Capacity Planning

What is capacity?
 Capacity of a facility is its limiting capacity to produce an
output over a period of time. E.g. the annual capacity of
Bajaj is 7 lacs scooters.
 Capacity can be termed as licensed capacity, installed
capacity, normal, ideal, practical capacity.
 Licensed capacity is capacity sanctioned by the govt. in
process industry
 The capacity that is installed is at the time of installation of
plant is installed capacity
 Normal capacity is calculated when normal conditions
prevails in the markets and enterprise works on normal level of
activities
 Estimated capacity is estimation of the capacity. It is for
shorter period
 Ideal capacity or design capacity indicates the maximum
number of operating hrs that would be available without any
stoppages.
 Measurement of capacity
 Output rate capacity : are the used for high volume
processes of homogeneous products, e.g. electricity
generation is measured in the terms of MW, steel plant in
the terms of million of tones per year
 Input Rate Capacity : this system is used for service
operations where output measures are difficult e.g. in
hospitals use of beds per month
Types of capacity
 Design capacity : Design capacity maximum output rate
or service capacity an operation, process, or facility is
designed for
 Effective capacity : is the max. output that a process or
firm can economically sustain under normal conditions. It
is always less than design capacity.
 Actual output : rate of output actually achieved cannot
exceed effective capacity.
 Efficiency and Utilization

Actual output
Efficiency =
Effective capacity

Actual output
Utilization =
Design capacity

Both measures expressed as percentages

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Capacity Planning
 Every business has two objectives raising revenue & with
lower cost. So it involves proper capacity planning
 Capacity planning involves the identification of trends in
resources usage & using that information for the projected
changes in resource demand
 It is a process of determining the production capacity needed
by the organization to meet the changing demands for the
products
Types of Capacity planning

 Long range capacity planning : is generally done for

the period exceeding a year. This is done by acquiring,
disposing of production resources
 Intermediate range capacity planning : consists of
monthly or quarterly plans. It is done through hiring,
firing, and layoffs
 Short range capacity planning : Are for less than one
months or daily or weekly scheduling processes,
overtime, etc.
Long Term Capacity Expansion
 The firm may give sub contract to some other
company
 Firm may acquire other companies, facilities or
resources
 The firm may develop new sites, construct buildings
or buy equipments for the purpose of expanding
 Firm may update or modify its existing facilities in
order to increase its capacity
 Firm may decide to restart its facilities that may be
put on hold previously
Capacity expansion Strategies
 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. The possible disadvantage to this
strategy is that it often results in excess inventory, which
is costly and often wasteful
 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.
It decreases the risk of waste, but it may result in the loss
of possible customers
 The Timing of Capacity Increments

Policy A: Capacity Leads Demand Policy B: Capacity lags Demand

Units Units

Capacity
Demand

Demand

Capacity

Time Time
Developing Capacity Alternatives

1. Design flexibility into systems

2. Take stage of life cycle into account

3. Take a “big picture” approach to capacity changes

4. Prepare to deal with capacity “chunks”
5. Attempt to smooth out capacity requirements
6. Identify the optimal operating level
Factors affecting Capacity Planning
1. Product-mix(design of a product)
2. Technology
3. Production Process(quantity n quality)
4. Demand
5. Cost of Operation
6. Investment
7. Location(FACILITIES- design, layout, env)
How Much Capacity Is Best?
 The Best Operating Level is the output that results in the lowest
average unit cost
 Economies of Scale:
 Where the cost per unit of output drops as volume of output
increases
 Spread the fixed costs of buildings & equipment over multiple
units, allow bulk purchasing & handling of material
 Diseconomies of Scale:
 Where the cost per unit rises as volume increases
 Often caused by congestion (overwhelming the process with
too much work-in-process) and scheduling complexity
 Best Operating Level and Size

 Alternative 1: Purchase one large facility, requiring one large

initial investment
 Alternative 2: Add capacity incrementally in smaller chunks as
needed
 Economies and
Diseconomies of Scale
250-unit 750-unit
shop 500-unit shop
Average unit cost
(dollars per unit)

shop

Economies Diseconomies
of scale of scale

Output rate (units per week)

 Capacity Planning Decisions
1. Estimate future capacity requirements.
2. Identify the gaps by comparing requirements with
available capacity
3. Develop alternative plans for filling the gaps
4. Evaluate each alternative, both qualitatively &
quantitatively & make a choice

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Estimate future capacity requirements
 Long-term capacity requirements based on future demand
 Identifying future demand based on forecasting
 Short term requirements
 Capacity cushions
 Plan to underutilize capacity to provide flexibility
Identify the gaps by comparing requirements with
available capacity
 A capacity gap is any difference between projected
demand & current capacity
 Identify gaps requires use of correct capacity measures
Develop alternative plans for filling the gaps

 Develop alternative:
 To do nothing & simply lose orders from demand that
exceeds current capacity
 Expansion strategy & wait & see strategy
 Short term options such as overtime, temporary workers
& subcontracting
Evaluate each alternative & make a choice

 Many tools exist to assist in evaluating alternatives

 Most popular tool is Decision Trees
 Decision Trees analysis tool is:
 a modeling tool for evaluating sequential decisions
 identifies the alternatives at each point in time (decision points),
estimate probable consequences of each decision (chance
events) & the ultimate outcomes (e.g.: profit or loss)
Decision tree
 Waiting line models
 Waiting line tend to develop in front of work centers like
airport ticket counters, machine centers etc
 Waiting line models use probability distributions to provide
estimates of average customer delay time, average length of
waiting lines, & utilization of the work center.