Capacity and Capacity Utilisation
Summary
TLDRThis 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
📏 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.
🔄 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.
Mindmap
Keywords
💡Capacity
💡Capacity Utilization
💡Dynamic Concept
💡Operational Capabilities
💡Productive Efficiency
💡Competitiveness
💡Fixed Costs
💡Breakeven Analysis
💡Seasonal Demand
💡Flexibility
💡Overcapacity
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
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