Capacity is the limiting capability of a productive unit to produce within a stated time period, normally expressed in terms of output in units per unit of time. Limiting capability also depends on the intensiveness of use of the productive unit. Creation of capacity is an investment decision b coz it means committing financial and other resources to it. Capacity is an illusive concept b coz it must be related to the intensity with which a facility is used. Capacity is to be planned keeping in mind our future growth and expansion plans, market trends, sales forecasting and our policy towards risk taking. Capacity planning has to decide a centralized capacity at one geographic location or a decentralized creation of plants at several locations.

Measures of capacity: When the production system produces a single output or when the output units are relatively plant uses no. capacity of job shop in terms of available labour hours per month .capacity is expressed in terms of available units of the limiting resources. measurement of capacity becomes really difficult. . capacity units are rather obvious. available seat miles for airline. For ex. For such organizations .ex. of autos. Available seat turns for restaurant. Steel plant uses tons of steel. power plant uses megawatts of electricity. When output units produced are more diverse. For ex. consultation days per year for a consultancy organization.for such organizations .capacity can not be measured in terms of output per unit of time.

Predicting demand also requires an assessment of contingencies.Predicting Future capacity requirements: Capacity plans are heavily dependent upon demand forecasting for outputs. Multiple outputs also provide some kind of a hedge against changes in environmental conditions and provides more stability in its total capacity requirements.wars or sweeping technological innovations. Multiple Outputs: There could be many products for which demand is to be forecast and each product could be at different stages of PLC. Industry capacity and competitive dynamics: Should any capacity be added within the industry? Should this firm be one to add it.the output mix of the organization will also change with time.recessions. Share in capacity in an industry can have extremely important price and competitive impacts. . If the different outputs have unequal growth rates . There are always contingencies that can have important effects such as the competitive situation.

) Stabilized demand for mature products: Electricity.the demand does not remain volatile and demand can be predicted with greater confidence.Predicting Future capacity requirements (contd. steel. Optimistic and pessimistic predictions can have a profound effect on capacity requirements. cement. . textiles are some products which have long PLC. fertilizers. In these cases . New products and risky situations: situations: it is difficult to predict capacity requirements for new products initially or in the rapid development phase of PLC.

Long Term Demand Forecasting: Judgmental /qualitative methods like Delphi technique. . The result is pooled judgment in which both the range of opinion and reasons for difference in opinion can be seen. consumer panels etc. Market surveys and analysis of consumer behavior and the data that result are extremely valuable inputs for predicting market demand. . The objective of Delphi technique is to probe into the future in hope of anticipating new products and processes and future market sizes etc.The Delphi technique draws on a panel of expert to obtain expert opinion in the form of a consensus instead of a compromise. it involves the use of questionnaires.

it consists of a system of simultaneous regression equations. . Regression analysis is a forecasting model that relates the dependent variable to one or more independent variables. Causal Forecasting methods: These methods are based on relationship between causal factors such as disposable income. These models express mathematical relationship between causal factors and the demand for the item being forecast. Econometric Forecasting is a further improvement on regression analysis.Long Term Demand Forecasting: (contd. A regression equation is developed on the basis of relationship between independent variables and dependent variable. Two general causal methods are Regression analysis &Econometric forecasting. competitive actions etc.) Extrapolative or Time series methods : seek to identify patterns in past data Moving average method & exponential smoothing method. new houses. cost of living indices. In this technique several relationship are to be estimated simultaneously.

. Large or small capacity increments When an enterprise enjoys demand growth . yet the additional capacity must be carried as additional overhead until it is actually productive. alternative plans like size and timing of added capacity. productivity losses resulting from pushing capacity beyond normal limits and the extra costs of subcontracting units of output.the issues are centered on how and when to provide the capacity.Generation of Alternative Capacity Plans When capacity gaps have been identified. one issue is whether capacity should be added more often in smaller increments to keep up with demand or less often in larger increments. the use of outside capacity sources or the absorption of lost sales . A unit of capacity added now may cost less than a unit added later. We can also use the facility more intensively (overtime. The cost effects of using alternative sources of capacity are the trade offs of some of the costs of carrying additional capacity against the costs of overtime and multiple shifts. subcontracting can also be done partly or fully. holiday work. use of overtime and multiple shifts. productive. Alternative Sources of capacity It is not always necessary to create additional capacity. additional shifts).

they offer economies of scale. Economies of scale: High capacity plants have high fixed scale: costs initially but since variable costs per unit are low. Lower variable costs in large plant bcoz larger volume will justify more mechanization and automation. Absorption of lost sales though risky strategy is used some time due to infrastructural bottle necks and at capacity limits. . business organizations therefore avoid less than required capacity.Lost sales Lost sales results into losing our market share which might prove very risky as it could be permanent.

resulting in a big dip in demand Demand growth approximates to optimistic prediction Factors which favour addition of capacity on conservative basis     Alternative capacity plans are easily available Build up cost of capacity is low Lead time to build new capacity is short Lost sales have no disastrous results or the customers are ready to wait . Building capacity is not very costly Buying outside is not feasible Lead time to add capacity is long Lost sales are viewed very negatively by trading circles.Factors which favour over capacity       When there is an economic capacity size below which the process is uneconomic.

concern . of machines required to perform an operation can be calculated by this formula N=ST× N=ST×MP MCxUC N=No. The no. machines and equipment. Machine capacity is generally expressed in terms of machine hours. of machines required ST=Time necessary to complete an operation in hours MP=The maximum requirement of that operation during a specified time MC=Maximum capacity of machine in hours UC= Utilization of machine capacity in % .a substantial part of financial resources are invested in the plant.Capacity utilization Machine requirements: In a mfg.

the problem is not so simple. However in reality. If the cost of costoverproduction exceeds cost of idle capacity in the unbalanced line. . The main problem arising out of such simplified line balancing is the disposal of the large volume of production. The technique of line balancing reduces the idle time of the installed production capacity and facilitates the intensive use of production capacity.Line balancing Problem of line balancing arises b coz of * The finished product is the result of many sequential operations.then the job may be performed with outside jobbing firms  Machines with lower capacity utilization may be used to perform the jobs of other manufacturers .  if negligible utilization of some machine capacity . The actual production in the line will be decided on the basis of machine with maximum production capacity. Solution is sought with cost-benefit analysis. then problem of idle capacity is handled through:  Another product line enabling the use of idle capacity of the first line could be run close to it. of machines. The production capacity of other machines in the line will be adjusted through the increase in the no. *The production capacity of each machine is not identical.

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