CAPACITY PLANNING AND ‎FACILITIES PLANNING

Operations Management (5568)
CAPACITY PLANNING &
FACILITIES PLANNING
DEFINITIONS:
 Online Business Dictionary defines ‘Capacity’ as:
- “Specific ability of an entity (person or organization) or resource, measured in quantity
and level of quality, over an extended period”.
- Manufacturing: “Highest sustainable output rate (maximum number of units per month,
quarter, or year) that can be achieved with current resources, maintenance strategies,
product specifications, etc.” (BD, 2019a)
 Online Business Dictionary defines ‘Capacity Planning’ as:
- “Systematic determination of resource requirements for the projected output, over a
specific period.” (BD, 2019b)
 The AMA Dictionary of Business and Management defines ‘Capacity Planning’ as:
- “Process used to determine how much capacity is optimum for any given output and for
the efficient use of material and personnel. In the short term, capacity planning concerns
issues of scheduling labor shifts and balancing resource capacities. It also involves
unexpected cycles of demand”. (Kurian, 2013)
 Capacity planning is the process of determining the amount of capacity required to meet
market demand for products and services. (C4 Operations Management, 2011).
 “Facility planning is the process of planning a factory from the first idea up to the start of
production. The process is systematic and task oriented, structured in phases, and carried out
with methods and tools (after VDI 5200).”
Synonyms are Factory design; Factory planning; Layout planning (Wiendahl & Nyhuis,
2014)
OVERVIEW:
Capacity is the maximum capability to produce. Capacity planning takes place at several levels of
details. Long-term capacity planning is a strategic decision that establishes a firm’s overall level of
resources. It extends over a time horizon long enough to obtain those resources-usually a year or more
for building or expanding facilities or acquiring new businesses. Capacity decisions affect product
lead times, customer responsiveness, operating costs, and a firm’s ability to compete. Inadequate
capacity can lose customers and limit growth. Excess capacity can drain a company’s resources and
prevent investments in more lucrative ventures. When to increase capacity and how much to increase
it is critical decisions. (Russell & Taylor, 2011)
Strategic capacity planning is essential as it helps the organization in meeting the future
requirements of the organization. Planning ensures that operating cost are maintained at a minimum
possible level without affecting the quality. It ensures the organization remain competitive and can
achieve the long-term growth plan. Capacity is the rate of productive capability of a facility.
Whereas, Facilities make a difference and they can provide a competitive edge by enabling and
leveraging the latest process concepts. Facility design has an impact on both quality and productivity.

Facilities affect how efficiently workers can do their jobs, how much and how fast goods can be
produced, how difficult it is to automate a system, and how responsive the system can be to changes
in product or service design, product mix, or demand volume. Facilities must be planned, located, and
laid out. (Russell & Taylor, 2011)
CAPACITY PLANNING
The production system design planning considers input requirements, conversion process and output.
After considering the forecast and long-term planning organizations undertake capacity planning.
Capacity is defined as the ability to achieve, store or produce. For an organization, capacity would be
the ability of a given system to produce output within the specific time period. In operations,
management capacity is referred as an amount of the input resources available to produce relative
output over period of time. In general, terms capacity is referred as maximum production capacity,
which can be attained within a normal working schedule. (MSG, 2019a)
Capacity planning is essential to be determining optimum utilization of resource and plays an
important role in decision-making process, for example, extension of existing operations,
modification to product lines, starting new products, etc. A technique used to identify and measure
overall capacity of production is referred to as strategic capacity planning. Strategic capacity planning
is utilized for capital intensive resource like plant, machinery, labor, etc. (MSG, 2019a)
CAPACITY PLANNING STRATEGIES
There are three primary strategies used to perform capacity planning. Each comes with its own set of
advantages and drawbacks.
- Lead Strategy: The Lead Strategy is the most aggressive of the three approaches to
capacity planning. Company increases its production capacity in advance of anticipated
increases in demand. Some companies use the Lead Strategy as a way to lure customers
away from competitors, especially if a competitor is vulnerable to inventory shortages
when demand skyrockets. The big risk with the Lead Strategy is that the anticipated
increase in demand never materializes and stuck with excess inventory.
- Lag Strategy: The Lag Strategy is much more conservative than the Lead Strategy.
Instead of increasing capacity in anticipation of suspected increases in demand, the Lag
Strategy responds to actual increases in demand by boosting capacity after the operation
is running at full steam. Although you won't accumulate excess inventory, the time it
takes to ramp up production can result in the loss of customers to the competition.
- Match Strategy: The Match Strategy is the middle road between the Lead and Lag
Strategies. Rather than substantially boosting capacity based on expected or actual
increases in demand, the Match Strategy emphasizes small, incremental modifications to
capacity based on changing conditions in the marketplace. Even though this strategy takes
more effort and is harder to accomplish, it is much more risk-averse than other capacity
planning options. (Gaebler Ventures, 2015)
Capacity planning is the first step when an organization decides to produce more or new products. Production
managers are more concerned about the capacity for the following reasons:

 Sufficient capacity is required to meet the customers demand in time.
 Sufficient capacity is required to meet the customers demand in time.
 Capacity affects the cost efficiency of operations.
 Capacity affects the scheduling system.
 Capacity creation requires an investment.
MEASUREMENT OF CAPACITY PLANNING
The capacity of the manufacturing unit can be expressed in number of units of output per period. In some
situations measuring capacity is more complicated when they manufacture multiple products. In such situations,
the capacity is expressed as man-hours or machine hours. The relationship between capacity and output is
below:
1. Design capacity: Designed capacity of a facility is the planned or engineered rate of output of
goods or services under normal or full scale operating conditions. For example, the designed
capacity of the cement plant is 100 TPD (Tonnes per day). Capacity of the sugar factory is
150 tonnes of sugarcane crushing per day.
2. System capacity: System capacity is the maximum output of the specific product or product
mix the system of workers and machines is capable of producing as an integrated whole.
System capacity is less than design capacity or at the most equal, because of the limitation of
product mix, quality specification, breakdowns. The actual is even less because of many
factors affecting the output such as actual demand, downtime due to machine/equipment
failure, unauthorized absenteeism.
Capacity and output relationship
The system capacity is less than design capacity because of long range uncontrollable factors.
The actual output is still reduced because of short-term effects such as, breakdown of
equipment, inefficiency of labour. The system efficiency is expressed as ratio of actual
measured output to the system capacity.
System Efficiency = Actual output / System capacity
3. Licensed capacity: Capacity licensed by the various regulatory agencies or government
authorities. This is the limitation on the output exercised by the government.
4. Installed capacity: The capacity provided at the time of installation of the plant is called
installed capacity.

5. Rated capacity: Capacity based on the highest production rate established by actual trials is
referred to as rated capacity. (Kumar & Suresh, 2006)
PROCESS OF CAPACITY PLANNING
Capacity planning is concerned with defining the long-term and the short-term capacity needs of an
organization and determining how those needs will be satisfied. Capacity planning decisions are taken
based upon the consumer demand and this is merged with the human, material and financial resources
of the organization. Capacity requirements can be evaluated from two perspectives long-term capacity
strategies and short-term capacity strategies.
Long-Term Capacity Strategies
Long-term capacity requirements are more difficult to determine because the future demand
and technology are uncertain. Forecasting for five or ten years into the future is more risky
and difficult. Even sometimes company’s today’s products may not be existing in the future.
Long range capacity requirements are dependent on marketing plans, product development
and life- cycle of the product. Long-term capacity planning is concerned with accommodating
major changes that affect overall level of the output in long-term. Marketing environmental
assessment and implementing the long-term capacity plans in a systematic manner are the
major responsibilities of management. Following parameters will affect long range capacity
decisions.
 Multiple products: Company’s produce more than one product using the same facilities in
order to increase the profit. The manufacturing of multiple products will reduce the risk
of failure. Having more than one product helps the capacity planners to do a better job.
Because products are in different stages of their life-cycles, it is easy to schedule them to
get maximum capacity utilization.
 Phasing in capacity: In high technology industries, and in industries where technology
developments are very fast, the rate of obsolescence is high. The products should be
brought into the market quickly. The time to construct the facilities will be long and there
is no much time as the products should be introduced into the market quickly. Here the
solution is phase in capacity on modular basis. Some commitment is made for building
funds and men towards facilities over a period of 3–5 years. This is an effective way of
capitalizing on technological breakthrough.
 Phasing out capacity: The outdated manufacturing facilities cause excessive plant
closures and down time. The impact of closures is not limited to only fixed costs of plant
and machinery. Thus, the phasing out here is done with humanistic way without affecting
the community. The phasing out options makes alternative arrangements for men like
shifting them to other jobs or to other locations, compensating the employees, etc.
Short-Term Capacity Strategies
Managers often use forecasts of product demand to estimate the short-term workload the
facility must handle. Managers looking ahead up to 12 months, anticipate output requirements
for different products, and services. Managers then compare requirements with existing
capacity and then take decisions as to when the capacity adjustments are needed. For short-
term periods of up to one year, fundamental capacity is fixed. Major facilities will not be changed.

Many short-term adjustments for increasing or decreasing capacity are possible. The adjustments to be
required depend upon the conversion process like whether it is capital intensive or labor intensive or
whether product can be stored as inventory.
Capital intensive processes depend on physical facilities, plant and equipment. Short-term capacity can
be modified by operating these facilities more or less intensively than normal. In labor intensive
processes short-term capacity can be changed by laying off or hiring people or by giving overtime to
workers. The strategies for changing capacity also depend upon how long the product can be stored as
inventory. The short-term capacity strategies are:
- Inventories: Stock of finished goods during slack periods to meet the demand during
peak period.
- Backlog: During peak periods, the willing customers are requested to wait and their
orders are fulfilled after a peak demand period.
- Employment level (hiring or firing): Hire additional employees during peak demand
period and layoff employees as demand decreases.
- Employee training: Develop multi-skilled employees through training so that they
can be rotated among different jobs. The multi-skilling helps as an alternative to
hiring employees.
- Subcontracting: During peak periods, hire the capacity of other firms temporarily to
make the component parts or products.
- Process design: Change job contents by redesigning the job.
(Kumar & Suresh, 2006)
FACILITY PLANNING
The basic meaning of facility is the space in which a business's activities take place. Facilities differ
from one another based on the type of industry and the business companies are in. The layout and
design of that space impact greatly how the work is done—the flow of work, materials, and
information through the system. The key to good facility layout and design is the integration of the
needs of people (personnel and customers), materials (raw, finishes, and in process), and machinery in
such a way that they create a single, well-functioning system.
The strategic facility planning process defines the process by which a facility management
organization envisions its future by linking its purpose to the strategy of the overall organization and
then developing goals, objectives and action plans to achieve that future. The result of the strategic
facility planning process is the strategic facility plan.
IFMA (2009), defines the strategic facility plan:
“A strategic facility plan (SFP) is defined as a two-to-five year facilities plan
encompassing an entire portfolio of owned and/or leased space that sets strategic
facility goals based on the organization’s strategic (business) objectives. The strategic
facilities goals, in turn, determine short-term tactical plans, including prioritization of,
and funding for, annual facility related projects.”

Hierarchy of Facility Planning
Location:
It is the placement of a facility with respect to customers, suppliers,
and other facilities with which it interfaces.
Structure:
It consists of all equipment, machinery, and furnishings within the
structure.
Layout:
It consists of the building and services (e.g., gas, water, power, heat,
light, air, sewage).
Handling System:
It consists of the mechanism by which all interactions required by
the layout are satisfied (e.g., materials, personnel, information, and
equipment handling systems)
Facility layouts are more flexible than ever before. Factories that once positioned shipping and
receiving departments at one end of the building, now construct t-shaped buildings so that deliveries
can be made directly to points of use within the factory. Stores sport portable kiosks for customer
inquiry and checkout at various locations throughout the facility. Classrooms incorporate desks on
wheels to be repositioned for different teaching styles and student interaction. Effective layouts can
have many different objectives.
OBJECTIVE OF FACILITY LAYOUT
Facility layout refers to the arrangement of activities, processes, departments, workstations, storage
areas, aisles, and common areas within an existing or proposed facility. The basic objective of the
layout decision is to ensure a smooth flow of work, material, people, and information through the
system. Effective layouts also:
- Minimize movement and material handling costs;
- Utilize space efficiently;
- Utilize labor efficiently;
- Eliminate bottlenecks;
- Facilitate communication and interaction between workers, between workers and their
supervisors, and between workers and customers;
- Reduce manufacturing cycle time and customer service time;
- Eliminate wasted or redundant movement;
- Facilitate the entry, exit, and placement of material, products, and people;
- Incorporate safety and security measures;
- Promote product and service quality;
- Encourage proper maintenance activities;
- Provide a visual control of activities;
- Provide flexibility to adapt to changing conditions;
- Increase capacity (Russell & Taylor, 2011)
DESIGN OF FACILITY LAYOUT
Principles which drive design of the facility layout need to take into the consideration objective of
facility layout, factors influencing facility layout and constraints of facility layout. These principles
are as follows:

- Flexibility: Facility layout should provide flexibility for expansion or modification.
- Space Utilization: Optimum space utilization reduces the time in material and people
movement and promotes safety.
- Capital: Capital investment should be minimal when finalizing different models of facility
layout.
DESIGN LAYOUT TECHNIQUES
There are three techniques of design layout, and they are as follows:
- Two or Three Dimensional Templates: This technique utilizes development of a scaled-
down model based on approved drawings.
- Sequence Analysis: This technique utilizes computer technology in designing the facility
layout by sequencing out all activities and then arranging them in circular or in a straight line.
- Line Balancing: This kind of technique is used for assembly line. (MSG, 2019b).
TYPES OF FACILITY LAYOUT
Layouts can be classified into the following categories:
1. Process layout
2. Product layout
3. Combination layout
4. Fixed position layout
5. Group layout
1. PROCESS LAYOUT
Process layouts, also known as functional layouts, group similar activities together in departments
or work centers according to the process or function they perform. Process layout is
recommended for batch production. All machines performing similar type of operations are
grouped at one location in the process layout e.g., all lathes, milling machines, etc. are grouped in
the shop will be clustered in like groups.
In process layout the arrangement of facilities are grouped together according to their functions.
The flow paths of material through the facilities from one functional area to another vary from
product to product. Usually the paths are long and there will be possibility of backtracking.
Process layout is normally used when the production volume is not sufficient to justify a product
layout. Typically, job shops employ process layouts due to the variety of products manufactured
and their low production volumes. A typical process layout is shown in the following figure.
Process layout

Advantages
 In process layout machines are better utilized and fewer machines are required.
 Flexibility of equipment and personnel is possible in process layout.
 Lower investment on account of comparatively less number of machines and lower cost of
general purpose machines.
 Higher utilization of production facilities.
 A high degree of flexibility with regards to work distribution to machineries and workers.
 The diversity of tasks and variety of job makes the job challenging and interesting.
 Supervisors will become highly knowledgeable about the functions under their department.
Limitations
 Backtracking and long movements may occur in the handling of materials thus, reducing
material handling efficiency.
 Material handling cannot be mechanized which adds to cost.
 Process time is prolonged which reduce the inventory turnover and increases the in- process
inventory.
 Lowered productivity due to number of set-ups.
 Throughput (time gap between in and out in the process) time is longer.
 Space and capital are tied up by work-in-process.
2. PRODUCT LAYOUT
Product layouts, better known as assembly lines, arrange activities in a line according to the
sequence of operations that need to be performed to assemble a particular product. Each product
has its own “line” specifically designed to meet its requirements. The flow of work is orderly and
efficient, moving from one workstation to another down the assembly line until a finished product
comes off the end of the line.

In this type of layout, machines and auxiliary services are located according to the processing
sequence of the product. If the volume of production of one or more products is large, the
facilities can be arranged to achieve efficient flow of materials and lower cost per unit. Special
purpose machines are used which perform the required function quickly and reliably.
The product layout is selected when the volume of production of a product is high such that a
separate production line to manufacture it can be justified. In a strict product layout, machines are
not shared by different products. Therefore, the production volume must be sufficient to achieve
satisfactory utilization of the equipment. A typical product layout is shown in the following
figure.
Product layout
Advantages
 The flow of product will be smooth and logical in flow lines.
 In-process inventory is less.
 Throughput time is less.
 Minimum material handling cost.
 Simplified production, planning and control systems are possible.
 Less space is occupied by work transit and for temporary storage.
 Reduced material handling cost due to mechanised handling systems and straight flow.
 Perfect line balancing which eliminates bottlenecks and idle capacity.
 Manufacturing cycle is short due to uninterrupted flow of materials.
 Small amount of work-in-process inventory.
 Unskilled workers can learn and manage the production.
Limitations
 A breakdown of one machine in a product line may cause stoppages of machines in the
downstream of the line.
 A change in product design may require major alterations in the layout.
 The line output is decided by the bottleneck machine.
 Comparatively high investment in equipments is required.
 Lack of flexibility. A change in product may require the facility modification.
 Combination Layout Advantages and Disadvantages

A Comparison of Product and Process Layouts
3. COMBINATION LAYOUT
A combination of process and product layouts combines the advantages of both types of layouts.
A combination layout is possible where an item is being made in different types and sizes. Here
machinery is arranged in a process layout but the process grouping is then arranged in a sequence
to manufacture various types and sizes of products. It is to be noted that the sequence of
operations remains same with the variety of products and sizes. The following figure shows a
combination type of layout for manufacturing different sized gears.
Combination layout for making different types and sizes of gears

4. FIXED POSITION LAYOUT
This layout is also called the project type of layout. In this type of layout, the material, or major
components remain in a fixed location and tools, machinery, men and other materials are brought
to this location. This type of layout is suitable when one or a few pieces of identical heavy
products are to be manufactured and when the assembly consists of large number of heavy parts,
the cost of transportation of these parts is very high.
Fixed position layout
Advantages
The major advantages of this type of layout are:
 Helps in job enlargement and upgrades the skills of the operators.
 The workers identify themselves with a product in which they take interest and pride in doing
the job.
 Greater flexibility with this type of layout.
 Layout capital investment is lower.
5. GROUP LAYOUT (OR CELLULAR LAYOUT)
There is a trend now to bring an element of flexibility into manufacturing system as regards to
variation in batch sizes and sequence of operations. A grouping of equipment for performing a
sequence of operations on family of similar components or products has become all the important.
Group technology (GT) is the analysis and comparisons of items to group them into families with
similar characteristics. GT can be used to develop a hybrid between pure process layout and pure
flow line (product) layout. This technique is very useful for companies that produce variety of
parts in small batches to enable them to take advantage and economics of flow line layout.
The application of group technology involves two basic steps; first step is to determine
component families or groups. The second step in applying group technology is to arrange the
plants equipment used to process a particular family of components. This represents small plants
within the plants. The group technology reduces production planning time for jobs. It reduces the
set-up time.
Thus group layout is a combination of the product layout and process layout. It combines the
advantages of both layout systems. If there are m-machines and n-components, in a group layout
(Group-Technology Layout), the M -machines and n -components will be divided into number of
machine-component cells (group) such that all the components assigned to a cell are almost
processed within that cell itself. Here, the objective is to minimize the inter-cell movements.

The basic aim of a group technology layout is to identify families of components that require
similar of satisfying all the requirements of the machines are grouped into cells. Each cell is
capable of satisfying all the requirements of the component family assigned to it.
The layout design process considers mostly a single objective while designing layouts. In process
layout, the objective is to minimize the total cost of materials handling. Because of the nature of
the layout, the cost of equipments will be the minimum in this type of layout. In product layout,
the cost of materials handling will be at the absolute minimum. But the cost of equipments would
not be at the minimum if the equipments are not fully utilized. In-group technology layout, the
objective is to minimize the sum of the cost of transportation and the cost of equipments. So, this
is called as multi-objective layout. A typical process layout is shown.
Group layout or Cellular layout
Advantages of Group Technology Layout
Group Technology layout can increase
 Component standardization and rationalization.
 Reliability of estimates.
 Effective machine operation and productivity.
 Customer service.
It can decrease the
 Paper work and overall production time.
 Work-in-progress and work movement.
 Overall cost.
Limitations of Group Technology Layout
This type of layout may not be feasible for all situations. If the product mix is completely dissimilar,
then we may not have meaningful cell formation.
(Wisdom IT Services.(2018)
REFERENCES
BD. (2019a). Capacity. businessdictionary.com. Retrieved from http://www.businessdictionary.com/definition/capacity.html

BD. (2019b). Capacity planning. businessdictionary.com. Retrieved from http://www.businessdictionary.com/definition/capacity-
planning.html
C4 Operations Information. (2011). Vancouver: Commonwealth of Learning.
Gaebler Ventures. (2015). Capacity planning strategies. Retrieved from http://www.gaebler.com/Capacity-Planning-Strategies.htm
IFMA. (2009). Strategic Facility Planning: A White Paper on Strategic Facility Planning. International Facility Management
Association. Retrieved from https://community.ifma.org/cfs-file/key/telligent-evolution-components-attachments/13-463-00-
00-01-05-69-96/2009_5F00_Strategic-Facility-Planning_5F00_White-Paper.pdf
Kumar, S. A., & Suresh, N. (2006). Production and operations management. New Delhi: New Age International.
Kurian, G. T. (2013). The AMA Dictionary of Business and Management. New York: AMACOM.
MSG. (2019a). Capacity Planning. Management study guide. Retrieved from https://www.managementstudyguide.com/capacity-
planning.htm
MSG. (2019b). Facility Layout - Objectives, Design and Factors Affecting the Layout. Management study guide. Retrieved from
https://www.managementstudyguide.com/facility-layout.htm
Russell, R. S. and Taylor, B. W. (2011). Operations management: Creating Value Along the Supply Chain. 7th
ed. Hoboken, NJ: John
Wiley.
Wiendahl, H., & Nyhuis, P. (2014). Facility Planning. In CIRP Encyclopedia of Production Engineering. Retrieved from DOI 10.1007/978-
3-642-35950-7_6401-3
Wisdom IT Services. (2018). Classification and Advantages of Plant Layout. Retrieved from https://www.wisdomjobs.com/e-
university/production-and-operations-management-tutorial-295/classification-of-layout-9481.html

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