Capacity Planning

Capacity planning is the process used to determine the capacity needed to meet demand. Almost
without exception, all businesses and organizations are limited in terms of capacity. A capacity
plan focuses on strategies aimed at utilizing existing capacity as efficiently as possible as well as
the identification of additional capacity required to meet short-, medium- and long-term demand.

Capacity planning originated in manufacturing, and we will primarily focus on capacity and
demand planning in this industry. However, the same principles can be applied in other fields
such as the provision of services in call centers, IT and hospitals as well as in project
management, engineering design and sales.

When considering capacity planning and how often you should do it, it's important to appreciate
the difference between design capacity and effective capacity. A system's design capacity
represents its theoretical maximum output but does not take into account limitations such as:

● Maintenance downtime
● Set-up times
● Maximum sustainable output
● Number of shifts worked
● Holidays
● Labor availability

The effective capacity of a system represents the capacity available after taking into account all
known limitations. In most instances, its actual capacity, what is actually produced, will be
somewhat lower because of unplanned events, breakdowns and inefficiencies.

While the primary goal of a capacity plan is to determine capacity to meet demand, a secondary
requirement is to minimize costs. Even better, instead of minimizing costs, companies might
want to plan for the most profit. This requirement is often overlooked as production management
is naturally incentivized to meet demand and achieve manufacturing targets.
For these reasons, capacity planning processes should always place high emphasis on production
cost as well as on production capacity.

Most medium- to large-scale manufacturing companies use capacity planning to determine their
production capacity. It's used by automotive companies, appliance manufacturers, process
industries, pharmaceuticals and in semiconductor manufacturing, to name a few.

Of all industries, manufacturing is by far the most complex when it comes to capacity planning.
A typical manufacturing process requires the procurement and manufacture of numerous
components, parts and sub-assemblies that go into a finished product such as an automobile,
smartphone or refrigerator.

The capacity of each step of the manufacturing process has to be meticulously studied so it's
possible to determine the actual capacity of each sub-operation on the production line as well as
for off-line operations. This is a complicated process because equipment such as laser cutting
machines and machining centers routinely make components for different production lines, each
with their own demand and priority.

An important aspect of preparing a manufacturing capacity plan is determining bottlenecks that

limit production. As a result, planners often turn to a technique known as the Theory of
Constraints for help. Sophisticated production control software is needed to calculate production
capacity and determine the best combinations of machinery and work centers to meet demand
while minimizing overall costs.

While MRP and ERP allow you to determine a feasible capacity plan for the next period of time,
the software design precludes effective scenario analysis to determine which of several
alternatives is best.

For this reason, most planners turn to Excel because of its ability to download data and to
perform scenario analysis. Excel is a useful tool for rough-cut capacity planning thanks to
flexibility and ease of programming.

While there's a place for Excel spreadsheets, their efficacy is undermined by data complexities
and coding errors. Anyone who has worked with large spreadsheets knows that checking for the
inevitable errors is difficult and tedious. Even one minor error can dramatically affect calculation
accuracy.

Determining the best production capacity expansion plan is an important strategic decision in
most industries and is of crucial importance for a nascent solar business. Because the solar
industry is affected by technology improvements, government policies, financing opportunities,
intense competition, and a myriad of other factors, the planning process involves considerable
uncertainty. Hence, we are faced with a capacity expansion problem with uncertainties in
problem parameters over a number of periods. One can model this problem using a multiperiod
stochastic programming approach; however, it is computationally intractable for a large number
of periods.
Moreover, the probability density functions (PDFs) of the uncertain parameters are not available
and are difficult to estimate. However, even if we could provide these estimates, convincing
business executives of their validity would be difficult. In addition, solving problems using PDFs
is computationally complex. Therefore, in our capacity planning, we use a novel scenario-based
approach that is both computationally tractable and acceptable to management. Our formulation
makes it possible to incorporate
a large number of parameters with uncertainties and solve a large-capacity planning problem in a
way that avoids the curse of dimensionality.