. If stock falls below this level then the firm is in danger of running out of supplies.
This is the process of ensuring that the older batches of stock are used first rather than the newer batches, in order to avoid the possibility that the older stocks will become obsolete or go past their sell-by-date. This is often referred to as a First In First Out (F.I.F.O) system
This is the time between an order being placed, and the goods being received

3. Today you will know what is meant by the term capacity utilisation.
Thursday, 20 April 2017
Today you will know what is meant by the term capacity utilisation.
You will understand the benefits and drawbacks of firms working to full capacity.
You will be able to apply this to the case study: Steven Carragher Sportswear

4. Capacity What is capacity?
This is the maximum amount of output that can be achieved over a period of time.
The level of capacity a business has will depend on many factors but manly the firms resources such machinery, buildings and labour.
A business can change their resources over time and so therefore they can change their capacity.

5. What is capacity utilisation?
Capacity Utilisation – the percentage of a firm’s total possible production level that is being reached. Capacity utilisation is measured using the following formula:
Student Task:
Work out the capacity utilisation of the room.

6. Capacity Utilisation Example….
A car business is capable of producing 3,500 cars a month.
It is actually producing only 2,800 cars.
The capacity utilisation is:
2,800/3,500 = 0.8 x 100 = 80%
The business has an extra 20% of capacity it could use each month.
That is a possible 700 cars.
The different is known as spare capacity.
Generally it is felt that between 90% and 100% capacity utilisation is an ideal figure.

7. Under Utilisation
There are a number of reasons why businesses may produce less than the desired maximum capacity level. These include:
New competitors or new products entering the market
Fall in demand for the product as a whole due to the changes in taste and fashion
Unsuccessful marketing
Seasonal demand
Over-investment in fixed assets
A merger or take-over leading to duplication of many resources and sites
Under utilisation can benefit a business as it allows for routine maintenance and other machinery checking to take place, staff are usually less stressed too.
However low capacity levels can cause unit costs to rise. The business ay have to increase the product price to meet these rising costs. Also staff can become bored and demotivated.

8. However operating at high levels of capacity has many drawbacks.
Over Utilisation
Some businesses push production as much as possible, this is usually to meet an increase in demand. They can achieve this by:
Increasing the hours of the work force, taking on temporary staff or allowing over time.
Subcontract the work to others, this is an effective way of meeting short-term demand.
Reallocate workers, this is achieved by making workers flexible and placing them where they are needed.
However operating at high levels of capacity has many drawbacks.
These include:
Poor quality of output and poor customer service
Stress and strain on staff and other resources
Possible loss of sales

9. Fixed Costs & Capacity…
It is vital to understand clearly the relationship between fixed costs and capacity utilisation. Fixed costs are fixed in relation to output, this means that whether capacity is at 50% or 100%fixed costs will not change.
This has implications, the fixed costs can become a huge burden for the business.
For example: If a football club invests in a huge expensive player (who's salary will be a fixed cost) but their matches are played to a half empty stadium, the salary will become a burden for the club. A half empty stadium means that the fixed cost per unit are double the level at maximum capacity.
When the stadium is at 50% capacity utilisation, then £10 of the ticket price is needed for the players wages alone. The many other fixed and variable costs of running the club would then be on top of the £10.
Full Stadium
Half-empty Stadium
No of fans
50,000 fans
25,000 fans
Weekly Salary bill
£250,000
Salary fixed cost per fan £5
£10
(£250,000 / 50,000)
(£250,000 / 25,000)

10. The Ideal Level of Capacity Utilisation…
The ideal level of capacity utilisation is as near to 100% as possible. This spreads the fixed costs as thinly as possible, boosting profit margins. There are two key concerns about operating at maximum capacity. These are:
The risk that demand will rise further, you will have to turn it away, enabling your competitors to benefit.
The risk that you will struggle to service machinery and train/retrain staff. This may prove costly in the long term, and will increase the chances of production breakdowns in the short term.
The production ideal, therefore, is capacity utilisation of around 90%.

11. How to improve Capacity…
When a business is trying to improve their capacity utilisation they have two options:
Increase Demand
Cut Capacity
Increasing Demand
Demand for existing products can be boosted by extra promotional spending, price cutting or even devising a new strategy to reposition the products into growth sectors. The business could also launch new products, this could be highly effective, but implies long term planning and investment.
Cutting capacity means reducing the amount that can be produced. This could be achieved by cutting the night shift (i.e. making them redundant) This would avoid the disruption and inflexibility caused by the alternative which is to move to a smaller premises. Moving would enable fixed costs to be cut (rent, rates, salaries etc) However it is important that if a business does move they enable some spare capacity, just encase demand improves.

12. Plenary
Business 1:
The Holbury Hotel has just merged with the Hardley Hotel. Thy have increased the number of guest rooms from 190 to 300.
Work out their capacity on the following days:
Monday: 210 rooms occupied
Saturday: 298 rooms occupied
Identify the problems they might have on Monday
Identify the problems they might have on Saturday

13. Student Activities…
Turn to page 327 of the text book and complete the following activities…
Student Task 1: Revision Questions
Complete questions 1- 7.
Write in FULL sentences at all times
(30 marks – 30 minutes)
Student Task 2: Case Study: R.Sivyer & Co
Read the case study and complete questions 1- 4.
(30 marks – 35 minutes)