You should know by know the different course of action businesses can take when operating with short or long-term excess capacity. You are also familiar with the problems of operating at full capacity.
What are the different possibilities for a business when operating at full-capacity (capacity shortage)?
Increase Capacity by acquiring more production resources such as land, capital, and labor;
Increasing capacity can be beneficial as it increases long-term capacity, ensures control over quality, and can even increase productivity (updated technology).
However, increasing capacity has its limitations: it doesn't come without intensive capital costs, the risk of future fall in demand (excess capacity), and the time required for such expansion.
Outsourcing can be another solution to the problem of operating at full-capacity:
It doesn't require intensive capital investment, it can be done quickly, and offers flexibility as contracts can be ended in case of falling demand.
However, control over quality is jeopardized, other costs such as administration and transportation may be added, and profits can decrease since a portion of the margin will need to be paid to the suppliers in question.
The last alternative to working at full-capacity is simply continuing at full capacity and not expand due to the risk of lowering demand.
Outsourcing - using a third party business to undertake parts of a business operations - is therefore a viable option:
Different businesses choose to outsource due to different reasons:
Capacity Shortage
Outsourcing is oftentimes introduced targeted reduction and control of operating costs: instead of hiring specialists who might not be used at all times it is cheaper to outsource to specialist firms who have economies of scale on that field;
Increased Flexibility as fixed costs become variable costs which that it can be added at any needed times;
Ability to focus on the company's core business rather than on peripheral activities - increasing the business overall efficiency;
Access to quality service or resources which would otherwise not be available internally since specialist firms have specialist labor and other resources which smaller firms would not be able to afford otherwise;
Freed-up internal resources (e.g. outsource your HR department and use their freed-up space to improve your customer service (office, computers. etc.).
The major limitations of outsourcing have to do with job security (motivation, bad publicity for outsourcing internationally), quality issues as the business becomes reliant on a third-party company; security over data; and customer resistance.
Activity 25.3
Business in Action 25.1
To-Do-List
No Homework!
Chapter 25 - Capacity Utilization and Outsourcing
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