Options available to increase capacity

Capacity utilization refers to the manufacturing and production capabilities that are being utilized by a
nation or enterprise at any given time.
It is the relationship between the output produced with the given resources and the potential output that
can be produced if capacity was fully used.

• Make the most of your space- maximize your productivity by using overhead space that would
normally be wasted- at a fraction of the cost of finding new premise to relocate
• Improve your layout- this means the layout of for e.g., warehouse should be efficient, and
measurements should be accurate as possible
• Redeploy unused resources, such as labour, from one production location to another to assist with
improving capacity
• Employ seasonal or part-time workers – this is often used when there is high seasonal demand, as it
helps the firm to produce more (for example, at Christmas, or in crop season in the sugar industry)
Few Problems when producing at Full Capacity

• The firm may find it difficult to meet any unexpected increase in demand

• There will be limited time, if any, available for plant maintenance

• Pressuring staff to produce at full capacity can result in high staff turnover rate, especially where employees

are not receiving incentives for doing so or feel that they are being overburdened
 ECONOMIES & DISECONOMIES OF
SCALE

Economies of Scale
This is when more units of a good or service can be produced on a larger scale, yet with (on average) fewer
input costs, economies of scale is said to be achieved

Internal economies of scale:

An internal economy of scale measures a company's efficiency of production. That efficiency is attained as the
company improves output when the average cost per product drops. This type of economy of scale is a
consequence of a company's size and is controlled by its management teams such as workforce, production
measures, and machinery.
 Internal economies of scale are firm-specific—or caused internally.
 The six types of internal economies of scale:

Purchasing economies- as the firms grow, they become large, and this therefore gives them an advantage to
purchase larger quantities of raw materials. Therefore, buying in bulk would lead to a trade discount and
would reduce the cost of production.

Managerial economies- Large firms would be able to hire specialized personnel's (such as marketing
manager) that would help the firm to operate sufficiently and receive economies of scale, while smaller firms
would have someone multitasking as accountants, PRO etc., as they grow, they would be able to hire
specialized personnel’s as well.

Technical economies-They are economies that accrue from the use of large machines with emphasis on full
utilization and efficiency in production. This would reduce labour costs as well. While smaller firms as they
expand can take advantage of larger and more efficient machinery which would reduce cost. For example, a
small farmer may not be able to afford much, if any, machinery and so will have to toil daily using simple
machines. As his farm increases in size, he can afford to purchase a tractor to help with the ploughing of the
soil.
Risk bearing economies- For any business, there will be risks involved. A business may risk all it’s investment if
the business fails. For many small firms, the world’s downturn in the economy will force a lot of small firms to fail.
If the conditions of demand and supply change for the major or the only product of a smaller firm, then sales may
be greatly affected. Conversely, if the same problem exists for a larger firm, it can shift its production to another
product or diversify the present product or diversify its market. Large firms are also able to invest in research and
development which helps to minimize the risk involved in the development of a new product or setting up
operation at a new location.

Financial economies-These are benefits obtained by large firms as a result of contracting credit from financial
institutions at lower interest rates than smaller firms. The fact is that the large firms can provide collateral
securities for such loans and their mere sizes alone make them credit-worthy as compared to smaller firms. In
addition to borrowing from financial institutions, large firms can easily float shares in the stock market. At times
suppliers of materials to large firms may give them out on credit. This is a sort of pre-financing of the firm’s
activity. All these advantages lead to the lower per unit cost of output produced.
Marketing economies- Advertising plays a major role in marketing the products, or what firms
have to offer. More advertising power spread out across a larger market, as well as a position in
the market to negotiate.
The firm needs to decide whether to advertise and whether to lease delivery vans or purchase
them. Advertising can be very expensive and as a result some small firms are not able to
advertise. However, as firms get larger, they can implement advertisements and other
promotional tools. The firm may also be able to purchase its fleet of delivery vehicles which may
be cost effective.
 External economies of scale
External economies of scale occur outside of an individual company but within the same
industry.  In addition to lower production and operating costs, external economies of scale
may also reduce a company's variable costs per unit because of operational efficiencies and
synergies.
These include:

Improvement in transport and communication links- Improvement in these areas, will

help industries achieve economies of scale, having better access to roads, reduced prices in
transportation, in addition technology is growing rapidly. Firms now have more access to
communication. These improvements have spun off on the firms which would see a
reduction in transportation and communication costs.
Training and Education- As these institutions grow in a country, many individuals will now be trained and have the
necessary knowledge and skills, therefore improving the skill level of workers and labour force in general. Educational
institutions have developed programmes and courses to meet the needs of the industry. This consequently would
reduce the production cost per unit.

Development of auxiliary services- Auxiliary services include, but are not limited to, custodial services,
food services, health services and transportation services. The services being offered can be contracted by the existing
firms that would otherwise have to perform the service themselves. Outsourcing these services might be cheaper for
the firms in the industry than performing them themselves.
Co-operation among businesses- Businesses coming together, to work along will help each
other achieve economies of scale, for e.g., cooperatives pool together to benefit from lower
costs. When this occurs, the firms benefit from external economies of scale.
 Diseconomies of scale

Diseconomies of scale happen when a company or business grows so large that the
costs per unit increase. It takes place when economies of scale  no longer
function for a firm. With this principle, rather than experiencing continued
decreasing costs and increasing output, a firm sees an increase in costs when
output is increased.
Diseconomies of scale can involve factors internal to an operation or external
conditions beyond a firm's control.
 Causes of diseconomies of scale

External diseconomies of scale can result from constraints of economic resources or

other constraints imposed on a firm or industry by the external environment within
which it operates. 

Internal diseconomies of scale involve either technical constraints on the production

process that the firm uses or organizational issues that increase costs or waste
resources without any change to the physical production process.
Poor communication- As the firm expands and becomes larger, communication may become difficult in the
organization. The expansion of the business might make the communication process long and bureaucratic.
Management may no longer be able to communicate with employees, and vice versa. The breakdown in
communication may prevent employees from receiving clear instructions and may increase wastage.

Demotivation- Workers within the organization may feel unmotivated and unappreciated that they are not treated
fairly. This will lead to low motivation and, by extension, a reduction in productivity. As productivity falls, output
will also fall and the average cost per unit will increase, leading to diseconomies of scale

Lack of control and coordination- As the firms get larger, it would be difficult to manage as the span of control
widens. Managers would not be able to see if all employees are working towards the businesses’ goals being
achieved and working at their full potential. As the business loses control and coordination, its costs of operating
may rise and diseconomies of scale set in.