Capacity Utilization

Posted in Operations and Supply Chain Terms, Total Reads: 2261
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Definition: Capacity Utilization

A firm possesses a definite set of resources at its disposal. This enables the firm to produce a certain number of products or provide a certain amount of service in a given period of time. This ideal, maximum capability of the firm is called its capacity. However, in actual scenario, this capacity is not fully used at all the time. The fraction of this capacity (usually expressed in percentage) used within a given interval of time is called the capacity utilisation of the firm or a unit of the firm.


Usually this is less than 100%, whereby the firm is said to operate at ‘under-capacity’. 100% implies ‘full capacity’ and greater than 100% implies ‘over-capacity’. Main reasons behind such fluctuations are:

  1. Seasonal demand
  2. Varying market share due to increase / reduction of competition
  3. More / less successful marketing

Though under-capacity generally implies less than ideal performance of the firm, full and over-capacity operations yield problems like less maintenance time, greater employee (and machine) fatigue due to over-time, etc.



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