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Capacity Planning And Decisions

Capacity planning is one of the key aspects of businesses management as it determines the amount of goods or services which can be produced within a given time duration. Too less capacity suggests that customers will not be satisfied and too much capacity would result in the operation being under-utilized with resultant high set costs and also affecting breakeven and profitability. A firm, when it must increase its capacity they have various options to consider, from working overtime to building a new center or a herb. Forecasting demand is critical to capacity planning and companies can take up different strategies of capacity planning, to ensure client satisfaction and keep maintaining the operations well within their budget and other constraints. Short-term capacity planning is very important for any company be it a product established or something based company particularly when there are seasonal needs, as those requirements are totally unstable and there can't a long lasting plan in place for short-term capacity planning seasonal needs. Momentary packages like staff overtime, subcontracting need to be considered and the best included in this and this incur least cost have to be selected and executed which has been mentioned at length in this project.

Chapter-1 Capacity Planning & Decisions

1. 1 Capacity Planning

Firstly, Capacity of any center is said to be the pace of productive capacity for it. Capacity normally can be assumed as the pace at which a center produces or in simple words, it is the ability of a facility to produce a certain level of output within a particular time period.

When a firm decides to create more of something or plans to produce altogether a new product, it always starts off with deciding how much capacity is necessary considering the factors that have an effect on capacity such as volume of staff and machines, skill set of workers, problems, suppliers, government policesetc. That is termed as Capacity Planning.

1. 2 Dependence on Capacity Planning

A company can determine its service location and choose the procedure technology only after it offers discovered a need for new or broadened facilities by analyzing the capacity or capacity planning.

Lack of capacity planning can cause under or over capacity and would incur unneeded costs in discovering ways to reduce or increase capacity.

Lack of capacity planning can also induce some undesirable situations such as poor delivery services, a rise in work-in-process and produce dissatisfaction in the heads of the sales employees and the team involved in manufacturing.

Decision making such as producing services, expanding developmentetc can be difficult without proper capacity planning.

1. 3 Determinants of Capacity

The determinants of capacity are:


Product and Service Factors

Process Factors

Manpower Factors

Operational Factors

Supply Chain Factors

External Factors

1. 4 How important are capacity decisions?

Capacity decisions have its impacts on various verticals of a company. Firstly it impacts the ability to meet future needs, as without capacity planning if not done remember the future requirements brings about a lack of products. If capacity is underestimated or overestimated it immediately influences the operating costs as though capacity is overestimated the operating costs engaged would get wasted and if underestimated the options taken to fix it might cost a lot and so is the way it affects the initial costs too. And all these factors affect many other factors like the competitiveness, managementetc.

1. 5 How are Capacity Decisions made?

Assessment of Existing Capacity

Forecasting Future Capacity Needs

Identification of Ways to Modify Capacity

Evaluation of Financial, Economical, and Technological Capacity Alternatives

Selection of a Capacity Alternative best suited to achieving tactical mission

1. 6 Measuring Capacity

Measuring capacity is easy for certain organizations. Reynolds, can use range of ballpoint pens produced per 12 months, Hyundai Motors may use number of cars per year. But for organizations whose product lines tend to be diverse it is difficult to find out a common product of output.

As an alternative, capacity can be indicated in terms of insight. A consultancy can express its capacity in conditions of the number of consultants used per calendar year. A lathe shop may communicate capacity in conditions of available labor time or machine hours weekly, month, or yr. Following desk shows a few examples of capacity steps.

Measures of Working Capacity




Automobile Manufacturer

Number of Autos


Barrels of Beer


Tons of Food

Steel Producer

Tons of Steel

Power Company

Megawatts of electricity





Number of Seats


Number of Beds

Job Shop

Labor and/or machine hours


Square Legs of Display or Sales Area

Movie Theatre

Number of Seats


Number of seats or table

Tax Office

Number of Accountants


Number of Students and/or faculty


Square or cubic legs of storage space space

Source: Productions and Functions Management, Content material Book

Day to day versions such as employees being absent or late, breakdowns of machines, downtime necessary for facility maintenance and repair make it often difficult to assess capacity realistically. A facility can in some cases operate at more than 100% capacity.

Chapter-2 Estimating Future Capacity Needs

2. 1 Capacity requirements can be assessed from two different perspectives viz. short term and long run.

2. 1. 1 Short-Term Requirements

Managers often use forecasting of product demand for estimating the short term work load the facility should be managing. By looking forward up to 12 months, managers expect output requirements for different products following that they compare requirements with presently existing capacity and find out when capacity adjustments should be made.

2. 1. 2 Long-Term Requirements

Long term capacity requirements are tougher to ascertain as future demand and technology are uncertain. Forecasting five or a decade in to the future is a high-risk and a hardcore job. A product existing today might not exactly even exist in the future. It really is easily obvious that long range capacity requirements rely upon marketing plans, product development, and the life cycles of the products.

Changes in process technology should also be expected. Although products continue to be unchanged, the techniques for creating them may change dramatically. Capacity planning should be affecting forecasting of technology as well as product demand.

2. 2 Strategies for Modifying Capacity

After currently existing and the near future capacity requirements are identified, alternatives ways of modifying capacity must be discovered.

2. 2. 1 Short Term Responses

For short-term times as high as twelve months, basic capacity is fixed. Majority of the facilities are seldom opened or closed on a regular monthly or every year basis. Many short-term alterations for increasing or lessening capacity are possible anyhow. The alterations to be produced depend on if the alteration process is mainly labor or capital intensive and if the merchandise is the one which can be stored in the inventory.

Capital-intensive processes hinge a lot on physical facilities, herb, and equipment. Short term capacity can be changed by functioning these facilities more or less intensively than normal. The expenses of establishing, changing over, and keeping facilities, procuring recycleables and manpower, handling inventory, and arranging can all be changed by causing such capacity changes.

2. 2. 2 LONG LASTING Responses

From World War 2 through the 1960s, the US economy was flourishing and scaling great heights. Since the 1970s, the United States has confronted problems of scarcity of resources and a more competitive economy. Organizations today cannot be constrained into considering only about expanding the resource platform; they must also consider appropriate methods to contracting it.


A warehousing procedure foresees the necessity for yet another 100, 000 square toes of space by the finish of the next five years. One option is to add yet another 50, 000 rectangular feet now and another 50, 000 rectangular feet after 2 yrs. Another option is to add the whole 100, 000 square legs now.

Estimating charges for building the whole addition now are $50/square foot. If extended incrementally, the original 50, 000 rectangular feet will cost $60/square ft. . The 50, 000 rectangular feet will definitely cost $60/square foot. The 50, 000 square foot to be added later are estimated at $80/square foot. Which alternate is better? At the very least, the lower development costs plus surplus capacity costs of total structure now must be weighed against higher costs of deferred development. The operations director must consider the costs, benefits, and hazards of every option.

Source: Productions and Operations Management by Everett E. Adam, Jr. Ronald J. Ebert

2. 3 Classification of Capacity Planning based on Time

Long Term Capacity Planning

Short Term Capacity Planning

2. 3. 1 PERMANENT Capacity Planning

Long Term capacity planning solves tactical issues involving the firm's major production facilities. Also, long-term capacity issues are interrelated to location planning. Technology and the capability to transfer the operations to other products are also interrelated to long-term capacity planning. Long-term capacity planning will come in to the picture when short-term amendments in capacity are scarce. For instance, if a firm adds a third change to its present two-shift plan if the output is still inadequate, and also if subcontracting options are unavailable, one functional alternative is adding capital equipment and modifying the design of the seed. An additional space or constructing an additional center may also be alternatives.

2. 3. 2 SHORT-TERM Capacity Planning

In the short-term, capacity planning concerns issues related to scheduling, labor shifts, and balancing resource capacities. The goal of short-term capacity planning is to control unexpected shifts in demand in an efficiently economic way. The time body for short-term planning is often only a few times but may go on as long as six months. Options for making short-term changes in capacity are numerous and may also take decisions to not meet demand whatsoever. A very easy & most commonly-used method to increase capacity in the short term is working overtime. That is a very adaptable and most affordable alternative. While the firm has to pay one and half times the standard labor rate, it is saved from the expenditures of hiring, training, and paying additional benefits. When not used abusively, most workers welcome the possibility to earn extra salary. If overtime does not provide enough short-term capacity, other alternatives are also available. Included in these are adding shifts, utilizing casual or in your free time workers, the utilization of floating staff, leasing workers, and facilities subcontracting.

Firms could also boost the capacity by improving the use with their resources. The most common alternatives in this category are staff/labor cross training and overlapping or staggering shifts. Most creation firms inventory some productivity ahead of demand so that any dependence on a capacity change in future is soaked up by the inventory buffer. From a specialized angle, businesses may initiate an activity design targeted at increasing productivity at the job stations. Manufacturers can also shift demand to avoid fluctuations in capacity need by backlogging, queuing demand, or lengthening the firm's lead times. Service businesses achieve the same results through scheduling consultations and reservations. A far more creative methodology is to change the result. Standardizing the output or offering complimentary services are types of the same. In services, customers might be allowed to do some of the procedure work themselves (e. g. , self-service gas pushes and fast-food restaurants). Another alternate reducing quality can be an undesired yet possible trick. Finally, the company might take steps to modify demand. Changing the price and promoting the product are common. Another alternative is to separated demand by initiating a yield or income management system. Resources also record success in moving demand by the use of "off-peak" prices.

2. 4 When capacity doesn't meet demand?

When capacity doesn't equivalent demand, then in short term capacity planning, it could be managed by temporary methods such as increasing or decreasing the labor force or creating and transporting inventory in the low fat period to be used in the maximum demand period.

If there is undoubtedly a mismatch between demand and capacity in long-term capacity planning, it can be taken care of by changing or changing the capacity. If the capacity is short a new service can be built or increase the existing center. In case of a surplus capacity then a temporary shutdown/sale/consolidation of facilities would help.

2. 5 Best Operating Level

Source: Procedures Management by William J Stevenson

The term capacity means an attainable rate of end result but mentions little or nothing about till what point of your energy that rate can be sustained. Thus, if we say that a given plant has a capacity of x models, we do not know if it is a one-day top or a six-month average. To avoid this issue, the idea of best operating level is brought into being. This is the level of capacity for which the process was designed and therefore is the volume of output of which average unit cost reaches a minimum. When the outcome of the center comes below this level (underutilization), average unit cost increase as overhead must be allocated to fewer units. Above this level (overutilization), average product cost also increases-here anticipated to overtime, increased equipment wear, and heightened defect rates.

2. 6 Capacity Planning Models

Present Value Evaluation:

It is employed to evaluate the time of capital investment and finance flows.

Aggregate Planning Models:

It assists with examining the way of using the existing capacity for short-term planning.

Break Even Evaluation:

It decides the minimum break down volumes of creation.

Linear Encoding:

It helps in determining the ideal product blend for maximizing contribution, taking into consideration the constraints enforced by capacity.

Computer Simulation:

It is helpful in determining the effects of various arranging policies.

2. 7 Economies of Scale

This popular basic principle of Economics illustrates the relationship between cost and capacity in an operating system. When output increases in an operating-system, the system will probably experience cost benefits on various factors. Because of the following reasons the average unit cost begins to show up with the rise in outcome level:

Spreading the fixed costs of capacity over a larger output.

Improved utilization of several resources in the machine.

Cost benefit in procurement due to increased size.

Efficient use of supervisory and management personnel.

The economies of level cease that occurs beyond an even of production or output. That is called "Diseconomies of Scale". There may be several known reasons for this:

Inefficient management due to large size of operation and the resulting lack of coordination.

Overuse of machines and breakdown of material handling tools.

Over employing of employees, or overtime exceeding justifiable boundaries.

Service decreases credited to increasing complexities.

Increase in quality degradations because of mismanagement and insufficient focus.

An Example for Economies of Level:

Economies/Diseconomies of Scale

Source: Microeconomics by Robert S. Pindyck, Daniel L. Rubinfeld, Prem L. Mehta

Chapter-3 Capacity Planning Techniques

3. 1 Capacity Planning Techniques

There are four strategies for capacity planning; capacity planning using overall factors (CPOF), capacity charges, resource information, and capacity requirements planning (CRP). The first three are about cut solutions that involve examination to recognize potential bottlenecks that can be used with or without processing learning resource planning (MRP) systems. CRP can be used along with MRP systems. Capacity using overall factors is a simple and a manual method of capacity planning that is dependant on the master production routine (MPS) and development standards that convert required devices of finished goods into historical lots on each work place. Bills of capacity are an operation based on the MPS. Instead of using historical ratios, it uses the bills of materials and routing sheet that shows the series or work stations required to produce the part, as well as the set up and run time. Capacity requirements can then be dependant on multiplying the number of items required by the MPS by enough time required to produce each. Resource information are the identical to expenses of capacity, except lead times being included so that workloads fall season into the appropriate durations. Capacity requirements planning (CRP) does apply only in companies using MRP or MRP II. CRP uses the information in one of the prior rough-cut methods, plus MRP outputs on existing inventories and lot sizing. The effect is a tabular load article for every work station or a visual load profile for aiding plan-production requirements. This will tell where capacity is not sufficient or idle, allowing for imbalances to be corrected by shifts in employees or equipment or the use of overtime or added shifts. Finite capacity scheduling is an expansion of CRP that simulates job order halting and beginning to produce a specific schedule that delivers a couple of start and surface finish dates for each and every operation at each work stop. A failure to know the very nature of managing capacity can lead to disorder and serious customer service issues. If there is a mismatch between available and required capacity, adjustments should be produced. However, it ought to be taken health care that organizations cannot Have perfectly-balanced material and capacity programs that easily accommodate emergency orders. If overall flexibility is the company's competitive priority, extra capacity would be appropriate.

3. 2 Usage and Efficiency

Utilization is the percentage of design capacity achieved.

Utilization = Real Output/Design Capacity

Efficiency is the percentage of effective capacity achieved.

Efficiency = Genuine End result/Effective Capacity

Bakery Example:

Actual production the other day = 148, 000 rolls

Effective capacity = 175, 000 rolls

Design capacity = 1, 200 rolls per hour

Bakery performs 7 days/week, 3 - '8 hour shifts'

Design capacity = (7 x 3 x 8) x (1, 200) = 201, 600 rolls

Utilization = 148, 000/201, 600 = 73. 4%

Efficiency = 148, 000/175, 000 = 84. 6%

Efficiency = 84. 6%

Efficiency of new brand = 75%

Expected Productivity = (Effective Capacity)(Efficiency)

= (175, 000)(. 75) = 131, 250 rolls

3. 3 Managing Demand

There are three situations in which demand should be managed and they're:

Demand Exceeding Capacity

Control demand by bringing up prices, scheduling longer lead time

Long term solution is to increase the capacity

Capacity surpasses demand

Stimulate market

Product changes


Produce products with complimentary demand patterns

Capacity planning in a nutshell time or short-term capacity likely to meet seasonal demands is explained at length in the next sections.

Chapter-4 Seasonal Demands

4. 1 Seasonal Demands

Seasonal Needs are those demands those cause unusually large ups or downs popular. Seasonal demand occurs in several different scenarios; most frequent of these is detailed in the next:

Natural seasonal modifications (e. g. better demand for snow cream in summertime and for chilly remedies in winter).

Specific calendar linked Situations like Diwali (Crackers, sweets), Mother's Day (e. g. greetings credit cards and blooms), and Holiday.

Regular every day Promotions that can happen frequently and semi-randomly within a year.

4. 2 Impacts and Challenges of Seasonal Demand

Managing seasonal demand obtaining a good forecast done, planning creation and procurement and controlling the fulfillment process introduces considerable additional problems in to the process that has already been complex. For some manufacturers, both key and important planning techniques are Forecasting & Demand Planning, and Production Planning & Scheduling.

The task in Forecasting and Demand Planning is principally handling the popular volatility and variability, and surprising demands. Specifically, deals & events have a tendency to cause the majority of the problems, and cause much larger and more recurrent demand spikes and dips than natural seasonal variations. If these are not prepared well in a timely fashion and launched into downstream development and distribution programs, the effect can be significant decrease in manufacturing and distribution efficiencies, increase in costs, lower customer support levels and satisfaction and all these ultimately can cause a lost business.

In Planning and Arranging, the best of problems is dealing with recurrent changes in forecasts and purchases. The ability to react quickly while making the best decision on the way of satisfying demand is often the desired strategy of "Make to Order" manufacturers. For manufacturers who are unable to meet peak demand because of capacity constraints, as well as for the ones that "Make to Stock" or use a blended MTO/MTS strategy, tactical planning requires careful tweaking of demand and development in order to plan for the right pre-building of inventory and also to ensure that the long business lead time items are ordered in synchronization with the improved production plans.

Manufacturers, of course, may, to resolve some or all their capacity issues, resort to sub-contracting. The recent upward trend in deal making, and the upsurge in virtual developing, that is, purchasing and distributing products from international countries significantly add to the overall supply string complexity. On this, with lengthy supply lead times, exactness of forecast is again paramount, and, the capability to give your suppliers correct projections of your requirements regularly is one of the most critical factors.

Despite the push of low fat strategies and guidelines of customer driven supply chain, one of the most common ways of interacting with any type of demand uncertainty in lots of the companies of today still appears to be to insure from the uncertainty by holding an extra inventory over the supply string which can be an expensive and unacceptable solution.

4. 3 Concentrate on Customers and Demand

"Obtaining the demand right" approach benefits every succeeding supply chain planning and execution processes from development planning, through sourcing and procurement to fulfillment which result in reduced costs as well as advancements in the very best range sales and market share. Alternatively, getting the demand incorrect brings cost to virtually all downstream processes, severely affecting competitiveness and again finally results in losing the business.

In forecasting and demand planning, one quite definitely visible guide is to focus more on the excessive than the standard. This does not mean not watching natural seasonal variants, but paying more attention on marketing promotions and incidents as they are the things that almost cause the highest volatility in demand always and will be the most tough to take care of.

Putting in extra initiatives to make sure you understand your visitors and the genuine sources of demand can also pay very good dividends. Many manufacturers still use their customers' demand from on the warehouses but frequently, their customer's ordering process isn't that good and is a poor way to obtain history of needs or demand trends. Wherever possible, it's better to have eyes on the genuine source of demand, namely the consumer. Utilizing their customer's POS data as part of the demand planning process often gives much better idea of the real demand.

The ability to maximize and continuously improve forecast accuracy is vital. Increasing sales and market show with the aid of much better perfect order performance and influencing and creating demand is similarly important. Concentrating well on demand and getting nearer to your customers can be an essential requirement to achieve these goals.

Chapter-5 Conclusion


Short term capacity likely to meet seasonal needs, thus is crucial for any company and proper forecasting of seasonal demands and an effective intend to meet all those seasonal demands should maintain place. Any flaw in this, can result in high inventory costs, staff dissatisfaction, deteriorating customer service levels and high customer dissatisfaction that causes losing the clients and ultimately getting rid of the business. A company should be at vigil constantly to start to see the changes happening in demands and really should keep changing its strategies of short-term capacity planning and achieve and preserve a superb business value.


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