The maximum output that a business can produce
in a given period with the available resources
Capacity is usually measured in production units
(e.g. 1,000 cars per month).
Capacity is linked to workforce planning: e.g. by
working more production shifts, capacity can be
Capacity needs to take account of seasonal or
unexpected changes in demand
E.g. Ice-cream factories needed to quickly
increase capacity during a heat wave
The ability to meet a customer’s requirements
with the available resources (machinery, factory,
labour, raw materials etc.) at hand.
Capacity planning is done on the basis of
projections for future product demand, labour
and equipment requirements.
Time and Capacity are the two main constraints
in capacity management.
Three types of capacity are taken into consideration:
It is for the long term and indicates the available capacity
at hand which can be utilized to influence the planning of
It is the maximum available capacity which can be
utilized in the short term ( on a day-to-day basis)
It is the part of the total available capacity which can
actually be put into use
Capacity is the ability to deliver in a defined time
It is a long-term strategic decision that establishes
a firm's overall level of resources.
Capacity decisions affect:
product lead times,
firm's ability to compete.
Inadequate capacity can lose customers and
Excess capacity can drain a company's
resources and prevent investments in more
When to increase capacity and how much to
increase capacity are critical decisions.
Product & Services factors: Type of product/
services to be provided
Process: The manufacturing process
Availability of Facilities: State of technology &
Human factors: Skill & quality of workers
Supply factor: Timely & assured supply of inputs
External factors: Investors & government policies
Impacts ability to meet future demands
Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects ease of management
Globalization adds complexity
Impacts long range planning
How much to increase capacity depends on:-
1. The volume and certainty of anticipated
2. Strategic objectives in terms of
3. The costs of expansion and operation.
Capacity lead strategy Capacity lag strategy
Average capacity strategy Incremental vs. one-step expansion
Capacity lead strategy:-
Capacity is expanded in anticipation of demand
This aggressive strategy is used
to lure customers from competitors
who are capacity constrained
or to gain a foothold in a
rapidly expanding market.
Capacity lag strategy:-
Capacity is increased after an increase in demand
has been documented.
This conservative strategy produces a higher
return on investment but may lose customers in
It is used in industries with
standard products and cost-based
or weak competition.
The strategy assumes that
lost customers will return from
competitors after capacity has expanded.
Average capacity strategy:-
Capacity is expanded to coincide with average
This is a moderate strategy
in which managers are certain
that they will be able to sell
at least some portion of the
Incremental vs. one-step expansion:-
Capacity can be increased incrementally or in one
Incremental expansion is less risky but more
An attractive alternative
to expanding capacity is
outsourcing, in which
suppliers absorb the
risk of demand uncertainty.
Capacity Planning Process
Resource planning involves long rate capacity
resource requirement and is directly linked to
Rough-cut capacity planning : Takes capacity
planning to the next level of detail, check the
feasibility of the MPS, provide warnings of any
bottlenecks, ensure utilization of work centers and
advise vendors of capacity requirement
Capacity requirements planning is directly linked
to the material requirements plan.
It is concerned with individual orders at individual
work centers and calculates work center loads and
labor requirements for each time period at each
A manufacturing planning is concerned with
planning and controlling all aspects of
manufacturing, including materials, scheduling
machines and people, and coordinating suppliers
There are 5 levels in the manufacturing planning
No single capacity measure is applicable to all
types of situations.
Hospitals measure capacity as the number of
patients that can be treated per day;
a retailer measures capacity as annual sales
dollars generated per square foot;
In general, capacity can be expressed in one of
1. Output measures OR
2. Input measures.
The usual choice for facilities that produce
standard products in high volumes, in a limited
number of models using production processes
with rigid flow patterns
The usual choice for facilities that produce custom
products in low volumes using processes with
flexible flow patterns.
It calculates a rough estimate of the workload
placed on critical resources by the proposed MPS.
Critical resources include bottleneck operations,
labor and critical materials.
Basically there are three approaches to perform
rough cut capacity planning:-
1. Capacity planning using overall factors
2. “Bill of labor” approach
3. “Resource Profile” approach
Capacity planning using overall factors (CPOF) :
It is the least detailed approach.
Capacity requirement is quickly computed but is
insensitive to shifts in product mix.
“Bill of labor” approach :
It involves multiplying two matrices, “the bill of labor” and
the “master production schedule”.
This approach picks up shifts in product mix, but does not
consider lead time offsets.
It strictly assumes a lot-for-lot policy for setting lot sizes.
When other techniques, such as economic order quantity
etc is used, then this approach gives a very rough
“Resource Profile” approach :
It is exactly same as “Bill of labor approach”,
except that it takes lead-time offsets into account.
Again, it strictly assumes a lot-for-lot policy for
setting lot sizes as in the case of “bill of labor
It is the process by which a company figures out
how much it needs to produce, and determines if it
is capable of meeting those production goals.
Small businesses must conduct capacity
requirements planning regularly to keep up with
changes in supply and demand.
Depending on the industry and type of
businesses, capacity requirements planning can
happen monthly, quarterly or annually.
It is necessary to set the capacity after considering
the current situation, in order to make Capacity
Requirements Planning more practical.
In this planning, the following three capacities are
1. Standard Capacity
2. Maximum Capacity
3. Set Capacity
The ability to produce items in a standard process.
The standard capacity is usually set for each
process, and such time margin as morning
meeting time and break time as well as
attendance rate are also considered.
In addition, Capacity may be registered for each
the ability to produce the maximum
quantity/quality of items in a process.
It can be set according to the actual performance
or as an overload tolerance.
The ability to be set based on the relationship
between the maximum capacity and load.
When setting the capacity, such factors as
overtime work, shift, and the increase or decrease
in staff transfer are considered.
It ensures that a company can meet the changing
demands for its products and services.
Discrepancies between capacity requirements and
the actual production output can cause product or
personnel shortages that leads to long delays in
delivering products or services, or lead the
company to leave some customer’s orders
Not being able to meet customer demand will
often mean losing customers to competitors.
Poor capacity requirements planning can also lead
to over-production of products that do not sell.
This unused inventory ties up the company’s
revenue and depresses reported earnings.
Different companies plan and schedule
manufacturing production using different
Some companies make goods only after receiving
a customer order while others make goods and
distribute them to retailers where customers buy at
A company strategy has a direct impact on the
amount of inventory it carries and that translates
into cash available for other needs.
Companies that use the chase strategy, or
demand matching strategy, produce only enough
goods to meet or exactly match the demand for
Restaurant, which produces meals only when a
customer orders, therefore matching the actual
production with customer demand.
The chase strategy has several advantages
It keeps inventories low, which frees up cash that
otherwise can be used to buy raw materials or
Reduces inventory carrying costs that are
associated with holding inventory in stock.Cost of
capital, warehousing, depreciation, insurance,
taxes, obsolescence and shrinkage are all
inventory carrying costs.
In a manufacturing the company continuously
produces goods equal to the average demand for
Scheduling consistently arranges the same
quantity of goods for production based on the total
demand for the goods.
So, if for three months a company wants to
produce 20,000 units of a certain item and there
are a total of 56 working days, it can level
production to 358 units per day.
Goods are produced before customers place
The retail environment is an example of make-to-
stock as goods are produced and put into
inventory at the retailer location.
The make-to-stock strategy typically allows
manufacturers to produce goods in long
production runs, taking advantage of production
Because the make-to-stock environment produces
goods on a consistent basis, a master production
schedule determines the exact number of units to
produce for each production run.
Companies that use a make-to-order strategy
produce goods after receiving an order from the
Most often a company that uses the make-to-order
strategy produces one-of-a-kind goods.
Examples include custom-tailored clothing,
custom machinery and some fine jewelry.
Certain fast-food restaurants use an assemble-to-
A customer walks in, places an order for a
hamburger and the hamburger gets assembled
from a stock selection of ingredients.
This strategy forces the restaurant to carry enough
ingredients to make every hamburger combination
a customer might request.
Automobile manufacturers also use the assemble-
to-order strategy. A customer can pick and choose
from many features including interior fabrics,
exterior paints, and seat, engine, wheel or tire
options. Once the dealer places the
customer&rsquo;s order, the manufacturing
plant assembles the standard component parts to
the customer&rsquo;s exact specifications. In
this environment the production scheduler uses a
final assembly timetable.
Capacity management occurs at all levels of the
It is directly related to the priority plan, need the
level of detail and time spans will be similar to the
related priority plan.
CP is concerned with translating the priority plan
into the hours of capacity required in
manufacturing to make the items in the priority
plan and with methods of making that capacity
Material requirements planning and capacity
requirements planning should form part of a
closed-loop system witch not only includes
planning and control functions but also provide
feedback so planning can always be current