Question 1

Is 100% capacity utilisation the ideal target for a business?

Accepted Answer

No, not usually. While it may seem efficient, operating consistently at 100% capacity leaves no room for flexibility. There is no spare capacity to cope with sudden increases in demand, staff absences, or essential equipment maintenance. This can lead to stress on resources, declining quality, and missed opportunities. Most businesses aim for a rate of around 85-95%, which is considered optimal for balancing efficiency with flexibility.

Question 2

Is having low capacity utilisation always a negative sign?

Accepted Answer

Not necessarily. While persistent under-utilisation is a concern, it can be a normal and temporary state in certain situations. For example, a new business start-up will likely have low utilisation as it builds its customer base. Similarly, businesses with highly seasonal demand, like ice cream manufacturers, will experience periods of low utilisation in the off-season. It becomes a problem when it is unplanned, prolonged, and results in uncompetitive unit costs.

Question 3

If a business is over-utilised, shouldn't it just increase its maximum capacity?

Accepted Answer

Increasing maximum capacity, for example by building a new factory or buying more machinery, is a potential long-term solution, but it carries significant risks. It is a capital-intensive strategy that may take years to implement. If the high demand turns out to be temporary, the business could be left with even greater excess capacity and higher fixed costs in the future. Short-term solutions like subcontracting or offering overtime are often more appropriate to manage temporary peaks in demand.

Significance and measurement of capacity utilisation

What you need to know

Significance and measurement of capacity utilisation