OPERATIONS STRATEGY

PART 3

CAPACITY STRATEGY
 INTRODUCTION
What is capacity strategy?
‘ It is, the maximum level of value-added activity over a period of
time that the operation can achieve under normal conditions’

The capacity strategy also defines its overall scale, the number
and size of different sites between which its capacity is
distributed, the specific activities allocated to each site and
the location of each site
LEVELS OF CAPACITY DECISION
Time- Decisions Span of Starting point of
Level scale relating to decision decision Key Questions

Probable markets
Strategic Years- Buildings & All parts of to be served in How much capacity do we need in total?
Capacity Months facilities, Process the process future, current How should the capacity be distributed?
decisions technology capacity Where should the capacity be located?
configuration

Medium Aggregate To what extent do we keep capacity level

term Months- number of Market forecast, or fluctuate capacity level? Should we
people, degree Business site physical capacity change staffing levels as demand
capacity weeks of subcontracted constraints changes? Should we sub-contract or off-
decisions
resources load demand

Individual staff
Short Weeks- within the Current demand, Which resources are to be allocated to
term hours- operation, Site current available what tasks? When should activities be
capacity loading of department
decisions minutes individual capacity loaded on individual resources?
facilities
FACTORS INFLUENCING THE OVERALL LEVEL OF CAPACITY

Availability of Forecast level

capital of demand

Cost Structure
Changes in
& capacity
future demand
increment

Overall level
Operation Resources Market Requirements
of capacity

Economies of Uncertainty of
scale Flexibility of Consequences future demand
capacity of over/under
provisions supply
FACTORS INFLUENCING THE OVERALL LEVEL OF
CAPACITY – Con’td
• Forecast Demand
– Forecast of future demand for an organization's products or service
– Starting point of capacity planning, but rarely an easy decision
• Uncertainty of future demand
– Forecast has inherent feature of ‘uncertainty’
• Over supply v/s Under supply
• Change in demand – long term or short term demand
– Long term demand lower than short term demand
– Short term demand lower than long term demand
• Availability of capital
– Forecast extremely bullish, novelty product, innovative,
doubling/tripling of profits
• The organization will need to up it resource base by 200% to 300%
‘is the company ready to face the consequences of doing this?’
FACTORS INFLUENCING THE OVERALL LEVEL OF
CAPACITY – Con’td
• Cost structure of capacity increments
– Break even analysis
• Economies of scale – are factors that reduce costs as volume
increases
– Diseconomies of scale tend to increase unit costs for increased output
beyond a certain volumes
• Flexibility of capacity provision
– Full capacity v/s small incremental capacity
 Once the overall level of capacity has been
decided, its important to decide on the
number and size of the sites-
e.g – Online retailers like Amazon, flipkart, etc.
Factors that will decide this include increase in
profitability v/s costs, risks involved, delivery
timings, customer requirements, competitors
strategy, etc.
 CAPACITY CHANGE
• Timing of the capacity change
– Forecast level of future demand
• Magnitude of capacity change
– Small increments in capacity v/s large increments
 LOCATION OF CAPACITY
• Spatially variable factors
– they are factors whose value changes with geographical
location
• Suitability of the site itself
• The image of the location
• Service levels
• Land and facilities investment
• Resource costs-
– Labor
– Energy
– Transportation
• Community factors