Operations Management

Capacity
Utilisation
What’s are the issues here?
1. Ops Mgt - Business Environment 2. The Production Process

Innovation,
How value is Production Job, batch,
research and
added? methods flow and cell
development

3. Productive Efficiency 4. Productive Quality

Productivity
Capacity Economies and External
Internal quality
utilisation & diseconomies of quality
scale
standards
Mgt standards

Stock control
Lean
Technology
production

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Learning Objectives To analysis or describe
the effects of under and
To know what is over utilisation of
Capacity Utilisation resources
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To understand how to determine

the level of Capacity

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Capacity refers to the output a business can achieve in a
given period of time

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1.
What is Capacity Utilisation?

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Capacity Utilisation

Capacity utilisation is the proportion

(%) of capacity that is actually being
used at a given time period

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Why Capacity Utilisation Matters

◎ It is often used as a measure of productive

efficiency
◎ Average production costs tend to fall as output
rises – so higher utilisation can reduce unit
costs, making a business more competitive
◎ So firms usually aim to produce as close to full
capacity (100% utilisation) as possible

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Calculating Capacity Utilisation

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Calculating Capacity Utilisation

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Calculating Capacity Utilisation

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 Why Operating ‘Below’ Capacity Might Happen

There are several reasons why businesses operate at less

than 100% capacity utilisation:
▶ Lower demand:
▶ General reduction in overall market demand
▶ Seasonal variation in demand
▶ Loss of market share
▶ Increase in capacity not yet matched by increased
demand:
▶ Possibly new technology introduced
▶ Provide some "slack"
▶ Inefficiency (a problem = less competitive unit costs)
▶ Poor maintenance, quality, employee disruption
HOWEVER - there are some dangers
of this:
➔ Higher unit costs - no EoS - less
competitive
➔ Less likely to achieve break-
even output
➔ Capital (investments) tied up in
underutilised assets - presents
opportunity costs

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 Operating at Full Capacity
Benefits Costs (evaluation points)
Average cost per unit will fall No ‘downtime’
Economies of Scale - achieved Hard to meet additional orders
Less wastage of resources Pressure on employees
Employees are more motivated No time for in-house training
Opportunities for bonus payments Quality may be affected
(overtime)
More competitive

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DO NOW
1. What is capacity utilisation?
2. What is the formula for capacity utilisation?
3. What does is mean for a business to be under-
utilisation? What is a problem with this?
4. Calculate the following:

A. D.

C. E.
B.
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Link these photos together

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Spare Capacity

When a business is operating at less than 100% capacity, it is said to

have "spare capacity".
▶ Sometimes spare capacity is not the problem – a business finds
itself with excess demand (i.e. it cannot produce enough to meet
demand). In such circumstances, what can it do to operate at
higher than 100% normal capacity? It can often:
▶ Increase workforce hours (e.g. extra shifts; encourage overtime; employ
temporary staff)
▶ Sub-contract some production activities (e.g. assembly of components)
[outsource]
▶ Reduce time spent maintaining production equipment
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