Unit 4.5 — Capacity utilisation, outsourcing and off-shoring
Learning outcomes (from the 9587 syllabus). This note is complete when every bullet below is covered.
Learning outcomes
- Capacity utilisation: importance; calculation of capacity utilisation
- Capacity excesses and shortages: effects and implications; approaches to overcome them
- Outsourcing: reasons for outsourcing; risks of outsourcing
- Off-shoring: reasons for off-shoring; risks of off-shoring
Running example: Swift Logistics has 10 vans that can each handle 100 deliveries a day — its maximum capacity is 1,000 deliveries/day.
Big picture
In plain English: capacity is how much a business can produce. Capacity utilisation is how much of that it actually uses. Outsourcing is paying another firm to do work for you; off-shoring is moving work to another country.
Analogy: capacity is like the seats on a bus. If the bus (100 seats) only carries 40 passengers, utilisation is 40% — the empty seats are wasted cost. Outsourcing is like hiring another bus company to run an extra route.
Core content
1. Capacity utilisation
Capacity utilisation = (actual output ÷ maximum capacity) × 100
If Swift Logistics actually delivers 800 parcels a day out of a maximum 1,000, its capacity utilisation is 800 ÷ 1,000 × 100 = 80%.
Importance: utilisation shows how fully the business uses its resources.
- High utilisation — fixed costs are spread over more output, so unit cost falls; but running at 100% leaves no room for breakdowns or extra orders.
- Low utilisation — resources are idle, but fixed costs (rent, vans) must still be paid, so unit cost rises.
2. Capacity excesses and shortages
Capacity excess (under-utilisation):
- Effects: idle machines/workers, wasted fixed costs, higher unit cost.
- Approaches to overcome: increase demand (marketing, lower prices), reduce capacity (sell equipment), or diversify into new products.
If Swift’s vans are only half full, it can run a promotion to attract more deliveries (increase demand) or lease out spare vans (reduce capacity).
Capacity shortage (over-utilisation):
- Effects: overtime costs, delays, quality drops, stressed staff, lost orders.
- Approaches to overcome: outsource the extra work, expand capacity, or reduce demand (raise prices).
During peak season, Swift has more orders than vans, causing late deliveries. It can outsource overflow deliveries to freelance couriers or expand by renting extra vans.
3. Outsourcing
Outsourcing = contracting another business to do work the firm previously did itself.
- Reasons: lower cost (specialists are cheaper), focus on core activities, access specialist skills, flexibility.
- Risks: loss of control, quality problems, dependence on the supplier, hidden costs, and harm to reputation if the supplier fails.
Swift Logistics outsources its payroll and IT support to specialist firms (cheaper, lets Swift focus on deliveries), but it risks poor service if the IT provider goes down during peak hours.
4. Off-shoring
Off-shoring = moving business activities to another country.
- Reasons: lower labour costs, access to skills, be closer to foreign markets, tax advantages.
- Risks: quality and communication problems, cultural/language differences, exchange-rate changes, political instability, and reputational damage (moving jobs abroad).
A Singapore electronics firm off-shores its assembly to Vietnam for lower wages, but risks quality problems, communication delays, and currency swings — and public criticism for moving jobs away.
Analysis & evaluation points (AO3/AO4)
- 100% utilisation is not always best — it leaves no flexibility and can overstrain staff and machines.
- Outsourcing cuts cost but adds dependence — the business relies on another firm’s reliability and quality.
- Off-shoring saves wages but adds “hidden” costs — logistics, quality control, communication and reputational risk.
- The right level of capacity depends on demand stability — stable demand allows high utilisation; fluctuating demand needs spare capacity.
Language bank: however · on balance · it depends on · trade-off ·
Worked examples (PEEL)
PEEL = Point → Explain → Example → Link. Use this structure for every written answer.
Worked example 1 — “Explain” (6 marks)
Question: Explain one effect of low capacity utilisation on a business.
- P (Point): Low capacity utilisation raises unit costs.
- E (Explain): Fixed costs such as rent and vehicle leases must be paid regardless of output, so when output is low these costs are spread over fewer units.
- E (Example): If Swift’s vans run half empty, the lease cost per parcel doubles compared with full vans.
- L (Link): This reduces profit margins and competitiveness.
Worked example 2 — “Evaluate” (12 marks)
Question: Evaluate whether a business should outsource its non-core activities.
- P (Point): Outsourcing non-core work lowers costs and lets the firm focus.
- E (Explain): Specialist firms do the work more cheaply and efficiently, freeing the business to concentrate on what it does best.
- E (Example): Swift outsources payroll to a specialist, saving the cost of an in-house payroll clerk and letting managers focus on deliveries.
- L (Link): This improves efficiency and competitiveness.
- Evaluate (AO4): However, outsourcing reduces control and creates dependence — a poor supplier can damage the business’s own reputation, and hidden costs can erode the savings. On balance, outsourcing non-core activities is usually beneficial if the firm chooses reliable suppliers and monitors quality closely.
Application bank (Singapore quick reference)
| Idea | Singapore example |
|---|---|
| Outsourcing | Firms outsourcing cleaning, security, IT, payroll to specialist companies |
| Off-shoring | Singapore firms moving labour-intensive manufacturing to Malaysia, Vietnam, Indonesia |
| Capacity (airlines) | SIA managing aircraft utilisation and seasonal capacity |
| Peak capacity | Delivery firms (Ninja Van, Lalamove) using freelance riders in peak periods |
Exam technique
- How it appears: a case study gives capacity figures and asks you to calculate utilisation or recommend how to handle excess/shortage.
- Model skeleton for “calculate capacity utilisation”: formula → substitute → answer (%) → interpret (high/low and what it means).
- Common pitfalls: forgetting the ×100; confusing outsourcing (another firm) with off-shoring (another country); ignoring the risks.
Self-test checklist
Essay practice: “Evaluate the view that outsourcing is always beneficial to a business.” (25 marks)