Lecture on Capacity Utilization

Introduction

• Capacity Utilization: Understanding how businesses calculate capacity utilization, issues with over and under utilization, and strategies to address these problems.

Key Concepts

• Business Capacity: The maximum total output a business can produce in a given time period.

  • Example: A cinema with 500 seats has a capacity of 500.
  • Example: A car manufacturer producing 300 cars a day has a capacity of 300 cars per day.

• Capacity Utilization: The percentage of total capacity that is actually being used.

  • Calculation: ( \text{Actual Output} / \text{Maximum Possible Output} \times 100 )
  • Example: If a cinema with 500 seats has 499 people, the utilization is 99.8%.

Importance of Capacity Utilization

• High Utilization:

  • Spreads fixed costs over more units, reducing cost per unit.
  • Important for profitability.

• Low Utilization:

  • Increases cost per unit, as fixed costs remain constant regardless of output.

• Over Utilization:

  • Difficult to maintain machinery, risking breakdowns and customer dissatisfaction.
  • Forces businesses to turn away potential customers, leading to lost sales to competitors.

Ideal Capacity Utilization

• Businesses aim for 90-95% utilization to avoid the extremes of over and under utilization.

Addressing Under Utilization

1. Increase Demand:

   • Engage marketing for promotions, special offers, price cuts.
   • Improve the product to attract more customers.

2. Reduce Capacity:

   • Implement rationalization to reorganize production, potentially cutting operational scale.
   • Example: A cinema reduces screens or replaces seats to increase utilization and improve customer experience.

Addressing Over Utilization

1. Increase Capacity:

   • Invest in expanding operations or creating new facilities.
   • Ensure sustained demand to avoid future underutilization.

2. Subcontracting:

   • Outsource part of production to other companies.
   • Avoids over-investment, but risks quality and reliability issues that could affect reputation.

Conclusion

• Balancing capacity utilization is crucial for cost efficiency and customer satisfaction.
• Businesses must carefully consider strategies for managing capacity to align with demand fluctuations.