Q&A - Operations - What is spare capacity and does it matter?

Print Email Tweet This!Save to Favorites
Recommend on Google+

When a business is operating at less than 100% capacity, it is said to have “spare capacity”.  What are the cause of spare capacity and does it matter?

There are several reasons why a business will operate with spare capacity:

Lower demand:
- General reduction in overall market demand (e.g. during the credit crunch)
- Loss of market share (perhaps unsuccessful marketing, competitors introduce better product)
- Seasonal variation in demand - i.e. temporary, but expected spare capacity

Increase in capacity not yet matched by increased demand
- Possibly because new technology has been introduced in anticipation of higher demand in the future
- Improvements in productivity mean capacity increases for a given level of demand
- Be careful that the business has not over-invested in fixed assets

Provide some “slack”
- Allow some spare capacity to be able to respond to short-term or unexpected increases in demand
- Provide time for maintenance, repairs and training

Inefficiency
- A problem = less competitive - implies higher unit costs than the competition

Does spare capacity matter?

There are some potential downsides to operating with spare capacity:

- Higher fixed costs per unit produced implies lower profitability than could be achieved
- De-motivated employees: boredom, fear of job losses (factory workers who have been made redundant often say that they could “see it coming” because production had been quiet
- The opportunity cost of the spare capacity - the returns foregone from the cash invested

However, it is often said that a business should maintain a capacity buffer - somewhere around 10% of capacity to allow for unexpected demand, staff training and development

blog comments powered by Disqus

BUSINESS TEACHER RESOURCE NEWSLETTER
Get first news of business teaching resources, ideas and other materials from tutor2u. Over 9,400 business teachers from the UK and around the world receive our regular teacher email newsletters. Sign up for free here!

*  Your Email Address:
*  Preferred Format:	HTMLText
Full Name:
*  Country:	-- Please choose your country --United KingdomAlgeriaArgentinaAustraliaAustriaAzerbaijanBahamasBahrainBangladeshBelgiumBermudaBosniaBotswanaBrazilBruneiBulgariaCambodiaCameroonCanadaChinaCyprusCzech republicEgyptEstoniaEthiopiaFijiFranceGeorgiaGermanyGhanaGreeceHong KongHungaryIndiaIndonesiaIranIrelandIsraelItalyIvory CoastJapanJordanKenyaKuwaitLebanonLiberiaLithuaniaMalawiMalaysiaMaldivesMaltaMauritiusMexicoNepalNetherlandsNew ZealandNigeriaNorwayOmanPakistanPapua New GuineaPhillipinesPolandPortugalQatarRomaniaRussiaSaudi ArabiaSierra LeoneSingaporeSlovakiaSloveniaSouth KoreaSpainSri LankaSwedenSwitzerlandTanzaniaThailandTunisiaUgandaUkraineUnited Arab EmiratesUnited StatesUruguayVietnamWest IndiesZambiaZimbabwe
Job / Position:
Postcode:
School / College:
Town / City:
AS/A2 Applied Business Board:	-- Please choose an option --AQAEdexcelOCRNot offered
AS/A2 Business Studies Board:	-- Please choose an option --AQAOCREdexcelCambridge Pre-UIBSQAWJECOtherDon't offer AS/A2 Business
BTEC First:	Offered Not Offered
BTEC National in Business:	Offered Not offered
GCSE Applied Business Board:	-- Please choose an option --AQAEdexcelOCRCCEAWJECDont Offer GCSE Applied Business
GCSE Business Board:	-- Please choose an option --AQAOCREdexcelIGCSEICAA/CCEAWJECSQAOtherDon't offer GCSE Business
*  Enter the security code shown:

Popular Topic Tags

recession, demand, prices, price, unemployment, profit, economics, costs, investment, inflation, supply, employment, trade, competition, gdp, risk, china, debt, euro, entrepreneur, capacity, production, innovation, downturn, tutor2u, revision, pay, exports, manufacturing, confidence, profits, food, incentives, banks, strategy, globalisation, aqa, expectations, oil, csr, usa, startup, retailers, housing, productivity, sterling, supermarkets, takeover, google, economies of scale, mortgage, cash flow, advertising, quiz, leadership, property, buss4, tesco, economic growth, video, efficiency, enterprise, motivation, stakeholders, apple, deflation, corporate social responsibility, ebea, market share, airlines, pricing, taxation, merger, slowdown, bank of england, acquisition, interest rates, market failure, borrowing, competitiveness, sustainability, product life cycle, credit crunch, budget deficit, aqa business studies, facebook, twitter, aqa business, bbc, nelson thornes, philip allan updates, starbucks, philip allan, monopoly, diversification, recruitment, organic growth, stocks, training, oligopoly, starter activity, shareholders, uk economy, poverty, emerging markets, dollar, government failure, retailing, management, suppliers, buss1, marketing mix, tim harford, cpi, branding, opportunity cost, breakeven, government spending, hodder education, vat, product, customer service, eu, losses, wages, evaluation, india, external growth, wealth, environment, edexcel, location, promotion, technology, information failure, business studies revision, sources of finance, franchise, aqa gce business, elasticity, regulation, spare capacity, welfare, jobs, economic cycle, marketing, zondle, strategic direction, british airways,
View all tags for the Business Blog