[Music] hello welcome to taking the beers in this tutorial we going to take a look at a concept known as capacity utilisation very first thing we'll do is pop a link in the top hand corner to a video that shows you how to calculate capacity utilization along with some other items of operations management data but in this tutorial we're going to take a look at the consequences for a firm of operating either too far below the capacity utilization or too close to their full level of capacity and we're going to take a look at what managers might do about each of those two different scenarios we'll begin by explaining what capacity is because all firms have one an organization's capacity is the maximum at the level of output that that firm could produce over a given time period whether that be a day a week a month or even a longer time period than that now the capacity utilization of an organization looks at what level of output the firm is actually producing at in relation to its capacity so the firm's capacity will be set by the amount of machinery space a labor that is available to the organization but their capacity utilization is the level that they are actually producing at so for example a firm may have a maximum capacity of being able to produce 10,000 units per month but just because that's how many they could produce it doesn't mean that's necessarily how much they are producing your capacity utilization shows you what percentage of your full capacity you are actually producing at so for this firm that could produce 10,000 product per month if they were actually producing 8000 products per month then they would be operating at a level that represented 80% of their maximum capacity now deciding what capacity level to work at is a challenging concept for managers because there are consequences to operating quite below your capacity figure and there are other consequences to operating too close to your maximum level of capacity we start with the the consequences of having a capacity utilization figure that is quite far below your full capacity then what that means is that the business is going to have resources that quite simply it is not utilizing whether that be factory space that's not being used machinery or vehicles that are just sitting idle or even labour that doesn't actually have work to be completing if you're operating too far under your capacity level it means that you are acting inefficiently you are wasting resources and the cost of that is that it increases your unit cost of production and by that we mean it's increasing how much it costs the organisation to produce one unit or one of its products now the reason for that is because the firm is going to have some fixed costs things like rent insurance and salaries and the less the firm produces the less product all of those costs can be split amongst so when a firm is operating below its capacity it means that those costs of production are being split amongst as many products as they could be and it has the effect of rising the unit cost of the organization so that makes it sound like a firm wants to try and increase the level of capacity that it's utilizing as close to its full capacity as possible but that might not necessarily be true either because there's consequences of operating at a level that is too close to your full capacity and the main one of those consequences is that the firm doesn't have any flexibility so if an unexpected order were to come in that potentially might lead to a longer term contract it may even be an order that's with a national or a multinational retailer that might secure the long-term viability of the business if the business is already operating at too close to its maximum patty it may have to turn that order down it may have to turn down a contract that could have been incredibly lucrative for the firm may have boosted revenues and profits but the firm can't take it because it doesn't have enough spare capacity in the organization so consequently managers may have to find tactics to deal with either being too far under their maximum capacity or too close to their maximum level of capacity so if they have a little look at some of the different strategies that managers might use we'll start with how managers might try to increase their capacity utilization figure if they feel that it is too low and the first tool that they might use in that is to use some different marketing strategies so maybe they could try and increase the amount of their capacity that they're utilizing only yeah by doing some marketing techniques that increase the demand for their products and services that try to raise sales and if sales are rising the firm can produce on a bigger output level and bring up that capacity utilization figure so that might involve techniques such as dropping the prices of the products to stimulate demand maybe depending on the price elasticity of the good firm is selling might even involve promotional techniques maybe promotional offers that might boost demand for a short period of time and allow the firm to increase their capacity utilization figure may even involve the firm analyzing its place or its distribution strategies trying to find new ways of distributing the goods or services that they sell in order to try and increase their demand perhaps the more drastic measure the firm might take is to go through a process known as a rationalization which is essentially down something the organization to bring down the overall capacity of the organization thus increasing the capacity utilization figure essentially what the firm is doing is trying to reduce its costs by lowering its maximum level of capacity now that could involve moving sites perhaps moving to a smaller facility it could involve closing down outlet so the firm doesn't have as many different bases that its operating from it might even involve selling assets that are at the moment unutilized with that the machinery or vehicles or maybe even letting some workers go to bring down the level of capacity of the firm so the level of demand that the firm is experiencing is now closer to its maximum capacity if we switch over and have a look at some different strategies managers might use to cope with a high capacity utilization figure one of the classic ones in the short term is to outsource some of its operations so if the firm has very little spare capacity itself if it takes on additional orders it might find it has to outsource some of its work to other firms so essentially what the business would do is hire other firms to complete work on their behalf now obviously now he's going to come at a cost because they're gonna have to pay this other firm some of the sales price that they are achieving to produce products for them but it does mean that the firm can now operate on a greater production level another thing the firm might do in the short term is to try and reduce demand for its goods and services which may sound counterintuitive but if a firm finds that it can't increase its capacity level then it might decide to increase its prices so that the level of output that it is producing at is at least achieving a greater sales price thus increasing the profit margins on the goods and services that they're selling or they might also do is create waiting lists for that product so accept orders focus from customers even though they don't have the capacity to fulfill all of those orders and instead create a waiting list which may create the the feeling that the product is is more desirable and more luxurious but also allows the firm to create waiting lists so it accepts all of those orders and it can profit from all of those orders even though it can't fulfill its obligation to all of those customers until some point in the future obviously in the longer term what the firm might look at doing is if it's capacity utilization figure is quite high and that is on quite an elongated basis then in the longer term they may look to expand the organization maybe grow the business move to a new site take on extra workers invest in greater technology and production materials so that the firm is able to achieve a greater level of capacity overall thus bringing down its capacity utilization figure so there's capacity utilization the consequences of having a figure that's too low or too high and the different kind of decisions that managers might take to deal with either scenario good luck with your ongoing revision keep on taking the bids and we'll see you incredibly seen you you you