Capacity Planning, Objectives, Needs, Factors determining capacity planning Capacity Planning decisions, strategies for modifying capacity, economies of scale.

1. Capacity planning

2. Capacity
 The capacity can be taken as a measure of an organisation’s ability to provide
customers with services or goods in the amount requested and time requested.
 In operations management capacity is referred as an amount of the input resources
available to produce relative output over a period of time.
 In general term capacity is referred to as maximum production capacity which can be
attained within a normal working schedule.
 A definition of capacity should take into account both the volume and the time over
which capacity is available.

3. Capacity planning
Capacity planning is the process of determining the production capacity needed by an organization to
meet changing demands for its products.
Capacity is the upper limit or ceiling on the load that an operating unit can handle.
Capacity also includes:
 Equipment
 Space
 Employee skills
The basic questions in capacity handling are:
 What kind of capacity is needed?
 How much is needed?
 When is it needed?

4. Objectives of capacity planning
 To identify and solve capacity problems in a timely manner to meet consumer
needs.
 To maintain a balance between required capacity and available capacity.
 The goal of capacity planning is to minimise this discrepancy.
Capacity is calculated : (number of machines or workers) x (number of shifts)x
(utilisation) x (efficiency).

5. Example:
Cinema Hall’s Seating Capacity = 500
Duration of Show = 3 hrs (time required to process a batch)
Hall Open for 12 hrs/day (Availability of resource)
Processing Capacity (output rate) = 2000 customers/day

6. Need for capacity planning
Here are five reasons why capacity planning is one of the most critical decisions a
manager has to make:
 Capacity planning estimates the cost of facility to determine its economic
feasibility. Too large a facility or production means excessive expense and too
small a facility means poor customer service.
 Determines capital requirement and therefore a large portion of fixed costs are
expected. Additional capacity may be needed if the expected output is inadequate.
Managers need to address how to effectively and efficiently add that capacity.

7. Need for capacity planning
 Even with good forecasting and facilities built according to forecasts there may be
poor match between actual demand and available capacity. There is no guarantee
of little or no discrepancy between capacity and demand or supply or whether
demand will be satisfied with facilities or if facilities will be idle.
 Dynamic nature of capacity-Capacity planning nowadays is harder due to rapid
changes which organisations need to respond to quickly. The foundation needed to
react to these changes is based on understanding changing supply and demand
capacities.
 The questions of when capacity should be increased and by how much are critical
decisions. Inadequate capacity planning can lead to the loss of the customer and
business. Excess capacity can drain the company's resources and prevent
investments into more lucrative ventures.

8. Types of capacity
 Design capacity : It is the theoretical maximum output of a system in a given period
under ideal conditions. For many companies design capacity can be straight forward.
Design capacity is the maximum amount of work that an organization is capable of
completing in a given period.
 Effective capacity : It is the capacity a firm expects to achieve given its current
operating constraints .Effective capacity is the maximum amount of work that an
organization is capable of completing in a given period due to constraints such as
quality problems, delays, material handling, etc.

9. Types of capacity
 It is often lower than the design capacity because the facility may have been
designed for an earlier version of the product or a different product mix than is
currently being produced.
Actual capacity: The maximum output rate which is actually achieved under the
constraints of machine breakdowns, labour inefficiencies and absenteeism.
It is always lower then effective capacity.

10. Determinants of Effective Capacity
• Facilities: The size and provision for expansion are key in the design of facilities. Other
facility factors include locational factors (transportation costs, distance to market, labor
supply, energy sources). The layout of the work area can determine how smoothly work
can be performed.
• Product and Service Factors: The more uniform the output, the more opportunities there
are for standardization of methods and materials. This leads to greater capacity.
• Process Factors: Quantity capability is an important determinant of capacity, but so is
output quality. If the quality does not meet standards, then output rate decreases because
of need of inspection and rework activities. Process improvements that increase quality
and productivity can result in increased capacity. Another process factor to consider is the
time it takes to change over equipment settings for different products or services.
• Human Factors: the tasks that are needed in certain jobs, the array of activities involved
and the training, skill, and experience required to perform a job all affect the potential and
actual output. Employee motivation, absenteeism, and labor turnover all affect the output
rate as well.
• Policy Factors: Management policy can affect capacity by allowing or not allowing
capacity options such as overtime or second or third shifts

11. Determinants of Effective Capacity
• Operational Factors: Scheduling problems may occur when an organization has differences
in equipment capabilities among different pieces of equipment or differences in job
requirements. Other areas of impact on effective capacity include inventory stocking
decisions, late deliveries, purchasing requirements, acceptability of purchased materials and
parts, and quality inspection and control procedures.
• Supply Chain Factors: Questions include: What impact will the changes have on suppliers,
warehousing, transportation, and distributors? If capacity will be increased, will these
elements of the supply chain be able to handle the increase? If capacity is to be decreased,
what impact will the loss of business have on these elements of the supply chain?
• External Factors: Minimum quality and performance standards can restrict management's
options for increasing and using capacity.
• Inadequate planning can be a major limiting determining of effective capacity.
The most important parts of effective capacity are process and human factors. Process factors
must be efficient and must operate smoothly, if not the rate of output will dramatically decrease.
Human factors must be trained well and have experience, they must be motivated and have a
low absenteeism and labor turnover. In resolving constraint issues, all possible alternative
solutions must be evaluated.

12. How is capacity measured?
 Output
Organisation Measure
Automobile manufacturer Number of autos
Steel producer Tonnes of steel
Power company Megawatts of electricity

13.  Input
organisation Measure
Airlines Number of seats
Hospital Number of beds
Tax office Number of accountants
How is capacity measured?

14.  Efficiency= actual output/effective capacity
 Utilization= actual output / design capacity
 E.g.
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 units/day
Efficiency=36 units per day/ 40 units per day
= 90%
Utilisation= 36 units per day/50 units per day
= 72%
EFFICIENCY AND UTILIZATION

15. CAPACITY PLANNING DECISION
Capacity planning normally involves the following activities:
1. Assessing existing capacity.
2. Forecasting capacity needs.
3. Identifying alternative ways to modify capacity.
4. Evaluating financial, economical, and technological capacity
alternatives.
5. Selecting a capacity alternative most suited to achieving strategic
mission.

16. THREE STEPS OF CAPACITY PLANNING:
Determine Service Level Requirements:
The first step on the capacity planning process is to categorize the work done by systems and to quantify
users expectation for how the work gets down.
(a) Define workloads
(b) Determine the unit of work
(c) Identify service levels for each workload
Analyse current capacity:
Next, the current capacity of the system must be analyzed to determine how it is meeting the needs of the
users.
(a) Measure service levels and compare to objectives
(b) Measure overall resources usages.
(c) Measure resource usages by workload
(d) Identify components of response time

17. THREE STEPS OF CAPACITY PLANNING:
Planning for future:
Finally, using forecasts of future business activity, future system requirements
are determined. Implementing the required changes in system configuring will
ensure that sufficient capacity will be available to maintain service level, even
as circumstanced change in the future.
(a) Determine future processing requirements
(b) Plan future system configuration

18. Importance of Capacity Decisions:
1. Impacts ability to meet future demands
2. Affects operating costs
3. Major determinant of initial costs
4. Involves long-term commitment
5. Affects competitiveness
6. Affects ease of management
7. Impacts long range planning

19. ESTIMATING FUTURE CAPACITY NEEDS:
Capacity requirements can be evaluated from two extreme perspectives; short term and long
term.
Short-term Requirements-
Managers often use forecast of product demand to estimate the short-term work load the facility
must handle. By looking ahead up to 12 months, managers anticipate output requirements for
different products or services. Then they compare requirements with existing capacity and detect
when capacity adjustments are needed.
Long-term Requirements-
Long term capacity requirements are more difficult to determine because future demand and
technologies are uncertain. Forecasting five or ten years into the future is a risky and difficult
task. What products or services will the firm are producing then? Today’s product may not even
exist in the future.

20. STRATIGES FOR MODIFYING CAPACITY:
After existing and future capacity requirements are assessed, alternative ways of modifying capacity must be identified.
Short-term Responses-
For short-term periods of up to one year, fundamental capacity is fixed. Major facilities are seldom opened or closed on a
regular monthly or yearly basis. Many short-term adjustments for increasing or decreasing capacity are possible,
however. Which adjustment to make depended on whether the conversion process is primarily labor-or capital-intensive
and whether the product is one that can be stored in inventory. In the short term, capacity planning concerns issues of
scheduling, labor shifts, and balancing resource capacities. The goal of short-term capacity planning is to handle
unexpected shifts in demand in an efficient economic manner. The time frame for short-term planning is frequently only
a few days but may run as long as six months.
Long-term Responses-
Over the long term, capacity planning relates primarily to strategic issues involving the firm's major production facilities.
In addition, long-term capacity issues are interrelated with location decisions. Technology and transferability of the
process to other products is also intertwined with long-term capacity planning. Long-term capacity planning may evolve
when short-term changes in capacity are insufficient. For example, if the firm's addition of a third shift to its current
two-shift plan still does not produce enough output, and subcontracting arrangements cannot be made, one feasible
alternative is to add capital equipment and modify the layout of the plant (long-term actions). It may even be desirable to
add additional plant space or to construct a new facility (long-term alternatives).

21. WHAT IS DONE IF THERE IN AN INBALANCE BETWEEN
DEMAND AND CAPACITY:
If there is an imbalance in the demand and the capacity in the short term then it can be
tackled by temporary measures adjustments such as increasing/ decreasing the labour
force or creating and carrying inventory in the lean period to be used up in the peak-
demand period.
If there is an imbalance in the long term demand and the capacity then an organization
can respond by changing /modifying the capacity. If capacity is short then it can create
new facility or expand existing facility If there is excess capacity then it can temporarily
close/ sell/ consolidate facilities. Consolidation can be done by relocation (combining
technologies) rearrangement of equipment.

22. MODELS AND TECHNIQUES USEFUL FOR
CAPACITY PLANNING
 Present value analysis: It is used to evaluate the time of capital investment and fund
flows.
 Aggregate planning models: it is useful for examining the way of using the
examining the way of using the existing capacity in the short terms.
 Break even analysis: to determine the minimum break even volumes of production.
 Linear programming: this is helpful in determining the optimum product mix for
maximizing contribution, considering the capacity constraints.
 Computers simulation: it is helpful to determine the effects of various scheduling
policies.
 Decision tree analysis: this can be applied for long term capacity problems.

23. ECONOMIES OF SCALE
It is well known principle of economics. It indicates the relationship between cost and capacity in an operating system.
When output increases in an operating system, the system is likely to experience cost advantages on account several
factors. Due the following reasons the average unit cost begins to fall with the rise in output level :
 Spreading the fixed costs of capacity over a larger output
 Improved utilization of several resources in the system
 Cost benefit in procurement on account of increased volume.
 Efficient use of supervisory and management staff.
 The economies of scale cease to occur beyond a level of production or output. This is called “Diseconomies of scale”.
There can be several reasons for this:
― Inefficient management due to largeness of operation and resultant lack of coordination.
― Overuse of machineries and break down of material handling equipment's.
― Over hiring of employees, or excessive overtime.
― Service slowdowns due to increasing complexities.
― Increase in quality problems because of mismanagement and lack of focus.

24. ECONOMIES OF SCALE
Production units have an optimal rate of output for minimal cost.

25. Optimal Rate of Output
Minimum
cost
Averagecostperunit
Rate of output
Production units have an optimal rate of output for minimal cost.
Minimum average cost per unit
5-

26. Economies of Scale
Averagecostperunit
0
Small
plant Medium
plant Large
plant
Output rate
Minimum cost & optimal operating rate are
functions of size of production unit.
5-