Capacity and capacity utilisation; ways of managing capacity; stock control and the stock-control chart; just-in-time and just-in-case; lean production and waste reduction; and the link between operations control and cost.

What this theme is asking

Eduqas wants you to understand capacity and capacity utilisation, how firms manage capacity, how they control stock (including the stock-control chart), the contrast between just-in-time and just-in-case, and lean production and waste reduction, all linked to cost. Managing capacity and stock well keeps unit costs down without risking shortages.

Capacity and capacity utilisation

Managing capacity

When demand exceeds capacity, a firm can invest in more capacity (machinery, premises, staff), use overtime or extra shifts, outsource (subcontract work out), or manage demand. When capacity exceeds demand (spare capacity), it can cut capacity (rationalise, sell assets, reduce staff), seek new orders, or use the slack for maintenance. Matching capacity to demand is hard for seasonal or variable demand, so firms use flexible staffing, temporary capacity and demand-management tactics.

Stock control

Just-in-time, just-in-case and lean production

Just-in-time (JIT) holds minimal stock, with materials arriving exactly when needed. It cuts storage costs, frees cash tied up in stock and reduces waste, but leaves no buffer, so any supply disruption halts production; it depends on reliable suppliers and accurate forecasting. Just-in-case (JIC) holds buffer stock to guard against disruption and demand spikes; it is safer but ties up cash and risks waste. Lean production is a philosophy of minimising all waste (excess stock, defects, waiting, overproduction, unnecessary movement), using methods such as JIT, cell production, continuous improvement (kaizen) and quality at source, to cut cost and raise quality.

Operations control and cost

Capacity and stock decisions feed straight into cost and cash. High utilisation and lean stock cut unit costs and free cash, improving competitiveness, but pushed too far they risk shortages, breakdowns and lost sales. The skill is balance: enough utilisation to keep unit costs low, enough stock and slack to avoid disruption, matched to the reliability of suppliers and the stability of demand.

Examples in context

A car plant runs at high capacity utilisation to spread fixed costs and uses JIT with trusted suppliers. A small manufacturer with unreliable supply holds buffer stock (JIC) to avoid stockouts. A supermarket uses tight stock control with re-order levels and short lead times. A lean factory uses kaizen to cut waste continuously.

Try this

Q1. A firm can produce $20{,}000$ units a month and currently produces $16{,}000$. Calculate its capacity utilisation. [2 marks]

• Cue. $\tfrac{16{,}000}{20{,}000} \times 100 = 80\%$.

Q2. Explain one risk of just-in-time stock management. [3 marks]

• Cue. With no buffer stock, any supply disruption (a late or failed delivery) halts production and can lose sales, so JIT depends on reliable suppliers and accurate forecasting.