OPERATIONS

MANAGEMENT-4
SIDDHARTH
PORWAL
2021A4PS1377G
Strategic Capacity Planning for Products and Services

Strategic capacity planning aims to align an organization's long-term supply

capabilities with predicted long-term demand levels.
Organizations engage in capacity planning due to changes in demand,
technology, the environment, and perceived threats or opportunities.
A gap between current and desired capacity leads to imbalances:
overcapacity results in high operating costs, while undercapacity strains
resources and risks losing customers.
Key questions in capacity planning include determining the type, amount,
and timing of needed capacity, which depend on the products and services
the organization intends to produce or provide.
Forecasts are crucial inputs for assessing the required capacity and timing.
Other considerations include cost, funding, expected return, potential
benefits and risks, sustainability issues, implementation timing, the supply
chain's ability to handle changes, and the accuracy and impact of forecasts.
DEFINING AND MEASURING CAPACITY

Capacity measurement varies depending on the situation, and no single measure is universally
appropriate. Tailoring the measure to the specific context is essential.
Commonly used measures of capacity include those listed in Table 5.1.
Two refined definitions of capacity are:
Design capacity: The maximum output rate or service capacity that an operation, process, or
facility is designed for.
Effective capacity: The design capacity minus allowances such as personal time and preventive
maintenance.
Steps in the Capacity Planning Process

1. Estimate future capacity requirements.

2. Evaluate existing capacity and facilities and identify gaps.
3. Identify alternatives for meeting requirements.
4. Conduct financial analyses of each alternative.
5. Assess key qualitative issues for each alternative.
6. Select the alternative to pursue that will be best in the long
term.
7. Implement the selected alternative.
8. Monitor results. Capacity planning can be difficult at times due
to the complex influence of market forces and technology.
Cost–Volume Analysis
Cost–volume analysis focuses on relationships between cost, revenue,
and volume of output. The purpose of cost–volume analysis is to
estimate the income of an organization under different operating
conditions. It is particularly useful as a tool for comparing capacity
alternatives.
The total cost associated with a given volume of output is equal to the
sum of the fixed cost and the variable cost per unit times volume:

The total revenue associated with a given quantity of output, Q, is

The volume at which total cost and total revenue are equal is referred to
as the break-even point (BEP). When volume is less than the break-
even point, there is a loss; when volume is greater than the break-even
point, there is a profit.
Total profit can be computed using the formula