methods of improving capacity utilisation

4.3 Capacity utilisation and outsourcing – Capacity utilisation

Objective: methods of improving capacity utilisation

Capacity utilisation is the percentage of a company's production capacity that is actually being used. It tells us how efficiently a firm is using its resources.

Formula:

\$\text{Capacity utilisation} = \frac{\text{Actual output}}{\text{Potential output}} \times 100\%\$

Actual OutputPotential OutputCapacity Utilisation (%)
8,000 units10,000 units80%

Imagine a pizza oven 🍕. If you bake only 2 pizzas in an hour, the oven is under‑used (low capacity utilisation). If you bake 10 pizzas, the oven is fully loaded (high utilisation). The goal is to keep the oven running close to its capacity without overloading it.

Ways to improve capacity utilisation

  1. Increase demand – Market more products or enter new markets. 📈

  2. Improve efficiency – Reduce downtime, streamline processes, and train staff. 🔧

  3. Flexible production – Switch between products quickly to match demand. 🔄

  4. Outsource non‑core activities – Let specialists handle tasks like IT or logistics, freeing up internal capacity. 📦

  5. Use idle capacity for contract work – Offer production services to other firms. 🤝

  6. Invest in technology – Automation and better machinery increase output without extra labour. 🤖

  7. Adjust workforce – Hire temporary staff during peak periods. 👥

Exam Tip: When answering questions on capacity utilisation, always start with the formula, then discuss at least two methods to improve it. Use examples like the pizza oven analogy to show understanding. Remember to mention both internal (efficiency, flexibility) and external (outsourcing, contract work) strategies.

Outsourcing – A Quick Overview

Outsourcing is when a company hires another firm to perform a task that could be done in‑house. Think of it like hiring a delivery driver 🚚 instead of buying a delivery van. Benefits include cost savings, access to expertise, and freeing up internal resources for core activities.

Exam Tip: In questions about outsourcing, explain the main advantages and potential risks (e.g., loss of control). Use the driver analogy to illustrate the concept simply.