Capacity Utilization

Introduction

• Concept covered: Capacity utilization
• Focus: Consequences of operating below or near full capacity
• Managers' strategies for these scenarios

What is Capacity?

• Capacity: Maximum level of output over a given time period (day, week, month, etc.)
• Influenced by: Machinery, space, labor

Capacity Utilization

• Definition: Actual production level relative to capacity
• Expressed as a percentage
• Example:
  • Max capacity: 10,000 units/month
  • Actual production: 8,000 units/month
  • Capacity utilization: 80%

Consequences of Low Capacity Utilization

• Underutilized Resources:
  • Idle factory space, machinery, vehicles
  • Labor without work
• Increased Unit Cost of Production:
  • Fixed costs (rent, insurance, salaries) spread over fewer products
  • Inefficiency and higher production costs per unit

Consequences of High Capacity Utilization

• Lack of Flexibility:
  • Unable to accommodate unexpected large orders
  • Missed opportunities for lucrative contracts
  • No spare capacity for urgent or high-value demands

Strategies to Increase Capacity Utilization

1. Marketing Strategies:

• Increase demand for products and services
• Techniques:
  • Price reductions to stimulate demand
  • Promotional offers
  • New distribution strategies

2. Rationalization:

• Reduce overall capacity to increase utilization
• Methods:
  • Moving to smaller facilities
  • Closing outlets
  • Selling unused assets
  • Reducing workforce

Strategies to Manage High Capacity Utilization

1. Outsourcing:

• Hire other firms to complete orders
• Comes at a cost but increases production capacity

2. Reducing Demand:

• Increase prices to control demand
• Create waiting lists for products

3. Long-Term Expansion:

• Grow the business
• Move to larger sites
• Hire additional workers
• Invest in technology and production materials

Conclusion

• Importance of balancing capacity utilization
• Different strategies for managing under or over-utilization
• Keep revising and understanding the concepts