Topic 6

Strategic Capacity Management

What is Capacity Management?
Capacity management refers to the ability to meet a customer’s
requirements with the available resources (machinery, factory,
labour, raw materials etc) at hand. Generally the required
outputs during manufacturing resource constraints are met by
working overtime or redeploying the workforce. 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.
 Economies & Diseconomies of Scale
When we talk about the scale of production of a firm, we often hear
about the fact that large-scale production, usually, helps in reducing
the cost of production.
Economies of scale The basic notion of economies of scale is that
as a plant gets larger and volume increases, the average cost per
unit of output drops.
It refers to the reduced costs per unit arising due to an increase in the
total output.
Diseconomies of scale, on the other hand, occur when the output
increases to such a great extent that the cost per unit starts increasing.
 Causes of Diseconomies of Scale

Communication Breakdown
Reduced Motivation
Lack of Coordination
Loss of Direction
Diseconomies of Scale and Mechanization
 Capacity Focus

The concept of a focused factory holds that a production facility works best
when it focuses on a fairly limited set of production objectives. This means, for
example, that a firm should not expect to excel in every aspect of
manufacturing performance: cost, quality, delivery speed and reliability,
changes in demand, and flexibility to adapt to new products. Rather, it should
select a limited set of tasks that contribute the most to corporate objectives.
Typically, the focused factory would produce a specific product or related
group of products. A focused factory allows capacity to be focused on
producing those specific items.
 Capacity Flexibility

Capacity Flexibility means having the ability to rapidly increase or decrease

production levels, or to shift production capacity quickly from one product or
service to another. Such flexibility is achieved through flexible plants,
processes, and workers, as well as through strategies that use the capacity of
other organizations. Increasingly, companies are taking the idea of flexibility
into account as they design their supply chains. Working with suppliers, they
can build capacity into their whole systems.
 CAPACITY PLANNING

Capacity planning is the practice of planning/determining production capacity and workforce needs
to make sure your supply chain is equipped to meet demand. Capacity planning lets businesses know
how and when to scale, identify bottlenecks, create better design capacity, and mitigate risk, within
a planned period of time.

Three (3) Types of Capacity Planning

1. Product capacity planning
Product capacity planning ensures you have enough products or ingredients for your
deliverables. For a florist, this would be flowers, vases, and cards. For a pool maintenance
company, this would be things like chlorine that are required to do the job.

2. Workforce capacity planning

Workforce capacity planning ensures you have enough team members and work hours available
to complete jobs. This type of planning will also show you when you need to hire more
employees and help you determine how far in advance you need to start recruiting based on the
length of your onboarding process.

3. Tool capacity planning

Tool capacity planning ensures you have enough tools to complete jobs. These includes any
trucks, assembly line components, or machinery you need to manufacture and deliver your
product.
 How to Start Capacity Planning

There are three basic steps to capacity planning.

How to Start Capacity Planning cont…

1. Measure
First, you’ll need to measure your resource capacity. How many deliveries can each of
your drivers make in a given period? How many orders can fit onto each of your
trucks? How many hours does it take your fleet manager to plan 50 deliveries? It’s
important to answer these types of questions as accurately as possible because the
rest of your plan will be based on these numbers.

2. Analyze
Once you have accurate measurements, you can spend time analyzing this
information. Making graphs will help you understand the numbers and make demand
forecasting easier.

3. Formulate
The final step is taking all of the information you’ve gathered and formulate a plan.
You can make calculations to see how much it will cost to fund new projects or hire a
full-time employee vs. bringing on seasonal part-time workers. The formulation stage
helps you see what the likely outcomes are for various options, so you can make the
best decision.
Capacity planning is generally viewed
in three time durations:
Long range — greater than one year. Where productive resources
(such as buildings, equipment, or facilities) take a long time to acquire
or dispose of, long-range capacity planning requires top management
participation and approval.

Intermediate range —monthly or quarterly plans for the next 6 to 18

months. Here, capacity may be varied by such alternatives as hiring,
layoffs, new tools, minor equipment purchases, and subcontracting.

Short range — less than one month. This is tied into the daily or
weekly scheduling process and involves making adjustments to
eliminate the variance between planned and actual output. This
includes alternatives such as overtime, personnel transfers, and
alternative production routings.
 Three (3) Strategies for Using Capacity Planning

1. Lag strategy
Lag strategy is planning to have enough resources to meet true demand (not projected). Lag
strategy is a conservative method of capacity planning that ensures your costs are as low as
possible. The potential problem to this strategy is that it can create a lag in the delivery of
products or services to customers, which is where the name comes from. If you get a sudden surge
in orders or land a large new client who wants fast turnaround times, lag strategy may prevent
you from meeting due dates.

2. Lead strategy
Lead strategy is planning to have enough resources to meet your projected demand. Lead
strategy assumes more risk than lag strategy. For example, if you hire new workers and don’t
wind up with the orders you were predicting, you could lose money paying employees to sit
around. The major benefit of this strategy is that if you do have a sudden uptick in orders, you will
most likely be able to keep all of your customers happy and meet due dates.

3. Match strategy
Match strategy is the middle ground between lag and lead strategy. Using match strategy, you do
strategic capacity planning more frequently. You closely monitor true demand, projected demand,
and market shifts/trends. Based on this information, you adjust your capacity management to
meet demand in increments. This strategy offers the most flexibility with less risk than lead
strategy, but it has more ability to scale than lag strategy.
 How Is Capacity Planning Different From Resource Planning?

Resource and capacity planning sometimes get confused with one another,
but they are different things – and you need both. Capacity planning is more
high level and helps you determine what and how many resources you need
to meet demand. Resource planning takes the number of resources available
(as determined by your capacity planning) and allocates them to individual
projects.