Unit 4. Chapter 23. Capacity utilisation

Question 1

Def. Capacity utilisation

Answer 1

The proportion of maximum output capacity currently being achieved.
(Current output level / Maximum output level) x 100 = Rate of capacity utilisation

Question 2

What are the potential drawbacks from operating full capacity (100%)? (3)

Answer 2

• Staff feel under pressure due to the workload. Operations managers cannot afford to make scheduling mistakes because there’s no slack time to make up for it
• Regular customers who want to increase their orders would have to be turned away - losing long term clients
• Machinery would constantly be operating with no time for maintenance

Question 3

Def. Excess capacity

Answer 3

Exists when the current levels of demand are less than the full capacity output of a business - also known as spare capacity.

Question 4

How to evaluate methods of fixing excess capacity? (2)

Answer 4

• Excess capacity leads to higher unit fixed costs
• The problem has to be distinguished as either short-term (e.g. seasonal downturn) or long-term (e.g. economic recession) before solving it

Question 5

Solutions for short-term excess capacity (option 1) + advantages (3) and disadvantages (3)

Answer 5

Option 1: Maintain output and produce for stocks
Advantages:
• Job security for staff
• No need to change production schedules or order from suppliers
• Stocks may be sold at times of rising demand
Disadvantages:
• Unsuitable for perishable stock
• High stock holding costs
• Demand may never increase

Question 6

Solutions for short-term excess capacity (option 2) + advantages (3) and disadvantages (3)

Answer 6

Option 2: Introduce greater flexibility like:
• Part time or temporary contracts
• Flexible machinery
Advantages:
• Production can be reduced and increased depending on demand
• Other products can be produced to spread risks
• Avoids stock build up
Disadvantages:
• Demotivated staff from lack of involvement (part time)
• Expensive equipment
• Requires further staff training

Question 7

Def. Rationalisation

Answer 7

Reducing capacity by cutting overheads to increase efficiency of operations, such as closing a factory or office department, often involving redundancies

Question 8

Solutions for long-term excess capacity (option 1) + advantages (2) and disadvantages (4)

Answer 8

Option 1: Rationalise and cut capacity e.g. closing a factory
Advantages:
• Reduces overheads
• Higher capacity utilisation
Disadvantages:
• Redundancy costs
• Loss of job security
• Capacity may be needed later (e.g. if economy picks up)
• Bad publicity for not fulfilling social responsibilities

Question 9

Solutions for long-term excess capacity (Option 2) + advantages (2) and disadvantages (3)

Answer 9

Option 2: Research and development into new products
Advantages:
• Will replace existing products and make business more competitive
• If introduced quickly, can prevent rationalisation
Disadvantages:
• Expensive
• Time consuming
• Requires long term planning -> cannot be done quickly

Question 10

Def. Capacity shortage

Answer 10

When the demand for a business’s products exceeds production capacity.

Question 11

Solutions for long-term capacity shortage (option 1) + advantages (3) and disadvantages (3)

Answer 11

Option 1: Use subcontracts or outsourcing
Advantages:
• No major capital investment
• Quick to arrange
• Offers much greater flexibility than expansion
Disadvantages:
• Less control over quality
• Less control over delivery times
• Unit costs may be higher due to outsourced business’s profit margin

Question 12

Solutions for long-term capacity shortage (option 2) + advantages (3) and disadvantages (3)

Answer 12

Option 2: Capital investment in expansion
Advantages:
• Long term increase in capacity
• Firms control quality and delivery times
• Further economies of scale
Disadvantages:
• High capital costs
• Risks of demand falling over long period
• Time consuming

Question 13

Def. Outsourcing

Answer 13

Using another business ( a third party) to undertake a part of the production process rather than doing it within the business using the firm’s own employees.

Question 14

Def. Business-process outsourcing (BPO)

Answer 14

A form of outsourcing that uses a third party to take responsibility for certain business functions, such as HR and finance.

Question 15

Reasons for outsourcing (5)

Answer 15

• Reduction of operating costs: Specialists firms can be cheaper than getting a specialists because they have economies of scale
• Increased flexibility: It’s easier to cancel outsourcing contracts rather than close business functions
• Improved company focus: By outsourcing ‘peripheral’ functions, managers can focus on main aims (e.g. outsourcing finance and focusing on marketing)
• Access to quality service and resources: which may not be available internally
• Freed up internal resources: e.g. outsourcing HR department frees up office space of the business’s previous HR department

Question 16

Potential drawbacks of outsourcing

Answer 16

• Loss of jobs within the business: Causes loss of job security, redundancy costs, and bad publicity
• Quality issues: less control over quality and different quality standards
• Customer resistance: Customers may questions reliability of using outsourced services
• Security: If IT functions are outsourced, data may be lost and leaked