Operations Management Capacity Planning

1. Capacity Planning Chapter 8 LU8
LO: Describe the meaning of capacity
 Capacity is usually assumed to mean the maximum rate at which a transformation
system produces or processes inputs.
 Sometimes, this rate may actually be "all at once"—as with the capacity of an
airplane.
 A more usable definition of capacity would be the volume of output per elapsed time
and the production capability of a facility.
Capacity planning is the process used to determine how much capacity is needed (and
when) in order to manufacture greater product or begin production of a new product.
A number of factors can affect capacity—number of workers, ability of workers, number
of machines, waste, scrap, defects, errors, productivity, suppliers, government regulations,
and preventive maintenance.
 Capacity planning is relevant in both the long term and the short term. However, there
are different issues at stake for each.
LONG-TERM CAPACITY PLANNING
 capacity planning relates primarily to strategic issues involving the firm's major
production facilities.
 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
SHORT-TERM CAPACITY PLANNING
 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.

2. Economies OfScale
There are benefits and drawbacks in increasing the size of operation of a business. The cost
advantage is known as economies of scale. The cost disadvantage is known as diseconomies
of scale.
The benefits of large-scale business
Economies of scale are the cost advantage from business expansion. As some firms grow
in size their unit costs begin to fall because of:
 purchasing economies - when large businesses often receive a discount because they are
buying in bulk
 marketing economies - from spreading the fixed cost of promotion over a larger level
of output
 administrative economies - from spreading the fixed cost of management staff and IT
systems over a larger level of output
 research and development economies - from spreading the fixed costs of developing new
or improved products over a larger level of output
DiseconomiesOfScale
A business can become so large that its unit costs begin to rise. Expanding firms can
experience diseconomies of scale. Causes include:
 Ineffective communication. Coordinating large numbers of staff becomes a
challenge. Big businesses can develop many levels of hierarchy which slow down
communication or even lead to miscommunication.
 Reduced motivation. Staff can feel remote and unappreciated in a large organisation.
When staff productivity begins to fall, unit costs begin to rise
Strategic Capacity Planning
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.

3. 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 Planning Classification
Capacity planning based on the timeline is classified into three main categories long range,
medium range and short range.
Long Term Capacity: Long range capacity of an organization is dependent on various other
capacities like design capacity, production capacity, sustainable capacity and effective
capacity. Design capacity is the maximum output possible as indicated by equipment
manufacturer under ideal working condition.
Production capacity is the maximum output possible from equipment under normal working
condition or day.
Sustainable capacity is the maximum production level achievable in realistic work condition
and considering normal machine breakdown, maintenance, etc.
Effective capacity is the optimum production level under pre-defined job and work-
schedules, normal machine breakdown, maintenance, etc.
Medium Term Capacity: The strategic capacity planning undertaken by organization for 2
to 3 years of a time frame is referred to as medium term capacity planning.
Short Term Capacity: The strategic planning undertaken by organization for a daily weekly
or quarterly time frame is referred to as short term capacity planning.
Goal of Capacity Planning
The ultimate goal of capacity planning is to meet the current and future level of the
requirement at a minimal wastage. The three types of capacity planning based on goal are
lead capacity planning, lag strategy planning and match strategy planning.

4. Factors Affecting Capacity Planning
Effective capacity planning is dependent upon factors like production facility (layout, design,
and location), product line or matrix, production technology, human capital (job design,
compensation), operational structure (scheduling, quality assurance) and external structure (
policy, safety regulations)
Forecasting v/s Capacity Planning
There would be a scenario where capacity planning done on a basis of forecasting may not
exactly match. For example, there could be a scenario where demand is more than production
capacity; in this situation, a company needs to fulfill its requirement by buying from outside.
If demand is equal to production capacity; company is in a position to use its production
capacity to the fullest. If the demand is less than the production capacity, company can
choose to reduce the production or share it output with other manufacturers.
Techniques for Increasing Capacity
Immediate capacity increases are usually achieved by:
 Using Existing Equipment For More Time (Adding Shifts or Overtime)
 Using Someone Else's Equipment (Outsourcing)
Future capacity increases are usually achieved by:
 Using Existing Equipment More Effectively (Improving)
 Purchasing New Equipment (Spending
LO: Explain the critical capacity decisions

5. Production capacity deals with output and how a manufacturer balances raw materials,
machinery, labor and storage to match demand for its products
. Decisions about production capacity can be strategic and operational, long- and short
term. Factors affecting production capacity interrelate to such a level that a change to one
potentially affects all.
What Are Production Capacity Decisions?
Raw Materials
 Materials need to be readily available in sufficient quantity to supply your production
line. Your supplier's turnaround time on additional orders is also important.
 With long lead times, you must either schedule ordering or maintain sufficient
quantities on hand.
 The quality of raw materials may be an issue that affects production capacity. One
reject per 10,000 parts may not affect production, but one reject per 100 parts may
slow down the line as bad parts are removed.
Equipment
When machinery is used for processes and fabrication, the speed and throughput of the
equipment are limiting factors for production capacity.
 Equipment reliability impacts capacity, as does the effectiveness of your maintenance
department.
 A small business may not have the resources to afford backup machinery, so decisions
about spare parts and ordering procedures affect production capacity.
 Anything that affects the way equipment performs must be factored into capacity
decisions. Electrical grid brownouts, for example, may affect work done on desktop
computers.
Labor
Staffing may be the most effective variable in short-term production capacity management.
Adding or reducing staff varies output of a production line.
 If a machine is capable of 1,000 units per shift, adding staff to run three shifts per day
increases capacity to 3,000 units per day. In retail, adding a person to handle only a

6. single function during rush periods, perhaps re-stocking shelves, improves the
capacity of the main staff to handle the increased flow of customers.
Storage
 Warehousing affects capacity both inbound and outbound.
 Raw materials must be warehoused and similar considerations affect finished goods.
Shelf life may also affect capacity.
 If a product cannot be stored indefinitely, it cannot be produced without considering
losses to spoilage. An ideal sales condition would be that production output is sold
prior to manufacture, so that shipping occurs for every unit as it is produced,
relieving the need for finished goods storage.
10 Critical Decision Areas Of Operation Management
I. Goods and service design. According to Henzer (2004), design of goods and design defines
much of the transformation process. The factors of cost, quality and human resources must be
made during the stage. Operation management of product and services is also different
because due to different characteristic and tangible / intangible feature.
II. Quality. Customer has a very high quality standard nowadays and operation management
decision in quality must be clear and strict for its members to understand and comply. It must
set a quality, standard and operating procedure to meet customers’ high expectation.
III. Process and capacity design. Manufacturing of physical products may have higher
importance on process and capacity design than services operation. Operation management
(product) should decide what process it, what type of technology and to what extent, human
resources, quality and maintenance that determines its basic cost structure. Services operation
decision on this area is much simpler and it can determine by customers who directly
involved in the process. For example, customer will ask tailor to design specific fashion
clothes. Capacity design issue is critical for services because it will try to reduce waiting time

7. and avoid lost of sales due to insufficient capacity. For manufacturing capacity design is
based on firms financial capability, forecast for future and market demand.
IV. Location can be an area for operation management to decide and with globalization of
business, operation managers too must think global. For physical goods, location selection
can be determined by pools of qualified human resources, technology, raw material, access to
market and government policy. For services as it is direct to customers, the location is
determined by market accessibility or near to customer as possible.
V. Layout design. Material flow, process selection technology used, capacity needs, workers
needs, inventory requirement, and capital will influence the decision for layout design. For
services such as hotels, beside capacity needs layout also will enhance its attributes and
features to the customers.
VI. Human Resources and Job Design – Employees is the integral part in the total system
design. Operation management must set a policy to set labor standards to ease transition of
skills, improvement of knowledge, skills and abilities (KSA), build a balance work and life
quality in an effective cost target. For services one extra area operation management should
touch, which is customers relationship that they are dealing directly.
VII. Supply Chain Management – Decisions that have to take place of what to produce, what
material to buy, from where, how is the cost and how is the delivery from supplier to the final
end customers in on-time delivery and minimum cost possible. It is more critical in
production of goods than services.
VIII. Inventory – Decisions on how and where the inventory level to keep long term
customers satisfaction, suppliers, material availability for not to disrupt the production,
human resources needed for this purpose and important the holding cost from financial
perspective. Goods production are more concern because manufacturer may kept raw

8. material, in progress work order and final goods while services is not critical as it is directly
produce and consume simultaneously.
IX. Scheduling – Efficient way of allocation, control and management of materials, capital
goods and human resources to efficiently produce the final goods from the input available.
Schedules are more formal in goods production with short, medium and long term planning
to accommodate customers demand. For services the demand is more direct and volatile and
often concern on human resources and KSA availability to meet current customers needs.
X. Maintenance – Decision must be made regarding the desired level of reliability, stability
and systems must be established by management to maintain that reliability and stability.