Capacity utilization is an important concept in determining industrial performance. It can be used to ascertain if your business is underperforming or outperforming. Utilizing industrial capacity to the full extent is critical to the successful existence of your business.
So why don’t we look at what capacity utilization implies real quick?
What is Capacity Utilization?
Capacity utilization is basically the extent to which a business or an economy uses its productive capacity.
It is the relationship between the output derived using a business’s production equipment and the potential output which could be derived using the same production equipment if capacity was fully utilized. Does this make your head spin? If yes, all you need to understand is that capacity utilization is the extent to which a business uses its productive capacity.
Productive capacity is the maximum possible output a business can produce.
Capacity is not fully utilized if a business can increase unit of production without increasing production cost. Hence, until production can’t be increased without incurring additional production cost, capacity is not fully utilized.
What is the Ideal Capacity Utilization Rate?
Capacity utilization rate cannot exceed 100%, but the reasonable or ideal expected capacity utilization can be said to be 90% because issues could arise with production machinery and workers. The machinery used for production could develop issues that would prevent it from working at its optimum. And if you agree with me, no worker could work at full capacity always. Putting these in mind, 90% could be said to be an ideal capacity utilization rate.
What is the Importance of Fully Utilizing Capacity?
Considering the fact that increasing capacity could prove expensive. It is wise for a business to make full use of its existing capacity.
The importance of fully utilizing capacity include:
It ensures productivity – Fully utilizing capacity ensures productivity because output produced increases without a rise in production cost. In simpler terms, you increase production without incurring additional expenses.
It reduces cost- A rise in output produced is usually accompanied by a fall in production cost. Hence, working to increase capacity utilization would reduce cost since increased capacity utilization is associated with a rise in output production.
It could Increase Profitability- A rise in output and a reduction in production cost, would result in increased profits for your business. However, if there is a reduction in demand and a loss in market share, it would not translate to an increase in profits.
How can you Increase Capacity Utilization in your Industry?
If you ever want to increase capacity utilization in your business, you have to plan properly and ahead. Planning ahead would help you employ your business resources in the best possible way. It would also help you easily adjust to the ever-changing business climate; making you react in the best possible way to the changes in demand, market share, manufacturing etc. Plan ahead to boost manufacturing, market share, and your product demand.
Your approach should be balancing your capacity with your product demand and market share to ensure profitability. Never increase capacity without an increase in your product demand or market share. Make sure the existing capacity in your business is fully used, before opting for a greater one.
Strategic decision making
In business, the strategy is everything. Your strategy should be to expand your business, maximize capital benefits with low production costs and increase market share. Your strategic decisions would go a long way in determining your level of capacity utilization.