Capacity Utilisation
L1 Definition
Capacity Utilisation - a measure of a firms actual output against potential output (shown as a percentage)
Capacity utilisation is a key efficiency indicator. It tells you how much of the firms resources ( labour, machinery and buildings) are being used in the production process
Measurement
Actual Output X 100
Potential Output
L3 High Capacity Utilisation
Working at 100% capacity is problematic;
-There would be no time or flexibility to carry out routine machine maintenance;
-Workers will have no time to go on training courses, this could be detrimental to long-term productivity;
-Managers and workers will be pushed to their limits, putting a lot of stress on them. This could encourage high labour turnover;
-The firm will not be flexible. It will not be able to respond to unexpected changes in demand;
-The firm may face late stock deliveries or machine failure, this would not enable firms to catch up
L4 Low Capacity Utilisation
- Increase unit costs
- leads to lower profit margins
-Firm could make a loss
L3 Boost Capacity
If the fall in demand is expected to be a short term effect
- Seek an aggressive promotional strategy.
- In the longer term the firm may seek to launch new products, but this will need careful planning and investment.
L4 Cut Capacity
This should only be used if the fall in demand is permanent.
- Make workers redundant- although they will have to pay a one-off lump sum.
- Move to smaller premises- this can be time consuming and disruptive.
- Sell of buildings, machinery and equipment .
Capacity Utilisation - a measure of a firms actual output against potential output (shown as a percentage)
Capacity utilisation is a key efficiency indicator. It tells you how much of the firms resources ( labour, machinery and buildings) are being used in the production process
Measurement
Actual Output X 100
Potential Output
L3 High Capacity Utilisation
Working at 100% capacity is problematic;
-There would be no time or flexibility to carry out routine machine maintenance;
-Workers will have no time to go on training courses, this could be detrimental to long-term productivity;
-Managers and workers will be pushed to their limits, putting a lot of stress on them. This could encourage high labour turnover;
-The firm will not be flexible. It will not be able to respond to unexpected changes in demand;
-The firm may face late stock deliveries or machine failure, this would not enable firms to catch up
L4 Low Capacity Utilisation
- Increase unit costs
- leads to lower profit margins
-Firm could make a loss
L3 Boost Capacity
If the fall in demand is expected to be a short term effect
- Seek an aggressive promotional strategy.
- In the longer term the firm may seek to launch new products, but this will need careful planning and investment.
L4 Cut Capacity
This should only be used if the fall in demand is permanent.
- Make workers redundant- although they will have to pay a one-off lump sum.
- Move to smaller premises- this can be time consuming and disruptive.
- Sell of buildings, machinery and equipment .