Managing capacity

Capacity is the maximum output that a business is able to produce within a given period of time with the resources it has available.

It’s usually measured in production units (for example, 3000 washing machines per month). Productive capacity is liable to change. For example, capacity is reduced is a machine is under maintenance and it increases if more production shifts are carried out. Capacity also needs to take into account unexpected and seasonal changes which affect demand.

Capacity utilisation is the percentage of total capacity that’s actually achieved during a given period of time.

capacity utilisation = (actual level of output / maximum possible output) x 100

Capacity utilisation is important because it can measure productive efficiency. As output rises, the average production costs tend to fall so businesses aim to produce as close to full capacity (so, 100% utilisation) as they possibly can.

However, there are reasons why a business may produce under 100% capacity:

• Lower demand: there could be a general reduction in overall market demand, seasonal variation in demand, or loss of the market share.
• Capacity increase: functioning at just under 100% provides a business with a little ‘slack’.
• Inefficiency: it could simply be a business’ inefficiency. For example, due to employee disruption or poor maintenance.

Ways in which a business can increase their capacity (although this tends to only be in short-term) include:

– increasing workforce hours (for example, extra shifts or temporary staff)

– sub-contract production activities (for instance, the assembly of components)

– decrease the time spent on equipment maintenance

Working at high capacity is a positive way for a business to function. However, there are problems associated with it:

• Lower quality: if production is rushed then there’s less time for quality control.
• Employee suffer: more work and additional stress can be de-motivating if dragged out for too long.
• Sale losses: if capacity is at 100% then a business is less able to meet sudden increases in demand.

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Production efficiency

Production efficiency can be measured in a number of ways:

– Productivity measured the relationship between production inputs and the resulting outputs.

– Unit costs are calculated by dividing the total costs by the number of units produced. The lower the ratio, the better the efficiency.

– Too many non-productive or ‘idle’ resources is a sign of inefficiency. For example, machinery only being used occasionally or employees with nothing to do.

Productive efficiency is the lowest cost per unit at which production can take place. This is important because:

• a business that’s efficient will produce its goods at a lower cost than its competitors meaning that it can generate more profit at a lower price
• production assets are expensive investments so a business needs to make sure that it’s maximising its return on them

Productivity can be improved through:

– Training

– Increasing motivations

– More and better capital equipment

– Improved raw material quality

– Better production organisation

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Stock control and efficiency

A stock control system ensures that a business never runs out of stock.

Re-order levels

A re-order level is the minimum amount of stock that will be held by a business before it re-orders more from suppliers. This level is different depending on the business and the industry it’s in. For instance, a supermarket is likely to sell more stock than an electrical good store and so will have a higher re-order level.

Re-order quantities

Once a business has reached its re-order level, this is the amount of stock and raw materials it will re-order from its suppliers. As before, the re-order quantity is different for businesses and industries.

There are a number of factors which affect how much stock is re-ordered:

• – Lead time
• – The customer demand expected
• – Stock holding stocks
• – Stock type (if it’s perishable or durable)

Buffer stocks

It’s important for a business to have a little extra stock in order to deal with the unexpected. This is called the buffer stock. For instance, if there’s an especially large order from a customer or a lack of raw materials being delivered at one time.

Lead times

This is the period of time between a business ordering new stock and it being delivered. In order to keep up with customer orders and minimise the time between paying and receiving stock, a business will want the lead time to be as low as possible.

However, sometimes delays can occur. For instance, a supplier lorries might be breakdown or there’s a delay with the supplier receiving the order.

An effective stock control system combines each of these factors.

Stock rotation

A lot of businesses use a stock rotation system, also known as a First In First Out (FIFO) system. It makes sure that old stock is used before new stock. This prevents older batches from becoming unusable, for example going past their sell-by-date or becoming obsolete.

Information technology (IT) is a good way to set-up a stock control system. Software packages allow for detailed records to be kept. Systems like Electronic Point Of Sale (EPOS) allow a business to keep a check on what stock has been purchased and what stock has been sold. By keeping a check on every transaction stock levels can be accurately monitored. This system is also able to re-order stock automatically when a certain level has been reached. This means that costs and waste can be tightly controlled as well as revenue and outstanding debts.