Capacity and Capacity Utilisation

Summary

This video explores the concept of business capacity, which measures a company's output potential over a set period. Capacity can be assessed in various ways, such as customer service rates, production numbers, or seating in venues. It's dynamic, influenced by factors like maintenance and workforce availability. Capacity utilization, calculated as a percentage of actual output to potential output, is crucial for operational efficiency and competitiveness. High fixed costs necessitate near-full capacity operation to minimize unit costs. However, low utilization can signal inefficiency or overinvestment, while pushing utilization too high may compromise quality and employee well-being.

Takeaways

• 📊 Capacity is a measure of a business's output, indicating how much a business can produce, sell, or achieve over a given period.
• 🔍 Capacity can be measured in various ways, such as the number of customers served per hour in a fast food outlet, or the number of customer calls handled by a call center daily.
• 🏟️ For fixed-capacity businesses like sports stadiums and cinemas, capacity refers to the maximum number of people that can be accommodated.
• 🏭 In manufacturing, capacity is about how many units of a product can be completed over a certain period, like cars in a car production line.
• 🔄 Capacity is a dynamic concept that can change due to factors like maintenance, the number of workers, or the number of production shifts.
• 💡 Capacity utilization is calculated as a percentage of the actual output to the maximum possible output, reflecting how much of the business's capacity is being used.
• 📉 Low capacity utilization can suggest inefficiency or overinvestment in resources, leading to higher unit costs and potentially affecting competitiveness.
• 💼 Businesses aim to operate close to full capacity to minimize unit costs, especially those with high fixed costs, to achieve a high break-even output.
• 💹 The cost of capacity includes not only the physical assets like production lines and buildings but also labor costs, which are significant in labor-intensive businesses.
• ⚠️ Operating at low capacity utilization can be risky, especially for businesses with high fixed costs, as it may lead to higher unit costs and reduced competitiveness.
• 🚫 Pushing for very high capacity utilization can lead to quality issues, employee stress, and a reduced ability to handle sudden increases in demand.

Q & A

What is business capacity?

Business capacity is a measure of output, indicating how much a business can produce, sell, or achieve over a given period. It can be measured in various ways, such as the number of customers served per hour in a fast food outlet or the number of customer calls handled by a call center per day.

How is capacity measured in a sports stadium?

In a sports stadium, capacity is measured by the number of fans that can be seated at each event, which is a fixed number determined by the physical structure of the stadium.

What is the significance of capacity utilization in a business?

Capacity utilization is significant because it is closely linked to productive efficiency and competitiveness. It measures how much of the business's capacity is being used over a particular period, calculated as a percentage of the actual output divided by the maximum possible output.

How is capacity utilization calculated?

Capacity utilization is calculated by dividing the actual level of output (in units) by the capacity (maximum possible output in units) and then multiplying the result by 100 to get a percentage.

Why is it important for a business to operate close to full capacity?

Operating close to full capacity is important because it helps to minimize unit costs, especially for businesses with high fixed costs. High utilization can lead to lower per-unit costs and is essential for achieving a high breakeven output.

What are the costs associated with capacity?

The costs associated with capacity include production line equipment, facilities, machines, buildings, and labor. Particularly for labor-intensive businesses, the cost of skilled and productive employees is a significant factor in determining output.

Why might a business not operate at full capacity?

A business might not operate at full capacity due to lower than expected market demand, seasonal variations, recent increases in capacity without corresponding demand, or the need for maintenance and repair of production facilities.

What are the risks of operating at low capacity utilization?

Operating at low capacity utilization can lead to higher unit costs, reduced competitiveness, and difficulties in covering fixed costs, especially for businesses with high fixed costs. It may also imply inefficiency and underutilization of invested resources.

What are the potential problems of pushing capacity utilization too high?

Pushing capacity utilization too high can lead to quality issues, overworked and stressed employees, and a reduced ability to handle sudden increases in demand. It can also result in a waste of shareholders' money if the capacity is not being fully utilized.

How does capacity utilization affect a business's break-even analysis?

Capacity utilization affects a business's break-even analysis because if utilization is low, it may be challenging to reach the break-even output where fixed costs are covered. High fixed costs combined with low utilization can lead to financial strain.

Outlines

00:00

📏 Understanding Business Capacity

This paragraph introduces the concept of business capacity, which is a measure of output indicating how much a business can produce, sell, or achieve within a given period. It can be measured in various ways, such as the number of customers served per hour in a fast food outlet, the number of calls handled by a call center, the number of fans seated in a stadium, or the number of cars produced on a manufacturing line. Capacity is dynamic and can change due to factors like maintenance, employee attendance, or operational shifts. The importance of capacity lies in its reflection of a business's operational capabilities and its need for flexibility to adapt to changes in demand.

05:00

🔄 Capacity Utilization and Its Impact

The second paragraph delves into the significance of capacity utilization, which is the percentage of the maximum possible output that is actually used. It explains how capacity utilization is calculated by dividing the actual output by the potential capacity and multiplying by 100. The paragraph uses the example of a printed circuit board manufacturer to illustrate this calculation. It also connects capacity utilization with productive efficiency and competitiveness, emphasizing the desire of businesses to operate near full capacity to minimize unit costs, especially those with high fixed costs. The discussion points out that low capacity utilization can lead to higher unit costs and reduced competitiveness, while also touching on the potential risks of operating at very high levels of capacity utilization, such as quality degradation, employee stress, and reduced ability to handle sudden demand increases.

Keywords

💡Capacity

Capacity refers to the maximum amount of output a business can produce, sell, or achieve over a given period. It is a fundamental measure of a business's operational capability. In the video, capacity is discussed in various contexts such as a fast food outlet's ability to serve customers, a call center's ability to handle calls, or a stadium's seating capacity. The concept is integral to understanding a business's potential and its ability to meet demand.

💡Capacity Utilization

Capacity utilization is the percentage of a business's maximum capacity that is actually used over a specific period. It is calculated by dividing the actual output by the potential output and then multiplying by 100. The video uses the example of a printed circuit board manufacturer with a capacity of 500,000 units per month and an actual output of 340,000 units, resulting in a utilization rate of 68%. This metric is crucial for assessing how efficiently a business is operating.

💡Dynamic Concept

The video describes capacity as a dynamic concept, meaning it can change based on various factors such as maintenance, workforce availability, or shifts in consumer demand. This highlights the need for businesses to adapt and adjust their operations to maintain optimal capacity utilization. For instance, if a production line needs repair, it may temporarily reduce the business's capacity.

💡Operational Capabilities

Operational capabilities refer to the skills, processes, and facilities that enable a business to produce goods or provide services. The video emphasizes that capacity is a key measure of these capabilities, indicating how much a business can produce within a certain timeframe. It's closely tied to the overall efficiency and effectiveness of a business's operations.

💡Productive Efficiency

Productive efficiency is the ratio of output to input in production, and it is closely linked to capacity utilization. The video suggests that high capacity utilization often correlates with productive efficiency, which in turn is associated with competitiveness. If a business is not using its resources efficiently, it may have higher costs and struggle to compete.

💡Competitiveness

Competitiveness refers to a business's ability to compete effectively in the market. The video explains that capacity utilization is tied to competitiveness because a business operating at high capacity utilization is likely to have lower unit costs and be more efficient, which can give it a competitive edge.

💡Fixed Costs

Fixed costs are expenses that a business incurs regardless of the level of production or sales. The video mentions that businesses with high fixed costs aim to operate at or near full capacity to spread these costs over more units, thereby reducing unit costs and improving profitability.

💡Breakeven Analysis

Breakeven analysis is a financial tool used to determine the number of units a business needs to sell to cover its total costs. The video connects capacity utilization with breakeven analysis, noting that high fixed costs necessitate reaching a high breakeven output, which is closely related to capacity utilization.

💡Seasonal Demand

Seasonal demand refers to fluctuations in consumer demand that occur at specific times of the year. The video discusses how seasonal variations can affect capacity utilization, as businesses may need to adjust their production to match these changes in demand.

💡Flexibility

Flexibility in capacity refers to a business's ability to adjust its production levels in response to changes in demand. The video stresses the importance of having flexible capacity to accommodate unexpected shifts in the market, which can help businesses stay competitive and efficient.

💡Overcapacity

Overcapacity occurs when a business's production capacity exceeds the demand for its products or services. The video implies that overcapacity can lead to underutilization, which might suggest inefficiency or an overinvestment in production capabilities.

Highlights

Business capacity is a measure of output, indicating how much a business can produce or sell over a given period.

Capacity can be measured in various ways, such as customers served per hour in a fast food outlet or calls handled by a call center.

Sports stadiums and cinema chains have fixed capacities, determined by the number of seats and how many can be filled.

Manufacturing capacity, exemplified by car production lines, is about how many units can be completed within a certain timeframe.

Capacity is dynamic and can change due to factors like maintenance, repairs, or the number of workers available.

Businesses often need flexible capacity to adapt to unexpected changes in demand.

Capacity utilization is calculated as a percentage of the actual capacity used over a period.

An example calculation: a printed circuit board manufacturer with a capacity of 500,000 units per month produced 340,000 units, resulting in a 68% utilization rate.

Capacity utilization is closely linked to productive efficiency and business competitiveness.

Operating at full capacity helps minimize unit costs, especially for businesses with high fixed costs.

Capacity has costs, including production line equipment, facilities, and labor, especially in labor-intensive businesses.

Reasons for not operating at full capacity include lower than expected demand, seasonal variations, and the need for maintenance.

Low capacity utilization can lead to higher unit costs, reduced competitiveness, and difficulty in reaching break-even points.

Pushing for high capacity utilization can risk quality, employee well-being, and the ability to handle sudden demand increases.

The concept of capacity is crucial for understanding a business's operational capabilities and its ability to adapt to market conditions.

Transcripts

hi there in this topic video we're going

to take a look at the concept of

capacity

now business capacity is a really widely

used concept it's important to

understand what it tries to achieve what

it tries to measure capacity is a

measure of output

it's a measure of how much a business

can produce or sell or achieve

over a given period and capacity can be

measured in lots of different ways in

the business

for example it could be measured in

terms of how many customers

per hour or per day could be served

perhaps in a fast food outlet

it can also measure the number of uh

interactions with customers for example

the capacity of a call center might be

measured in terms of

how many customer calls can be handled

each day or each week

of course in the business of sports

stadium have a fixed capacity

and therefore capacity is how many

uh fans can be seated at each each event

similarly a cinema a cinema chain has a

fixed number of seats in each of its

screens but its capacity is how many of

those seats

could be filled over a particular period

and of course we should be familiar with

the manufacturing capacity in particular

for example an example of the car

production line how many cars could be

completed

over a certain period so capacity is a

really important measure of operational

capabilities how much can a business

produce over a given period

capacity is also importantly a dynamic

concept capacity changes for example if

you've got a production line and you

have to repair or

maintain or replace a machine that

reduces how much that production line

can make whilst that maintenance or

repair has been has been

carried out similarly

if capacity how much you can make is

linked to how many people you have in

the business your capacity may be

affected by how many turn up to work or

how many production shifts that you run

each day or each week

capacity also needs to be damaging

dynamic in the sense it needs to be

flexible

many businesses need to be able to flex

or change their capacity to take account

of unexpected changes for example a

significantly seasonal demand in a

business would want you'd want capacity

that's flexible

of course also picking up on unexpected

changes in demand it's important to be

able to add to capacity so keep key

points so far therefore therefore

capacity is a measure of output it's a

measure of capability but it's also a

dynamic concept capacity can be and

sometimes needs to be changed

now another important concept capacity

utilization and there's a clue in the

term the utilization of capacity is how

much capacity is used over a particular

period and we calculate this as a

percentage we calculate the percentage

of the actual capacity that's being used

here's a little example of how we

calculate it using this formula

we take the actual level of output

always in units

divide it by the capacity the maximum

possible output also in units and of

course to get to a percentage we need to

multiply that number by 100.

let's have a look at an example in this

case we've got a printed circuit board

manufacturer the stuff that goes in so

many electronic devices this factory has

the capacity

is capable of producing half a million

circuit boards per month 500 000 per

month that's our capacity

last month we're told actual output was

340 000 units what was the capacity

utilization

well if you want to have a go pause the

video

it's quite a simple calculation using

that formula we take the actual output

of 340 divided by the capacity of 500

000 and multiply by a hundred in this

case that would be 0.68 times 100 or 68

percent

now in a separate revision video video

we are looking at how you could

calculate capacity utilization in two or

three other different ways

but that's the classic way

now you might be asking well why why are

we bothering to to look at things like

capacity utilization well the key a line

of analysis here is that capacity

utilization is very closely linked to

the concept of productive efficiency

and therefore it's also very closely

linked to the concept of competitiveness

if you imagine capacity is a measure

isn't it of how much resource we've got

invested in the business and if the

utilization or use of those resources is

low in other words it has a low

percentage utilization

that might be a suggestion that we've

either got too much invested in the

business

or

the business is being inefficient it's

got idle unused resources

and as a general rule

lower utilization tends to result in

higher unit costs because a lot of those

resources are fixed costs

so generally businesses try to operate

at as close as possible to full capacity

as a way of minimizing their unit costs

and of course that's particularly

important for businesses that have high

fixed costs because

if

if you remember from your break even

analysis if a business has high fixed

costs

it's important to try to achieve the

high breakeven output

and capacity utilization of course is

going to be fundamental to achieving

that

now capacity has cost we've talked about

fixed costs here if you think about

capacity it's the way

the business enables itself to produce

units

so it's the costs that are involved in

making capacity possible so it's

definitely things like production line

equipment or facilities isn't it

equipment

facilities machines

and the buildings in which those

machines and facilities and services are

housed but of course also the

significant cost of capacity is labor

particularly for labor-intensive

businesses where output is largely

determined by how many people you've got

in the business by how skilled and

productive they are

so capacity is very closely linked to

the costs of a

business so

why you might ask would not would a

business not operate at full capacity

for as long as it can well the answer is

there are lots of different reasons why

it's not possible to operate at full or

100 utilization firstly of course it

might just be that demand is lower than

you expect

so you've got a factory that can sell

100 000 units but demand is only 50 000

units well there's no point running the

factory producing 100 000 if the demand

isn't there so lower than expected

market demand

can reduce capacity utilization and of

course that might also be a symptom of a

loss of market share

maybe you used to be the market leader

with a large factory that was very busy

you lose market share all of a sudden

the large factory's still there but

you're not so busy

we've also mentioned of course these

there can be these seasonal variations

in demand that can affect utilization

from from month to month or week to week

and of course it could be that actually

there's been a recent increase in

capacity but not yet an increase in

demand that'll be a reason why

utilization is less than 100

but of course generally you can't really

achieve 100 because of the need to

maintain and repair your capacity

there's always going to be some parts of

it that just needs fixing or repairing

or maintaining

a quick bit of evaluation to finish off

uh a classic question might ask you to

consider the the risks or dangers of

operating at low capacity utilization

what might the implications of that be

well i think we've already hinted at

this haven't we which is that

low capacity utilization particularly

for a business with high fixed costs

is really bad news because it implies

that the business is going to have

higher unit costs than the competition

and if you've got high unit costs on the

competition that's usually a sign that

you're lacking competitiveness

we've also mentioned break even so if

capacity utilization is low and fixed

costs are high it means that you're less

likely to get to that break even output

at which your fixed costs are covered

and of course the other big cash flow

reason and return on capital reason why

you shouldn't

operate for a long time at low capacity

utilization is that you've got so much

capital tied up in capacity in fixed

assets and factories and plans if you're

not using it that's a waste of the

shareholders money

however there are some potential

problems of trying to push utilization

as high as you can get it

you know how close can you get can you

even get over 100 i guess in certain

circumstances it's just about possible

one of the issues of course is it could

be that you're pushing so hard that

quality suffers there's less time to

check that the quality is is good and of

course don't forget the poor world

employees in a labor intensive business

operating at very high levels of

capacity utilization

there's a there's a risk of

overworked employees increased stress

which of course over time can become

pretty demotivating and demoralizing

and of course the other issue with

working at high capacity utilization is

that you're less able to deal with

sudden or unexpected increases in demand

so there we go guys that's been an

introduction to the concept of capacity

and i guess the key points there are

that capacity is a measure of the output

of the business

the key calculation is that utilization

how much of that capacity are we using

and is that good or bad for the business