Posted in Operations and Supply Chain Terms, Total Reads: 5022
Underutilization means not utilizing to the fullest capacity. Under-utilization of resources have an impact on profits of the company and hence are a matter of concern for the management. Under utilization can be in terms of machines, labor, raw materials, etc.
Machines designed for a particular capacity are face underutilization when the demand for the products to be produced on it decreases. This means that fixed cost per unit of product are higher in comparison to the price per unit of product. This has serious consequences on our business and in turn our operations. Thus, an asset is underutilized when the capital invested in it fails to create its anticipated use, instead creating unnecessary hindrances in capital budgets that would put a limitation on its capacity to invest in other areas.
Eg–In times of recession when companies don’t have projects, we generally see a lot of manpower sits idle, but they are still being paid. This is an example of under-utilization of manpower.