OPERATION

MANAGEMENT
OPERMAN
LESSON 7: STRATEGIC CAPACITY
PLANNING OF PRODUCTS AND
SERVICES

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Topics:
•Strategic Capacity Planning
• Defining And Measuring Capacity
•Importance of capacity decision
• Capacity expansion strategies KEY FEATURES:
Capacity Management:
Adjusting Capacity
Capacity Constraints
Capacity Timing

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 Topic 1. Strategic Capacity Planning
STRATEGIC CAPACITY PLANNING involves determining the
capacity level of capital-intensive resources such as facilities,
equipment, and the labor force. The goal is to align the long-term
Overcapacity –
supply capabilities of an organization with the predicted level of operating costs that
long-term demand. are too high.

The capacity of an operating unit is crucial for planning as it allows Under-capacity –

managers to quantify production capability in terms of inputs or strained resources
outputs. This information helps in making decisions and plans and possible loss of
related to these quantities. customers.

CAPACITY DECISIONS are fundamental design decisions

influenced by demand stability, technological change, and
competitive factors.

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Topic 2. Defining and Measuring Capacity
Capacity often refers to an upper limit on the rate
of output. • In selecting a measure of
capacity, it is important to
choose one that does not
Two Useful Definitions of Capacity: require updating.

1. Design Capacity: the maximum output that can • No single measure of capacity
possibly be attained. will be appropriate in every
situation. Rather, the measure
of capacity must be tailored to
2.Effective Capacity: the maximum possible the situation.
output given a product mix, scheduling
difficulties, machine maintenance, quality factors,
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The 2 different measures of capacity are useful in defining
two measures of system effectiveness:

Efficiency and Utilization.

• EFFICIENCY is the ratio of actual output to effective capacity.
• UTILIZATION is the ratio of actual output to design capacity.
Efficiency = Actual Output/Effective Capacity
Utilization = Actual Output/Design Capacity
Example Problem: Compute the efficiency and utilization of the vehicle repair department:
Design Capacity = 50 trucks per day
Effective Capacity = 40 trucks per day
Actual Output = 36 trucks per day
Solution:
Efficiency = Actual Output/Effective Capacity
= 36 trucks per day/40 trucks per day = 90%
Utilization = Actual Output/Design Capacity
= 36 trucks per day/50 trucks per day = 72%

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Topic 3. Importance of Capacity
Decision
1.Capacity decisions have a real impact on the ability of the organization to meet
future demands for products and services; capacity essentially limits the rate of
output possible. Having capacity to satisfy demand can allow a company to take
advantage of tremendous opportunities.

2.Capacity decisions affect operating costs. Ideally, capacity and demand

requirements will be matched, which will tend to minimize operating costs. In
practice, this is not always achieved because actual demand either differs from
expected demand or tends to vary (e.g., cyclically).

3. Capacity is usually a major determinant of initial cost. Typically, the greater the
capacity of a productive unit, the greater its cost.
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Topic 3. Importance of Capacity
Decision
4. Capacity decisions often involve long-term commitment of resources and
the fact that, once they are implemented, it may be difficult or impossible to
modify those decisions without incurring major costs

5. Capacity decisions can affect competitiveness. If a firm has excess capacity,

or can quickly add capacity, that fact may serve as a barrier to entry by other
firms.

6. Capacity affects the ease of management; having appropriate capacity makes

management easier than when capacity is mismatched

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Topic 4. Capacity Expansion Strategies
• Capacity decisions impact product lead times, customer responsiveness, operating costs, and
competitiveness. Inadequate capacity can result in customer loss and hinder growth.

The Three basic strategies for the timing of capacity

expansion in relation to a steady growth in demand.
• Capacity lead strategy – Capacity is expanded in anticipation of demand growth.

• Capacity lag strategy – Capacity is increased after an increase in demand has been documented.
This conservative strategy produces a higher return on investment but may lose customers in the
process.

• Average capacity strategy – Capacity is expanded to coincide with average expected demand.
This is a moderate strategy in which managers are certain they will be able to sell at least some
portion of the additional output.

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Capacity Management (Adjusting Capability)
•Discrepancies between the capacity of an organization and the demands of its customers result in inefficiency, either in
underutilized resources or dissatisfied customers. It may be a serious cost resulting in lost sales, lost customers
and potentially loss of reputation.

•Capacity changes may take a long period of time because capacity of operation is complicated mix of
resources.

Capacity can be increased using a number of methods which involve adjusting the resources
and inputs into an organization such as:
• Introducing new approaches and materials
• Increasing the number of service providers or machines
• Increasing the number of operational hours
• Acquiring additional facilities.

The decision to alter capacity has to be taken carefully in line with future predictions of
demand.

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Capacity Management ( Capacity Contraints

A constraint on capacity is a resource that is less capable, of increasing its output over the
given time period, than other parts of the operation.
The capacity will be constrained by under producing machine and this may create a ‘bottle
neck’ in the process. By increasing the capacity of the machine the capacity of the overall
facility will also increase.
Capacity is always constrained by the lowest producing part of the process. In layman’s terms
an operation will ‘always go at the pace of the slowest walker’.

Identifying a restrictive part of the process and adding resources that can increase its
capacity will improve the overall capacity of the operation.

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Capacity Management ( Capacity
Contraints
How resource mix constrained capacity and operation

1. STAFF/SKILL LEVELS: Training staff to be more versatile can enhance process flexibility.
2. IT FACILITIES/TECHNOLOGY: Investments in technology can significantly improve
processes, reduce processing time, and transform operations.
3. WORKING SCHEDULES AND FACILITY ACCESS: Availability of capacity can be influenced
by convenient schedules and facility accessibility.

1. Materials Availability: Changes in raw material supply can impact the capacity potential of an
operation.
2. Product or Service Mix: Adjustments in the mix of products or services can constrain operation
capacity due to varying resource requirements.
3. Storage: Work-in-progress or finished goods storage can enhance process capacity temporarily by
managing timing constraints.
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Capacity management (capacity timing
The ability to increase or decrease capacity can be viewed
in 3 time phases; short term, medium term and long term.

1. Short-term Planning: Reactive and immediate adjustments to capacity within 3

months using flexible resources.

2. Medium-term Planning: Planning horizon of 3-18 months allows significant

capacity adjustments beyond immediate operations management.

3.Long-term Planning: Beyond 12-18 months, significant investment decisions

linked to operational strategy, difficult to reverse.
Impact of Utilization: Dependence on process nature; skill-based processes require
retention, while technology-reliant processes offer flexibility in capacity.

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Thank you

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