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.