Utilization is the actual output as a percentage of design capacity, which is th
ID: 461003 • Letter: U
Question
Utilization is the actual output as a percentage of design capacity, which is the theoretical maximum output of a certain time frame under ideal conditions. Efficiency is the actual output as a percent of effective capacity, which is that of a capacity a firm can achieve, given certain circumstances. The differences between the two is that utilization is the percent of design capacity actually achieved and efficiency is the percentage of effective capacity achieved. I feel that the most useful measure for an operations manager is that of efficiency, in which they would look at the actual output and not so much that of utilization. Efficiency provides a better measure for operations due to its capacity that is readily available, the end result so to speak.
Do you feel there would be a difference in which is more important, utilization or efficiency, in a service industry verses a manufacturing industry? explain
Explanation / Answer
Capacity utilization is more important in manufacturing industries and efficiency is more important in service industry.
This is for the simple reason that capacity utilization is difficult to measure in service industry because of the subjectivity involved in measuring the design capacity.
Capacity utilization is important for manufacturing industries, as it is a measure of utilization of the design capacity to determine whether the plant is operating at under-capacity or if there’s a surplus capacity. There are economic implications to both situations, and the plant may need to add or reduce capacity in order to deal with the situation for optimizing the economic profit.
Service industry is driven more by the efficiency, as quantifying the design capacity accurately is very difficult and depends upon the technological elements, experiences and skills of the employees, which are dynamic elements and keep changing as the employees change and as the technologies change. Therefore measuring the prevalent effective capacity and the subsequent efficiency is a more practical and useful measure in service industry.
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