Overcapacity

In business administration and economics, overcapacity is a part of production factors that cannot be used in the long term . It is that part of the capacity that can not be used by utilizing the means of production within a certain period of time .

Business administration

Overcapacity is mathematically the difference between the actual and the maximum possible production in a certain period of time. If operational capacities are dimensioned in such a way that they can be fully utilized , there is no excess capacity in the narrower sense in the event of a short-term drop in capacity utilization . Overcapacities are only considered to be overcapacities if full capacity utilization in the company cannot be achieved over the long term. These real overcapacities are so-called structural overcapacities , while the cyclical overcapacities are only temporarily available in times of a sales crisis . Walter Hamm , according to is excess capacity, if the production of an essential part of the provider about seasonal and cyclical fluctuations of time at free price formation is no longer profitable to be used.

Overcapacities can exist in the case of workers - an overcapacity of the factor work capacity -, machines and technical systems , material and operational areas . Because of the observance of notice periods , the operational staff is the least elastic to be dismantled; the sale of machines and areas can lead to losses. This means that existing excess capacities cannot be reduced as quickly as demand decreases; this results in cost retention . Where there are storage options in industry , these can prevent overcapacities in the short term by building up stocks. In this way, warehouses can help smooth out capacity problems in the short term. On the one hand, overcapacities can arise from planning errors if the production resources are too high in size from the outset (due to bad investments ) and their full capacity utilization is not foreseeable. On the other hand, they arise when there is a long-term slump in demand and the unneeded empty capacities are not eliminated. Then the fixed costs incurred by the availability of the overcapacity are not offset by any income ( idle costs ), which leads to a decrease in profit or an increase in losses. When the production volume is reduced, these fixed costs are transformed from useful costs into avoidable idle costs, which is why companies with particularly high fixed costs are exposed to the risk of overcapacity.

Structural overcapacities can, however, be necessary if high demands are placed on the flexibility of a company and there is a permanent, structurally unavoidable change between capacity bottlenecks and overcapacities. In the case of service companies, it should be borne in mind that the customer perceives the provision of resources as a quality feature, especially if the service is provided in cooperation with the customer. If unnecessary excess capacities are not eliminated, this can result in a company crisis . According to a survey, the main reasons for company bankruptcies in 2010 were recession (85%), lack of funds (71%) and overcapacity (63%).

Economics

In the market economy , capacities are designed to cover peaks in demand, so that supply (capacity) and demand are only approximately balanced in boom phases . Overcapacity arises as soon as there is a drop in demand and a demand gap exists. In economics, a distinction is made between cyclical and structural overcapacity . The structural overcapacity is characterized by a long-term sustained decline in demand due to demand migration in the course of structural change. The cyclical one is a rather short or medium term overcapacity due to cyclical fluctuations in demand. Overcapacities tend not to be reduced immediately, so that expected increases in demand can be absorbed without any problems. Such tactical overcapacity is accepted in order to be able to serve expected increases in demand immediately without any problems, while the strategic overcapacity can be recognized by the fact that established companies deliberately maintain overcapacity in order to signal to potential new companies that their market entry with an expansion of supply and thus price reduction would be answered. The strategic overcapacity is therefore a market entry barrier . The consequence of overcapacity is intensified competition and a drop in prices.