Increasing and reducing productive capacity
See the notes on capacity utilisation for a discussion of possible reasons for low or high capacity utilisation, and the problems that can be caused for a business.
Exam hint: the following solutions might be used to address capacity problems. Be careful in exam responses to choose only those approaches that are relevant to the circumstances of the firm that you are discussing. These issues have ample scope for analysis and evaluation, using cross-cutting themes from motivation, marketing, finance and strategy.
Dealing with high capacity utilisation
If a firm is struggling to keep up with demand, it could use the following approaches:
- Extra shifts or longer opening hours - using extra labour in the form of staff overtime or additional staff. This is how many firms address short term increases in demand, for example if one very large order is required. As long as it doesn’t go on for too long, staff may welcome the extra pay – which is usually at a higher rate.
There will be an increase in labour and other fixed costs – such as extra heating and lighting - and the firm might find there is insufficient time for maintenance and training. It is nevertheless a suitable approach to meet increased demand while the firm determines whether there will be a longer term need for extra capacity.
In some industries, local residents might object to additional noise and traffic caused by night or weekend working.
- Seasonal workers – if the capacity shortage is seasonal, then temporary staff may be taken on to meet the need. This is common in industries such as retail at Christmas, and in leisure and farming in the summer. The main problem is finding enough good temporary workers who have the right skills to maintain the firm’s levels of service and quality.
- Outsourcing or subcontracting – this means passing one or more aspect of the production process to another firm. For example an engineering firm could send components to another specialist firm for plating and concentrate itself on the other aspects of production. Motor manufacturers have increasingly sourced bodywork panels and other components through subcontractors, concentrating on assembly and finishing of vehicles.
This is a practical approach adopted by many firms that allows the firm to concentrate on what it does best. The partner firm may be more efficient at the outsourced operation. However, there are logistical challenges and costs associated with this and it does depend on the reliability of the partner firms.
This approach is also used as a primary mode of expansion by many large manufacturers. Apple, for example, very quickly out-sourced the manufacture of iPods to Chinese firms and Dyson outsourced vacuum cleaner manufacture to Korea.
- Expansion – investment in larger or additional factories, new machinery, further shops or offices. This will involve recruitment and training of new employees. Although there is considerable expense involved, this may be an appropriate strategy if demand is growing steadily and is expected to be sustained.
Dealing with low capacity utilisation
If a firm cannot find enough orders, it will be suffering from increased fixed costs, or overheads, per unit of production. Some possible solutions include:
- New business - of course, the most obvious solution is to try and find new business or change the marketing proposition so that the firm’s product or service is more competitive!
However, if this is not successful, other measures may have to be taken to cut overheads, such as:
- Rationalisation – or ‘downsizing’ - this means shutting down or selling off parts of the business. Staff may have to be made redundant, losing skilled and trained staff, so long term expectations must be taken into account before taking such drastic measures.
- Short-time working – cutting out a shift or reducing working hours. This will mean either reducing the workforce, or asking them to accept reduced wages and/or a loss of overtime. Obviously, this is likely to damage staff morale but might be preferable to permanent job losses – as long as there is the possibility of an upturn in trade.
- Laying off workers – this will reduce labour costs but not other fixed costs unless other actions are also taken.
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