Capacity planning is central to long-term organizational success and involves both long and short-term plans. There are different types of capacity including production, design, effective, and maximum capacities. Effective capacity is most impacted by factors related to facilities, products, processes, human resources, operations, and external forces. When determining capacity needs, organizations must consider economies and diseconomies of scale and develop alternatives such as building flexibility, differentiating product maturity, taking a holistic view, and smoothing requirements over time.

1. PRODUCTION AND OPERATIONS
MANAGEMENT
CAPACITY PLANNING

2. CAPACITY
AMOUNT OF OUTPUT A SYSTEM IS CAPABLE OF
ACHIEVING OVER A SPECIFIC PERIOD OF TIME.
Capacity planning
Capacity planning is central to the long-term success of an
organization. Capacity plans are made at two levels:
(i) Long-term capacity plans :
which deal with investments in new
facilities and equipments covering the requirements for at
least two years into the future and
(ii) Short-term capacity plans :
which focus on work-force
size, overtime budgets, inventories etc.

3. CAPACITY PLANNING
A long term strategic decision that establishes a
firm’s overall level resources.
Three major capacity decisions are:
i. How much capacity to be installed,
ii. When to increase capacity and
iii. How much to increase

4. TYPES OF CAPACITY
1) Production capacity: Maximum rate of
production or output of an organization.
(e.g., 100 cars per day etc .. )
2) Design capacity: The maximum output
that can possibly be attained.
3) Effective capacity: The maximum
output given a product mix, scheduling
difficulties, machine
maintenance, quality
factors, absenteeism etc.
4) Maximum capacity: The maximum
output that a facility can achieve under
ideal conditions. Also known as peak

5. DETERMINANTS OF EFFECTIVE CAPACITY
 Many decisions about design of the production system and
operation of the production system may have an impact on
capacity. The main factors relate to the following:
(i) Facilities,
(ii) Product or services,
(iii) Process
(iv) Human resource considerations,
(v) Operations and
(vi) External forces.

6. ECONOMIES AND DISECONOMIES OF SCALE
 Economies scale: The concept which states that “the
average unit cost of product can be reduced by
increasing the rate of output”.
 Best operating level: The annual output which results in
the least average unit cost.
 Diseconomies of scale: Above a certain level of
output, additional volume of output results in ever-
increasing average unit costs. This phenomenon is
referred to as diseconomies of scale.

7. DEVELOPING CAPACITY ALTERNATIVES
 To enhance capacity management, the following
approaches to capacity alternatives could be developed:
1) Designing flexibility into the system
2) Differentiating between new and mature
products or services
3) Taking a “big-picture” approach to capacity
changes
4) Preparing to deal with “chunks” of capacity
5) Attempting to smooth out capacity requirements