Capacity Planning

Capacity refers to an upper limit or ceiling on the load that an operating unit can handle. Capacity
planning is a key strategic component in designing the system. It encompasses many basic decisions
with long-term consequences for the organization. The key questions in capacity planning are the
following:

1. What kind of capacity is needed?

2. How much is needed to match demand?

3. When is it needed?

Capacity often refers to an upper limit on the rate of output. it can be refined into two useful definitions
of capacity:

1. Design capacity: The maximum output rate or service capacity an operation, process, or facility is
designed for.

2. Effective capacity: Design capacity minus allowances such as personal time, and maintenance.

Once capacity requirements have been determined, the organization must decide whether to produce a
good or provide a service itself, or to outsource from another organization.

The capacity of IBPL factory is expressed in the amount of case number. Each case consist of 24
bottles.

Type of product Capacity (No. of cases)

250ml 35000
400ml 37000
>400ml 60000

How much capacity is needed to match demand is determined by forecasting. At the start of the year,
they forecast an annual volume which is divided into four quarter. This forecast is predicted mostly by
historical data. For example, the peak season for IBPL is summer (April, may, June, July). Among this
four, in May the demand is highest. IBPL has already started project to expand its capacity. They are
planning to launch their new CSD (Carbonated Soft Drink) line in April, 2020. Expected capacity is not
much disturbed by the labor for IBPL. Because of their being highly dependent on machine, the lost time
due to labor is less. However, production mix and maintenance takes noticeable amount of time.

Aggregate planning

Aggregate planning is intermediate-range capacity planning that typically covers a time horizon of 2 to
12 months, although in some companies it may extend to as much as 18 months. It is particularly useful
for organizations that experience seasonal or other fluctuations in demand or capacity. The goal of
aggregate planning is to achieve a production plan that will effectively utilize the organization’s
resources to match expected demand. Planners must make decisions on output rates, employment
levels and changes, inventory levels and changes, back orders, and subcontracting in or out. They do this
for products that are grouped. One of the major reasons of aggregate planning is to deal with the
variation between supply and demand. To adjust the demand, options are pricing, promotions, using
back orders (delaying order filling), and creating new demand. And for supply adjustment the options
are include hiring/laying off workers, overtime/slack time, part-time or temporary workers, inventories,
and subcontractors.

Aggregate planners might adopt a number of strategies. Some of the more prominent ones are the
following:

1. Maintain a level workforce (level capacity).

2. Maintain a steady output rate (level capacity).

3. Match demand period by period (chase demand).

4. Use a combination of decision variables.

IBPL executes their aggregate planning quarterly. Being a beverage company, producing
carbonated soft drinks, the demand for the product is seasonal. In summer the demand is remarkably
high and the scenario is completely the opposite in winter. However, the fluctuation in demand is very
narrow and not surprising. Due to having various product line like Coca-Cola, Sprite, Fanta, Current and
Kinley, the products are considered to be grouped. During summer, when the demand is high they
choose subcontracting as an option to meet the demand. They subcontract from PRAN where they have
set up a production line. But during winter, significant steps are not taken to recover the under-utilized
capacity. The strategy they follow as aggregate planner is the chase demand strategy. They try to match
their demand quarter by quarter.