University - Year 1

Operations Management
Notes-9

1. Define Capacity.

Capacity refers to an upper limit or ceiling on the load that an operating unit can handle.

2. What are the 3 basic questions under Capacity?

a. What kind of capacity is needed?
b. How much is needed to match demand?
c. When is it needed?
3. What are the considerations for Capacity Planning?
a. Capacity decisions have a real impact on the ability of the organization to meet future
demands for products and services; capacity essentially limits the rate of output possible.
b. Capacity decisions affect operating costs.
c. Capacity is usually a major determinant of initial cost.
d. Capacity decisions often involve long-term commitment of resources and the fact that, once
they are implemented, those decisions may be difficult or impossible to modify without
incurring major costs.
e. Capacity decisions can affect competitiveness.
f. Capacity affects the ease of management; having appropriate capacity makes management
easier than when capacity is mismatched.
g. Globalization has increased the importance and the complexity of capacity decisions.
h. Because capacity decisions often involve substantial financial and other resources, it is
necessary to plan for them far in advance.
4. Define the following:
a. Design Capacity

The maximum designed service capacity or output rate.

b. Effective Capacity

Design capacity minus personal and other allowances.

c. Actual Output

Actual output cannot exceed effective capacity and is often less because of machine breakdowns,
absenteeism, shortages of materials, and quality problems, as well as factors that are outside the
control of the operations managers.

5. What is the formula for Efficiency and Utilization, respectively?

Actual output
Efficiency = ×100 %
Effective capacity

Actual output
Utilization = ×100 %
Design capac ity