Capacity Utilisation

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  • Capacity Utilisation
    • What is it and How is it Calculated?
      • The Capacity of an organisation is the maximum output that it can produce in a given period without buying anymore fixed assets- machinery, factory, space etc.
        • Capacity depends on; number of employees and their skill level, the technology the business has and the production process the business uses
      • Capacity Utilisation is how much capacity a business is using.
        • Capacity Utilisation (%)= Current Output/ Maximum possible Output x 100
      • Capacity needs will change due to demand changes, short/long term changes such as decline in product lifecycle of a good or lack or market research
    • Over-Utilisation
      • Increase capacity utilisation can lead to over utilisation
        • High capacity utilisation is better than low, however 100% capacity utilisation has drawbacks and can be know as over-utilisation
      • The business can't temporarily increase output for seasonal demand
      • There is no margin for error
      • There is no down time and machines are operating 24/7
      • Business may need to consider turning away potential customers because it cannot increase output anymore
      • How can firms with over-utilisation increase their capacity?
        • Increase productivity; reallocate staff to busier areas, and increase employee motivation
        • Buy more machines
        • Utilitise outsourcing, by getting foreign businesses to complete work on its behalf, this can be done primariliy in busier periods, and they don't need to increase thie rown capacity
    • Under-Utilisation
      • This is insufficient and increases unit costs, because businesses are not getting good use out of machinery and facilities that they've payed for
      • There may however be benefits, for example its easy for the business to take new orders from seasonal demand changes
      • Easier to organise maintenance and staff training
      • How can firms deal with under utilisation?
        • Change marketing mix to stimulate demand and deter competitors
        • Reduce capacity long term e.g. sell of equipment and don't replace retiring staff
        • Reduce short term capacity e.g. make redundancies


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