Capacity utilisation is an important concept:
There are several reasons why businesses operate at less than 100% capacity utilisation:
Lower demand:
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:
Negative effect on quality (possibly)
The Capacity Utilization figure can vary among different industries,inventory/production models, stock building cycles, seasonal demand cycles, and warehousing practices. It is important to set the aim capacity utilization rate with consideration to customer demands first and the other factors mentioned above. It may be that several aim rates will be set for different times in a year or business cycle. When Capacity utilization is at a high level it is important that most gross production is actually saleable production. This means the production process must produce minimal waste, monitor its safety stock levels and be efficient. Lean manufacturing principles are valuable in achieving these required efficiencies, as a lean well run production process will maximize revenue for the business and also cut down customer lead times.
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- 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
There are several reasons why businesses operate at less than 100% capacity utilisation:
Lower demand:
- General reduction in overall market demand
- Loss of market share
- Seasonal variation in demand
- Possibly new technology introduced
- Provide some "slack"
- Poor maintenance, quality, employee disruption
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)
- Reduce time spent maintaining production equipment
Negative effect on quality (possibly)
- Production is rushed
- Less time for quality control
- Added workloads & stress
- De-motivating if sustained for too long
- Less able to meet sudden or unexpected increases in demand
- Production equipment may require repair
Operating At Near Full Capacity
Operating at near full capacity
can have a number of advantages:
·
Its fixed costs per unit are at their lowest possible level.
·
The firm is assumed to be using all of its fixed assets
effectively, therefore profits should be high.
·
It will be perceived as a successful country both internally
and externally leading to positive effects.
Internally, employees will feel a sense of pride working for such a
successful organisation. Externally, if customers know that a firm is working at full
capacity it will assume that it is offering a good product.
Firm’s operating at or near
full capacity may wish to increase their total capacity, this can be done in
a number of ways:
·
Employing more workers.
·
Building larger buildings for manufacture or providing service.
·
Purchasing more raw materials/stock.
The use of capacity utilization as a KPI
Capacity utilization is a widely used KPI and operational measure in many industries in the strategic capacity and business planning functions of many organizations. It can be used as a measure which helps determine optimum timing of capacity expansions, entry into new markets, market exits, cost curves for different manufacturers and profitability. Capacity utilization, along with other information, can also be used in operations and production management to calculate the average marginal cost of production, the split between fixed and variable costs, inventory , manning, overtime costs, and engineering/maintenance costs.The Capacity Utilization figure can vary among different industries,inventory/production models, stock building cycles, seasonal demand cycles, and warehousing practices. It is important to set the aim capacity utilization rate with consideration to customer demands first and the other factors mentioned above. It may be that several aim rates will be set for different times in a year or business cycle. When Capacity utilization is at a high level it is important that most gross production is actually saleable production. This means the production process must produce minimal waste, monitor its safety stock levels and be efficient. Lean manufacturing principles are valuable in achieving these required efficiencies, as a lean well run production process will maximize revenue for the business and also cut down customer lead times.
(CHECK ALL THE UNDERLINED TERMS BY CLICKING THIS LINK)
