Good morning everyone. Today we are going to talk about a very important topic in operations management called Capacity Utilisation. I know that sounds a bit technical, but it is actually quite simple once you understand it. By the end of this lesson, you will know what capacity utilisation means, how to measure it, and why it matters for businesses.
Let’s start with what it means. Capacity utilisation is a way of showing how much of a business’s production ability is actually being used. In other words, it measures how busy a business really is compared to how busy it could be.
For example, imagine your school canteen. The canteen staff have the ability to prepare one thousand meals a day, but they usually make only seven hundred. That means they are using seventy percent of their total capacity. The same idea applies to any business, whether it is a car factory, a bakery, or a call centre.
We can calculate capacity utilisation with a simple formula. You take the actual output, divide it by the maximum possible output, and multiply by one hundred. For instance, if a factory can produce ten thousand units a month but is currently making seven thousand, its capacity utilisation is seventy percent.
Now, why is this important? The level of capacity utilisation affects costs, profits, and even how a business is viewed by others. A business can either operate below capacity or above capacity, and both situations have pros and cons.
When a business operates below maximum capacity, it means it is not using all its resources. There are some advantages to this. It gives the business flexibility to meet sudden increases in demand. It also reduces the risk of overworking employees or damaging machinery. However, there are disadvantages too. The main problem is that the average cost per unit becomes higher, because the fixed costs like rent and salaries have to be spread over fewer products. This can lower profits and might make the business look inefficient to investors or customers.
On the other hand, sometimes a business operates above capacity. This usually means staff are working overtime or machines are running longer hours to meet high demand. The good thing about this is that it can increase revenue and make full use of resources in the short term. But if this continues for too long, it can cause problems. Equipment might break down more often, employees can get tired or stressed, and the quality of products might fall. There is also a risk that the business cannot deliver on time because it is overstretched.
So, what can a business do to improve its capacity utilisation? There are several ways to do this. One method is to increase demand by using promotions, discounts, or by entering new markets. For example, a gym could offer a summer discount to attract more members when attendance is low. Another method is to rationalise operations, which means reducing the parts of the business that are not being used efficiently. This might involve selling off unused machinery or closing a production line that is not needed.
Businesses can also use outsourcing or subcontracting. This means asking another company to help with production when demand is temporarily high. For example, a clothing brand might outsource extra work during busy seasons like Eid or Christmas. Finally, companies can make their workforce and technology more flexible. Hiring part-time workers, using overtime when needed, or introducing automation can help a business handle changes in production levels more efficiently.
In conclusion, capacity utilisation tells a business how well it is using its resources. If it is too low, the business is wasting money and not making the most of its assets. If it is too high, the business may face stress, lower quality, and delays. The best position is to operate close to full capacity but not beyond it. This balance allows the business to stay efficient, profitable, and flexible
