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Chapter 14 - Capacity Utilisation and Outsourcing - Coggle Diagram
Chapter 14 - Capacity Utilisation and Outsourcing
Significance and measurement of capacity utilisation
Capacity is the maximum output that can be produced using currently avaliable resources
Capacity utilisation is the proportion of the full capacity of a business unit that is currently being produced
This is importnat because operating at below or above maximum capacity results in higher costs and less eficient use of resources
Maximum capacity is determined by the available resources of land, labour, and capital
When these are being fully used, a business operates at full or maximum capacity, if there is spare capacity resources wont be used but they might still incur costs
Some staff who are not working still may be paid, and machines may attract interest payments, the fixed costs still have to be paid
The lower capacity utilisation is the higher the fixed cost per unit of output is, and the more difficult it will be to make profits as the selling price will cover less of the fixed costs
How capacity utilisation is measured
Capacity utilisation is the proportion of the full capacity of a business unit currently being produced
Capacity utilisation = current output/ maximum possible output x 100
Impact on a business of operating under maximum capacity
Operating under maximum capacity means there are unused resources that have to be paid for, but don't contribute to generating an income
Causes of underutilisation include falling demand, seasonal variations, inefficiency in production
Positive impacts
Ability to take sudden orders
Flexibility
Negative impacts
Higher unit fixed costs
Under or unemployed resources, leading to poor motivation
Unsold output, higher inventory costs
Inefficiency in production
Impact on a business operative over maximum capacity
If demand is greater than full capacity, then a business can take steps to increase production in the short term
Means customers are disappointed or receive late delivery, quality falls, employees become stressed, maintenance on machines if difficult, costs increase
Improving capacity utilisation
Operating just below full capacity if seen as optimal as it lowers fixed costs per unit while retaining some flexibility to meet new orders, maintain equipment, or train employees
Businesses must identify the reasons for lower than capacity operations
If it is a marketing related, then a new marketing campaign to get more orders may be wise
Methods of improving capacity utilisation
Rationalisation
Rationalisation is reorganising resources to increase efficiency and reduce capacity, used when demand falls and expected to remain lower
3 methods are reducing labour force through redundancy, reducing costs of assets by closing factories, selling leasing or mathballing machinery
Increasing production
A business can start using underemployed or unemployed resources if extra orders arrive
Adding labour by extra shifts or paying overtimes, using zero hour contracts, subcontracting work to other businesses
Outsourcing
Outsourcing is when a business pays another firm to supply components or services instead of providing them as part of its own production
Outsourcing finctions to another business requires careful checks on quality, reliability and prices to achieve success
Benefits may be access to special equipment, enabling a focus on core activities, sharing risks with other businesses, lower operational recruitment and overhead costs, flexibility to bring in additional resources when required