GCSE / Level 2 Revision Notes

Production & operations - Managing production capacity

Capacity can be defined as:

The maximum output that a business can produce in a given period with the available resources

Capacity is usually measured in production units (e.g. 1,000 cars per month, or 500 customers served per day). It is unusual for a business to used all its capacity all of the time.

The proportion of capacity that a business uses is known as capacity utilisation, and it is an important measure of how efficiently a business is operating.

When a business is operating at less than 100% capacity, it is said to have “spare capacity”.

Sometimes spare capacity is not the problem – a business finds itself with excess demand (i.e. it cannot produce enough to meet demand).  In such circumstances, what can it do to operate at higher than 100% normal capacity? It can often:

• Increase workforce hours (e.g. extra shifts; encourage overtime; employ temporary staff)
• Sub-contract some production activities (e.g. assembly of components)
• Reduce time spent maintaining production equipment

However, there are some potential pitfalls with operating at very high capacity (i.e. around 100%):

• Negative effect on quality (possibly)
• Production is rushed
• Less time for quality control
• Employees suffer
• Added workloads & stress
• De-motivating if sustained for too long
• Loss of sales
• Less able to meet sudden or unexpected increases in demand
• Production equipment may require repair