Capacity Utilisation
Capacity utilisation is a measure of the extent to which the productive capacity of a business
is being used. It can be defined as the percentage of total capacity that is actually being
achieved in a given period. The formula is given as follows:
Full Capacity
This is a situation whereby a business uses the maximum number of its resources in order to
produce goods and services.
Advantages of working at full capacity

Lower average costs (the fixed costs are spread over more output).
By producing goods and services in greater quantity, businesses may enjoy advantages of
large-scale production such as discount on bulk buying. It is also known as economies of
scale.

Improves image amongst customers (business looks successful, busy customers).
By producing at full capacity, the business will be able to satisfy customer’s needs and wants,
especially those who demand a large quantity of goods and services. This will give the
business a competitive advantage.

Increases Staff Motivation and Job Security.
By producing at full capacity, employees might not fear about losing their jobs, since this
may definitely show that the business is productive and will have lower chances of facing
lack of supply.
Disadvantages of working at full capacity

Cannot produce any more which means you could miss out on lucrative orders from
customers.
By producing at full capacity, this means that the business will not be able to produce much
more even in situation where there is sudden rise in demand. As such, this may cause a
wastage of resources.

Training and Maintenance increases (increased pressure on staff and machines and a
lack of time generally).
By using all the resources for production, this may also mean higher maintenance and more
demand from workers. This may create a stressful working environment.

Strain on Resources.
By using all the resources for production, this may result into a reduction and at some point in
time to the depletion of resources as resources are scarce.
Excess Capacity
This situation occurs when the current levels of demand are less than the full capacity output
of a business, also known as spare capacity.
Drawbacks
1. Increased unit fixed cost since excess capacity is being paid for in terms of fixed costs.
2. Increased overhead.
3. Lack of competitivenes with other firms in the same cartegory, but running at near or full
capacity.
4. Risk of equipment attaining obsolescence during period of excess capacity.
Solutions towards short term excess capacity

Maintaining high output levels although it is risky in situations where sales cannot
recover.

Adopting a more flexible production system accordingly to market forces.

Offering employment contracts accordingly to peak and off-peak periods.
Solutions towards long term excess capacity (change in taste and fashion, economic
recession …)

Rationalisation
It is a reorganization of a company in order to increase its efficiency. This reorganization may
lead to an expansion or reduction in company size, a change of policy, or an alteration of
strategy pertaining to particular products.
Capacity Shortage
It occurs when the demand for a business' products exceeds production capacity.
Outsourcing
It is the usage of 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.
Business process outsourcing
It is a form of outsourcing that uses a third party to take responsibility for certain business
functions, such as HR and finance.
Advantages of outsourcing
There are many reasons why a business may choose to outsource a particular task, job or a
process. For example, some of the recognised benefits of outsourcing include:

improved focus on core business activities - outsourcing can free up your business to
focus on its strengths, allowing your staff to concentrate on their main tasks and on
the future strategy

increased efficiency - choosing an outsourcing company that specialises in the process
or service you want them to carry out for you can help you achieve a more productive,
efficient service, often of greater quality

controlled costs - cost-savings achieved by outsourcing can help you release capital
for investment in other areas of your business

increased reach - outsourcing can give you access to capabilities and facilities
otherwise not accessible or affordable

greater competitive advantage - outsourcing can help you leverage knowledge and
skills along with your complete supply chain
Outsourcing can also help to make your business more flexible and agile, able to adapt to
changing market conditions and challenges, while providing cost savings and service level
improvements.
Disadvantages of outsourcing
Outsourcing involves handing over direct control over a business function or process to a
third party. As such, it comes with certain risks. For example, when outsourcing, you may
experience problems with:
1. Lack Of Control
Although you can provide direction in regard to what you need to accomplish, you give up
some control when you outsource.
There are many reasons for this, including the fact that you are often hiring a contractor
instead of an employee. And since the person is not working on-site, it can be difficult to
maintain the level of control you desire.
2. Communication Issues
Different businesses may have different managerial styles and as such, the communication
methods undertaken in these businesses will be completely different. Unfortunately, this may
have a negative impact on the efficiency of both businesses.
3. Problems With Quality
Despite all the benefits of outsourcing, it is only a good thing if you’re receiving the quality
you expect. Anything less than this will be a disappointment.
This isn’t to say you can’t successfully outsource particular tasks, but you need to discuss the
expected quality upfront.
Impact On Company Culture
Unfortunately, there could be a mismatch of culture between the two businesses and as such,
this may impact negatively on the productivity and efficiency of businesses. In addition to
this, if the culture of the business is to maintain high quality products, this might not be the
case for the outsourcing business.