Capacity levels are critical components of any production sector. According to Leoncini and Montresor (2008: 33-36), capacity level refers to a match between a nation’s or enterprise’s production output and its installed equipment. It is important for any firm to know its optimal capacity in order to have knowledge on the output to produce, which will match the maximization of using the equipment installed in the firm. This helps the firm to prevent instances of under-utilization of the equipment present. Under-utilization occurs when firms produce lesser output than equipment can handle.
The overuse of the existing equipment is known as excess capacity (Tirole 2007: 318-321). Both excess capacity and under-utilization represent inefficiency, since resources present are over-utilized and underutilized respectively. Capacity levels are important in analyzing the efficiency of using factors of production. This enables the management to take measures which improve the utilization of these factors to achieve optimal capacity. In case there is either excess capacity or under-utilization, there is need to change the capacity levels.
There are several factors which are considered when making the decision to change the capacity levels. Factors which are considered when changing the capacity levels. Present and future market trends. A firm should study
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The main reason for studying future trends is that the market is the major factor which influences the output to be produced. If analysis of the present situation shows that the firm is not meeting the market demand, it should increase its capacity levels and vice verse. If the future trends point to an increase in purchasing power or market share in terms of consumers, the firm should increase its capacity level and vice verse. Present and future economic environment. In making the decision to change capacity, it is very important to analyze the present and future economic environment.
This is due to the reason that the economic environment affects many aspects of firms, some of which include sales, production costs, storage costs and others. For instance, currently there is a global economic meltdown, which has adversely affected many economies. This has led to reduced sales in the manufacturing sector, such as the motor-vehicle sector (Walayat: 2008). Firms in this sector should lower their capacity in order to prevent incurring costs accruing from excess production.
The future economic environment also guides the decision on changing capacity of industries due to a similar reason. The optimum level As previously mentioned, the optimal capacity is the level of production which matches the existing equipment. It is very important to produce goods or services at optimum levels since this represents the most efficient way of utilizing the available resources. It ensures that under-utilization and excess capacity is avoided. In light of this, when changing the capacity levels, it is important to consider the optimal capacity.
This will enable the firm to make changes, which are as reflective as possible, of the optimal capacity. Conclusion. It is very important to know the optimum capacity of any firm, since this reflects the efficient use of factors of production. It is also important to consider the present and future market trends and economic environment, since these affect the production and sales of firms. Producing the optimal capacity of any product not only ensures that resources are used efficiently, but it also prevents wastage or shortage of the products.
Handfield, H. B. (2006). Supply Market Intelligence: A Managerial Handbook for Building Sourcing Strategies. California: CRC Press. Leoncini, R. , Montresor, S. (2008). Dynamic Capabilities Between Firm Organisation and Local Systems. London: Routledge. Tirole, J. (2007). The Theory of Industrial Organization. Massachusetts: MIT Press. Walayat, N. 2008. “US auto industry in meltdown as Ford loses record $8. 7 billion”. [Online] Available from: http://www.marketoracle.co.uk/Article5600.html (Accessed January 29, 2009).