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Unit 4. Chapter 23. Capacity utilisation

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FLASHCARDS IN UNIT 4. CHAPTER 23. CAPACITY UTILISATION DECK (16)
1

Def. Capacity utilisation

The proportion of maximum output capacity currently being achieved.

(Current output level / Maximum output level) x 100 = Rate of capacity utilisation

What are the potential drawbacks from operating full capacity (100%)? (3)

• Staff feel under pressure due to the workload. Operations managers cannot afford to
make scheduling mistakes because there's no slack time to make up for it
• Regular customers who want to increase their orders would have to be turned away -
losing long term clients

• Machinery would constantly be operating with no time for maintenance

Def. Excess capacity

Exists when the current levels of demand are less than the full capacity output of a
business - also known as spare capacity.

How to evaluate methods of fixing excess capacity? (2)

• Excess capacity leads to higher unit fixed costs

• The problem has to be distinguished as either short-term (e.g. seasonal downturn) or

long-term (e.g. economic recession) before solving it

Solutions for short-term excess capacity (option 1) + advantages (3) and

disadvantages (3)

Option 1: Maintain output and produce for stocks

Advantages:

• Job security for staff

• No need to change production schedules or order from suppliers

• Stocks may be sold at times of rising demand

Disadvantages:

• Unsuitable for perishable stock

• High stock holding costs

• Demand may never increase

Solutions for short-term excess capacity (option 2) + advantages (3) and

disadvantages (3)

Option 2: Introduce greater flexibility like:

• Part time or temporary contracts

• Flexible machinery

Advantages:

• Production can be reduced and increased depending on demand

• Other products can be produced to spread risks

• Avoids stock build up

Disadvantages:

• Demotivated staff from lack of involvement (part time)

• Expensive equipment

• Requires further staff training

Def. Rationalisation

Reducing capacity by cutting overheads to increase efficiency of operations, such as

closing a factory or office department, often involving redundancies

8
 Solutions for long-term excess capacity (option 1) + advantages (2) and
disadvantages (4)

Option 1: Rationalise and cut capacity e.g. closing a factory

Advantages:

• Reduces overheads

• Higher capacity utilisation

Disadvantages:

• Redundancy costs

• Loss of job security

• Capacity may be needed later (e.g. if economy picks up)

• Bad publicity for not fulfilling social responsibilities

Solutions for long-term excess capacity (Option 2) + advantages (2) and

disadvantages (3)

Option 2: Research and development into new products

Advantages:

• Will replace existing products and make business more competitive

• If introduced quickly, can prevent rationalisation

Disadvantages:

• Expensive

• Time consuming

• Requires long term planning -> cannot be done quickly

10

Def. Capacity shortage

When the demand for a business's products exceeds production capacity.

11

Solutions for long-term capacity shortage (option 1) + advantages (3) and

disadvantages (3)

Option 1: Use subcontracts or outsourcing

Advantages:

• No major capital investment

• Quick to arrange

• Offers much greater flexibility than expansion

Disadvantages:

• Less control over quality

• Less control over delivery times

• Unit costs may be higher due to outsourced business's profit margin

12

Solutions for long-term capacity shortage (option 2) + advantages (3) and

disadvantages (3)

Option 2: Capital investment in expansion

Advantages:

• Long term increase in capacity

• Firms control quality and delivery times

• Further economies of scale

Disadvantages:

• High capital costs

• Risks of demand falling over long period

• Time consuming

13

Def. Outsourcing

Using another business ( a third party) to undertake a part of the production process
rather than doing it within the business using the firm's own employees.

14

Def. Business-process outsourcing (BPO)

A form of outsourcing that uses a third party to take responsibility for certain business
functions, such as HR and finance.

15

Reasons for outsourcing (5)

• Reduction of operating costs: Specialists firms can be cheaper than getting a

specialists because they have economies of scale

• Increased flexibility: It's easier to cancel outsourcing contracts rather than close
business functions

• Improved company focus: By outsourcing 'peripheral' functions, managers can focus

on main aims (e.g. outsourcing finance and focusing on marketing)

• Access to quality service and resources: which may not be available internally
• Freed up internal resources: e.g. outsourcing HR department frees up office space of
the business's previous HR department

16

Potential drawbacks of outsourcing

• Loss of jobs within the business: Causes loss of job security, redundancy costs, and
bad publicity

• Quality issues: less control over quality and different quality standards

• Customer resistance: Customers may questions reliability of using outsourced

services

• Security: If IT functions are outsourced, data may be lost and leaked