• Planning ensures that operating costs are

Capacity and Capacity Planning

maintained at a minimum possible level
without affecting the quality.
Define Capacity • It ensures that the organization remain
For an Organization: competitive and can achieve its long-term
 ‘Capacity’ is the ability of a given system to growth plan.
produce output within the specific time
period. Demand Forecast
In Operations:
 ‘Management Capacity is referred as the
amount of input resources available to
Capacity Planning
produce relative output over period of time.
In General Terms:
The goal of Strategic Capacity Planning is to
 ‘Capacity’ is referred to as maximum achieve a match between the long-term supply
production capacity, which can be attained capabilities of an organization and the predictive
within a normal working schedule. level of long-term demand.
Capacity Planning
 is essential to be determine the optimum Factors Affecting Capacity
utilization of resources and plays an
important role in decision-making process Internal Factors:
such as for, extension of existing operations, 1. Facilities
modification to existing product lines, 2. Product and Service Factors
starting new products, etc. 3. Process Factors
4. Human Factors
Capacity and Capacity Planning 5. Policy Factors
6. Operational Factors
Capacity
● Refers to an upper limit or ceiling on the
External Factors:
load that an operating unit can handle
1. Government Regulations (Working hours,
Capacity Planning
Safety, Pollution)
 A key strategic components in designing the
2. Union Agreements
system
3. Supplier Capabilities
 Encompasses many basic decisions with
long term consequences in the organization Other Factors Affecting Capacity Planning
 Production Technology Product Line or
Strategic Capacity Planning Matrix
• ‘Strategic Capacity Planning’ is crucial as it  External Structure (such as policies, safety
helps the organization in meeting the future regulations etc.)
requirements of the organization.  Operational Structure (such as scheduling,
quality assurance etc.)

 Human Capital (such as job design,
compensation etc.)
 Production Facility (such as layout, design,
and location etc.)
Types of Capacity Planning
The three types of capacity planning based on
goal are:
 Lead Capacity Planning
 Lag Strategy Planning
 Match Strategy Planning
Steps in Capacity Planning Process
1. Estimate the future planning benefits
2. Evaluate the existing capacity and facilities and
identify gaps
3. Identify the meeting requirements.
4. Conduct financial analyses of each alternative
5. Assess key qualitative issues for each alternatives
6. Select the alternative to pursue that will be the
best in the long term.
7. Implement the selective alternative
8. Monitor the results
Importance of Capacity Decision
● Impacts the ability of the organization to
meet future demands
● Affects operating costs
● Affects lead time responsiveness
● A major determinant of initial costs
● Involves long-term commitment of
resources
● Affects competitiveness
● Affects ease of management
● Are more important and complex due to
globalization
● Needs to be planned for in advance due to
their consumption of financial and other
resources
Measurement of Capacity
The capacity of the manufacturing unit can
be expressed in number of units of output per
period. In some situation measuring capacity is
more complicated when they manufacture multiple
products. Thus, expressed as man-hours or
machine hours.
Measurement of Capacity
1. Design Capacity
- The planned or engineered rate of output
of goods or services under normal or full scale
operating conditions.
2. Effective Capacity
- Maximum output of the specific product
or product mix the system of workers and machines
is capable of producing as an integrated whole.
System capacity is less than design capacity or at
the most equal, because of the limitation of
product mix, quality specification, breakdowns.
CAPACITY AND OUTPUT RELATIONSHIP
The system capacity is less than design
capacity because of long range uncontrollable
factors. The actual output is still reduced because
of short-term effects such as, breakdown of
equipment, inefficiency of labor. The system
efficiency is expressed as ratio of actual measured
output to the system capacity.
System Efficiency (SE)=
Actual output
System capacity
3. Licensed Capacity
- Capacity licensed by the various regulatory
agencies or government authorities. This is the
limitation on the output exercised by the
government.
4. Installed Capacity
- The capacity provided at the time of installation of
the plant is called installed capacity.
5. Rated Capacity
- Capacity based on the highest production rate
established by actual trials is referred to as
rated capacity.
Capacity Requirements
1. Long-Term Capacity Strategies
- Long-term capacity requirements are
more difficult to determine due to uncertain
future demand and technology. Long range
capacity requirements are dependent on
marketing plans, product development and life-
cycle of the product. Long-term capacity
planning is concerned with accommodating
major changes that affect overall level of the
output in long-term.
a. Multiple Products
- Company’s produce more than one
product using the same facilities in order to
increase the profit. Having more than one
product helps the capacity planners to do a
better job. Because products are in different
stages of their life-cycles, it is easy to schedule
them to get maximum capacity utilization.
b. Phasing In Capacity
- In high technology industries, and in
industries where technology developments are
very fast, the rate of obsolescence is high. The
products should be brought into the market
quickly. Some commitment is made for building
funds and men towards facilities over a period of
3–5 years. This is an effective way of capitalizing on
technological breakthrough.
c. Phasing Out Capacity
- The outdated manufacturing facilities
cause excessive plant closures and down time. The
impact of closures is not limited to only fixed costs
of plant and machinery. Thus, the phasing out here
is done with humanistic way without affecting the
community. The phasing out options makes
alternative arrangements for men like shifting them
to other jobs or to other locations, compensating
the employees, etc.
2. Short-Term Capacity Strategies
- Short-term capacity can be modified by
operating these facilities more or less intensively
than normal. The strategies for changing capacity
also depend upon how long the product can be
stored as inventory.
a. Inventories - Stock of finished goods during
slack periods to meet the demand during
peak period.
b. Backlog - During peak periods, the willing
customers are requested to wait and their
orders are fulfilled after a peak demand
period.
c. Employment Level (Hiring or Firing)
- Hire additional employees during peak
demand period and lay off employees as
demand decreases.
d. Employee Training - Develop multi-skilled
employees through training so that they can
be rotated among different jobs. The multi-
 skilling helps as an alternative to hiring
employees.
e. Subcontracting - During peak periods, hire
the capacity of other firms temporarily to
make the component parts or products.
f. Process Design - Change job contents by
redesigning the job.
Objectives of Operations Scheduling
The following are the main objectives of
operations scheduling:
● Due importance to delivery date and to
avoid delays in completion
● Proper utilization of work centers
● Reducing time of job on machines
Principles of Operations Scheduling
‘Operations Scheduling’ is arrived at based on the
following principles:
● Ensure continuous job schedule
● End to end completion of job
● Ensure feedback so as to make
adjustments
What is Aggregate Planning?
● Aggregate Planning’ is the process of
working out production requirements for a
medium range by working backwards from the
final sales unit to raw materials required.
● Aggregate Planning’ is an operational
activity critical to the organization as aims at
balancing the long-term strategic planning with
short term production success.
Overview of Proaduction Planning and
Control
It is essential to integrate the production
planning and control system for efficient, effective
and economical operation in a manufacturing unit
of an organization.
Factors affecting Production Control
● ‘Production Control’ cannot be the same across
all of the organization.
● ‘Production Control’ is dependent upon the
following factors:
• Nature of Production
(job oriented, service oriented, etc.)
• Nature of Operation
 ‘Production Control’ cannot be the same across
all of the organization. ‘Production Control’ is
dependent upon the following factors:
• Size of Operation
Independent Demand Inventory Model
‘Independent Demand Inventory Model’
talks about raw material demand which is
dependent upon prevailing market conditions and
is not correlated to any raw material currently used
by the organization.
Finished goods are an appropriate example
for independent demand inventory model.
Material Requirement Planning
One of the crucial components of a
production plan is material and manufacturing
planning system.
‘Material Requirement Planning’ plays a
pivotal role in assembly-line production.
Waiting Line (Queue) Management
‘Queue Management’ deals with cases
where the customer arrival is random; therefore,
service rendered to them is also random.
A service organization can reduce cost and
thus improve profitability by efficient queue
management.