Capacity Utilisation & Outsourcing (Cambridge (CIE) A Level Business): Revision Note

Measuring capacity utilisation

• Capacity utilisation measures how effectively a business uses its assets to produce output

  • It compares current output to the maximum possible output a business can produce using all of its assets

• Capacity utilisation is calculated using the following formula and expressed as a percentage

The impact of under-capacity utilisation

• Low capacity utilisation means resources are being underused

  • This may lead to inefficiencies and lost potential output

Positive and negative impacts of undercapacity utilisation

Improving capacity utilisation

• High capacity utilisation means a business is making the most of its resources, such as staff, machines, and buildings

  • This helps to lower unit costs, improve efficiency, and increase profits

Ways to increase capacity utilisation

• Increase customer demand

  • Boost sales through marketing, special offers, or new products so more output is needed

• Make better use of staff and equipment

  • Improve planning and scheduling to ensure that workers and machines are kept busy and productive

• Accept more orders, even at lower profit margins

  • Taking on additional work, like bulk or discounted orders, can help fill unused capacity and reduce unit costs

• Use spare capacity to produce for other businesses

  • If a business has too much capacity, a business could offer manufacturing services to other companies

• Launch products or services at different times of year

  • Spreading demand across the year avoids quiet periods and helps keep production steady

• Close under-used parts of the business

  • If some facilities are regularly unused, shutting them down can cut costs and improve overall efficiency

The impact of operating over maximum capacity

• High capacity utilisation may mean flexibility to respond to new orders is lost

  • Staff are under pressure to increase output

  • Overworked staff may leave, increasing staff turnover 

  • Machinery operates at its limit and is more prone to breakdowns, which disrupts production

• High capacity utilisation minimises unit costs and increases competitiveness

  • Busy workers feel secure in their employment 

  • A busy business is likely to be well thought-of and attract customers who are willing to wait for products to be delivered

Outsourcing

• Outsourcing is the process where a business delegates specific business activities (IT, customer support, HR etc) to external service providers

  • Businesses choose to outsource these functions to reduce costs, access specialised expertise, or focus on core competencies

Advantages of outsourcing

• Cost savings

  • Businesses can often reduce expenses associated with operations such as hiring and training employees, maintaining infrastructure and managing IT systems

• Access to specialised skills

  • External specialists have resources that the business lacks internally, which allows it to benefit from the knowledge and experience of industry specialists when required

• Increased flexibility

  • Outsourcing provides greater flexibility to scale operations up or down based on demand fluctuations, which is particularly valuable in industries with seasonal or unpredictable demand

• Focus on core competencies

  • Businesses can concentrate their resources and efforts on their core competencies, where they can add value

Disadvantages of outsourcing

• Quality control

  • Outsourcing makes it harder to ensure consistent quality and adherence to company standards

• Loss of control

  • Handing direct control over those activities to others outside of the business may be risky

  • Companies must carefully select reliable partners and establish clear contractual terms to protect their interests

• Data security and confidentiality

  • Sharing sensitive information outside of the business introduces risks to data security and confidentiality