Operations Management - 20ME41P 2021-22

Week -4 Session-2
CAPACITY AND AGGREGATE PLANNING

Content Page No.

 Measurement of Capacity 2
 Capacity Expansion Strategy 2
 Capacity requirement planning strategy 3

 Form /Models of Capacity Planning 3

 Problems on Capacity Planning 4-5

Expected Outcomes: - CO-1

Course Outcome: - Production capacity utilization plan based on demand forecast

and available production capacity for a given product.

Linked Programme Outcome: - PO-1

Session Time / Teaching Hours: - 1hour

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Week - 4
CAPACITY AND AGGREGATE PLANNING:

Measurement of capacity

Capacity of a plant is usually expressed as the rate of output, i.e., in terms of units
produced per period of time (i.e., hour, shift, day, week, month etc.). But when firms
are producing different types of products, it is difficult to use volume of output of
each product to express the capacity of the firm. In such cases, capacity of the firm is
expressed in terms of monetary value (production value) of the various products
produced put together.

For example: -

i. The capacity of an automobile unit can be expressed as number of vehicles

produced per month.

ii. The capacity of a steel plant can be expressed as millions of tonnes per annum.

iii. The capacity of a textile mill is expressed as metres of cloth per day.

Capacity Expansion Strategy

Capacity requirements can be evaluated from two extreme perspectives – shortterm

and long-term. After existing and future capacity requirements are assessed,
alternative ways of modifying capacity must be identified.

Strategic aspects of capacity: Capacity planning for the long term is a strategic
decision.

If capacity is too small, an organization may,

 Lose customers

 Allow competitors to enter the market

 Unable to provide timely service.

If capacity is too large, an organization may,

 Have difficulty in controlling the operations

 Glut the market and drive down the price, or

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 Be unable to pay off a loan obtained to build capacity.

Capacity Requirement Planning Strategies

Two types of capacity planning strategies used are:

(i) “Level capacity” plan and

(ii) “Matching capacity with demand” plan.

“Level capacity” plan:- is based in “produce-to-stock and sell” approaches wherein

the production systems are operated at uniform production levels and finished goods
inventories rise and fall depending upon whether production level exceeds demand or
vice versa from time period to time period (say every quarter).

“Matching capacity with demand” Plan: - In this plan, production capacity is

matched with the demand in each period (weekly, monthly or quarterly demand).
Usually, material flows and machine capacity are changed from quarter to quarter to
match the demand. The main advantages are low levels of finished goods inventory
resulting in lesser inventory carrying costs. Also, the back-ordering cost is reduced.
The disadvantages are high labour and material costs because of frequent changes in
workforce (hiring, training and lay-off costs, overtime or idle time cost or
subcontracting costs).

Forms/Models of Capacity Planning

Based on time-horizon

(i) Long-term capacity planning and

(ii) Short-term capacity planning

Based on amount of resources employed

(i) Finite capacity planning and

(ii) Infinite capacity planning

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Problem 1:

Problem 2:

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Problem 3:

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References
1. Production and Operations Management–Creating Value along the Supply
Chain ByRusseland Taylor, Wiley Publications, 7 Editions.
2. Modern Production and Operation ManagementBy Buffa and Sarin, Wiley
Publications, 8 edition
3. Production and Operations ManagementBy Chary, Tata Mc Graw Hill
Publications
4. Production and Operations Management-Concepts, Models and Behavior by
Adam and Ebert, Prentice Hall Publications.

LIST OF SOFTWARE/LEARNING WEBSITES

1. www.youtube.com/watch?v=SF53ZZsP4ik
2. www.youtube.com/watch?v=iPZlQ3Zx5zc

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