Capacity Planning

Strategy
Capacity planning is the process of determining the production capacity needed by an organization to meet
changing demands for its products

Turnover

External Market
factors Share

Capacity
Long planning
term Profit /
/Short Deprecia
term tion
demand

Asset
Technolo
Impairme
gy
nt
P & L Account
1. Turnover
2. Expenses
a…..
b…Depreciation
c….Interest
3. PBIT
4. Income Tax
5. PAT
6. Dividend
Impact on Turnover
Positive
• More product or service
• More revenue or turnover
• More sales
• More Sales channel Partners /
Dealers
• New Geographies to venture
Challenges
• Do higher turnover result in share
holder net worth ?
• Higher dividends to share holder ?
• Market value of share?
• Management Capability & Strategy ?
• Make or Buy Decision …Giving
technology to others
• Legal contract & licencing
Impact on Market Share
Positive
• More Capacity to produce or
service will lead to increase in
market share
• E.g Indigo highest market share
in aviation
Challenges
• Leadership in industry
• Utilization of more capacity
• Structural changes in organisation
…Support Function (HR / IT etc)
• Globalization ( Marketing
strategies)
Impact on PBIT / PAT
Positive
• May increase if turnover
increase with same level
( reduced pricing) of product /
service pricing
• Less pay out of Income Tax as
higher Depreciation can be
claimed
Challenges
• Capital Investment may lead to
increase in Depreciation and may
result in lower PBIT & PAT
• This may result in lower dividends
to share holders
• This may affect Market Value of
share
Impact due to Technology
Positive
• In new capacity planning, new
technology / higher level of
automation / new work culture
can be adopted
• E.g setting up of new plant in
new geography
Challenges
• Liaison with government / other important
agencies including affected surrounding
population
• Selecting technology which can sustain for
atleast one Decade and will give
competitive advantage
• New manpower to handle new technology
• E.g Vednata's plant closure contributed to
66% of global copper deficit
Impact – Asset impairment
What is it?
According to U.S. accounting rules (US GAAP), the
value of an asset is impaired when the sum of
estimated future cash flows from that asset is less
than its book value. At this point an impairment
loss should be recognized, which is done by taking
the difference between the fair market value
 (FMV) and the book value and recording this
amount as the loss. This basically records the asset
as if it were being acquired brand new at its FMV,
recording this as its new book value.[1] This is a
common occurrence for goodwill where a
company will purchase a target company for more
than the value of its net assets. Under US GAAP,
goodwill is tested annually for impairment.
Challenges
• In new capacity planning, new technology / higher
level of automation may lead to higher product cost.
• This may become unviable to sell the product
• Companies are left with option of Asset impairment
i.e. devaluating the asset and bearing the huge loss
in that financial year
• This may badly effect the financial rating / Market
value of the share
• E.g. Tata Motors did for JLR and suffered a loss of
26, 961 Cr in Q3 of Fy2018-19
Impact – Demand Short or Long
Term ?
Positive Challenges
• Realistic assessment of long term /
• Short term demand …can be fulfilled short term demand
by running extra shift / installing • Bullwhip effect
bottle neck machine / outsourcing /
building stocks in advance / • Big Bullion day sales etc

• Long Term demand ..can be fulfilled

by installing new capacity in existing
area or at new locations
Impact – External Factors – Competition /
Environment

Positive
• These will force to adopt better
technology
• Greater benefit to society
Challenges
• May increase the product cost
• E.g. Pollution norms from Bs4 to
BS6
Capacity Decisions are Strategic
1. Capacity decisions have a real impact on the ability of the organization to meet future demands for products and
services.
2. Capacity decisions affect operating costs.
3. Capacity is usually a major determinant of initial cost. Typically, the greater the capacity of a productive unit, the
greater its cost.
4. 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.
5. Capacity decisions can affect competitiveness.
6. Capacity affects the ease of management.
7. Globalization has increased the importance and the complexity of capacity decisions.
8. Because capacity decisions often involve substantial financial and other resources, it is necessary to plan for them
far in advance.
What is capital Planning
• Capital Planning is an integral part of an organisation strategic
planning process that provides a blue print IN ORDER TO MEET THE
GOALS AND OBJECTIVES in the agency strategic and annual
performance plans.

• It is the process of budgeting resource for the future of an

organisation long term plans.
How do business use capital
budgeting
• Accounting rate of return
• Average accounting return
• Discounted / payback period
• Net present value
• Profitability Index
• Internal rate of return
• Modified Internal rate of return
• Equivalent Annual Cost
• Real options valuations
 Types of Capacity Planning -
Strategy
• Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive strategy
 with the goal of luring customers away from the company's competitors by improving the service level and reducing
lead time. It is also a strategy aimed at reducing stockout costs. A large capacity does not necessarily imply high 
inventory levels, but it can imply higher cycle stock costs. Excess capacity can also be rented to other companies.

• Advantage of lead strategy:

a. First, it ensures that the organization has adequate capacity to meet all demand, even during periods of high
growth.
b. This is especially important when the availability of a product or service is crucial, as in the case of emergency care
or hot new product. For many new products, being late to market can mean the difference between success and
failure.
c. Another advantage of a lead capacity strategy is that it can be used to preempt competitors who might be
planning to expand their own capacity. Finally many businesses find that overbuilding in anticipation of increased
usage is cheaper and less disruptive than constantly making small increases in capacity.
Of course, a lead capacity strategy can be very risky, particularly if demand is unpredictable or technology is evolving
rapidly.
Types of Capacity Planning -
Strategy
• Lag strategy refers to adding capacity only after the organization is
running at full capacity or beyond due to increase in demand. This is a
more conservative strategy and opposite of a lead capacity strategy. It
decreases the risk of waste, but it may result in the loss of possible
customers either by stockout or low service levels. Three clear
advantages of this strategy are a reduced risk of overbuilding, greater
productivity due to higher utilization levels, and the ability to put off
large investments as long as possible. Organization that follow this
strategy often provide mature, cost-sensitive products or services.
Types of Capacity Planning -
Strategy
• Match strategy is adding capacity in small amounts in response to
changing demand in the market. This is a more moderate strategy.
Types of Capacity Planning -
Strategy
• Adjustment strategy is adding or reducing capacity in small or large
amounts due to consumer's demand, or, due to major changes to
product or system architecture.
1.Clearly Define the project
2.Foster Transparency
3.Establish Internal Accountability
4.Craft Effective contracting strategies
5.Establish Rigorous communication and reporting
process
Thank You