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Capacity planning is one of the cardinal facets of operations direction as it determines the sum of goods or services which can be produced within a given clip continuance. Too less capacity indicates that clients wo n’t be satisfied and excessively much capacity would ensue in the operation being under-utilized with attendant high fixed costs and besides impacting breakeven and profitableness. A company, when it has to increase its capacity it has assorted options to see, from working overtime to constructing a new installation or a works. Forecasting demand is critical to capacity planning and companies can follow different schemes of capacity planning, to guarantee client satisfaction and keep the operations good within their budget and other restraints. Short term capacity planning is really of import for any company be it a merchandise based or a service based company particularly when there are seasonal demands, as those demands are wholly unpredictable and there ca n’t a lasting program in topographic point for short term capacity planning for seasonal demands. Fleeting programs like employee overtime, farm outing have to be considered and the best among them and that incur least cost have to be selected and implemented and this has been discussed in item in this undertaking.

Chapter-1 Capacity Planning & A ; Decisions

1.1 Capacity Planning

First, Capacity of any installation is said to be the rate of productive capableness of it. Capacity otherwise can be assumed as the rate at which a installation produces or in simple words, it is the ability of a installation to bring forth a certain degree of end product within a specific clip period.

When a house decides to bring forth more of a merchandise or programs to bring forth wholly a new merchandise, it ever starts with make up one’s minding how much capacity is needed sing the factors that affect capacity such as figure of workers and machines, accomplishment set of workers, defects, providers, authorities regulationsaˆ¦etc. This is termed as Capacity Planning.

1.2 Need for Capacity Planning

A house can find its installation location and take the procedure engineerings merely after it has found out a demand for new or expanded installations by measuring the capacity or capacity planning.

Lack of capacity planning can ensue in under or over capacity and would incur unneeded costs in researching ways to cut down or increase capacity.

Lack of capacity planning can besides trip a series of unwanted events such as hapless bringing services, an addition in work-in-process and convey about dissatisfaction in the heads of the gross revenues forces and the squad involved in fabrication.

Decision doing such as bring forthing new merchandises, spread outing productionaˆ¦etc can be hard without proper capacity planning.

1.3 Determinants of Capacity

The determiners of capacity are:


Product and Service Factors

Procedure Factors

Manpower Factors

Operational Factors

Supply Chain Factors

External Factors

1.4 How of import are capacity determinations?

Capacity determinations have its impacts on many different verticals of a house. First it affects the ability to run into future demands, as without capacity planning if non done maintaining in head the hereafter demands leads to a deficit of merchandises. If capacity is underestimated or overestimated it straight affects the operating costs as if capacity is overestimated the operating costs involved would acquire wasted and if underestimated the steps taken to repair it may be a batch and so is the manner it affects the initial costs excessively. And all these factors affect many other factors such as the fight, managementaˆ¦etc.

1.5 How are Capacity Decisions made?

Appraisal of Existing Capacity

Forecasting Future Capacity Needs

Designation of Ways to Modify Capacity

Evaluation of Financial, Economical, and Technological Capacity Alternatives

Choice of a Capacity Alternative most suited to accomplishing strategic mission

1.6 Measuring Capacity

Measuring capacity is simple for certain organisations. Reynolds, can utilize figure of ballpen pens produced per twelvemonth, Hyundai Motors can utilize figure of cars per twelvemonth. But for organisations whose merchandise lines are more diverse it is hard to happen out a common unit of end product.

As an option, capacity can be expressed in footings of input. A consultancy can show its capacity in footings of the figure of advisers employed per twelvemonth. A lathe store may show capacity in footings of available labour hours or machine hours per hebdomad, month, or twelvemonth. Following tabular array shows some illustrations of capacity steps.

Measures of Operating Capacity

End product



Automobile Manufacturer

Number of Autos


Barrelss of Beer


Tonss of Food

Steel Producer

Tonss of Steel

Power Company

Megawatts of electricity

Input signal




Number of Seats


Number of Beds

Job Shop

Labor and/or machine hours


Square Feet of Display or Gross saless Area

Movie Theatre

Number of Seats


Number of seats or tabular array

Tax Office

Number of Accountants


Number of Students and/or module


Square or three-dimensional pess of storage infinite

Beginning: Productions and Operations Management, Text Book

Day to twenty-four hours fluctuations such as employees being absent or late, dislocations of machines, downtime required for installation care and fix make it frequently hard to mensurate capacity realistically. A installation can in some instances operate at more than 100 % capacity.

Chapter-2 Estimating Future Capacity Needs

2.1 Capacity demands can be evaluated from two different positions viz. short term and long term.

2.1.1 Short-run Requirements

Directors frequently use prediction of merchandise demand for gauging the short term work burden the installation should be managing. By looking frontward up to 12 months, directors expect end product demands for different merchandises or services following which they compare demands with presently bing capacity and happen out when capacity accommodations are to be made.

2.1.2 Long-run Requirements

Long term capacity demands are tougher to find as future demand and engineerings are unsure. Forecasting five or ten old ages into the hereafter is a hazardous and a tough occupation. A merchandise bing today may non even exist in the hereafter. It is easy seeable that long scope capacity demands depend on selling programs, merchandise development, and the life rhythms of the merchandises.

Changes in procedure engineering should besides be expected. Even if merchandises remain unchanged, the methods for bring forthing them may alter drastically. Capacity planning should be affecting prediction of engineering every bit good as merchandise demand.

2.2 Schemes for Modifying Capacity

After presently bing and the hereafter capacity demands are determined, options ways of modifying capacity must be found out.

2.2.1 Short Term Responses

For short-run periods of up to one twelvemonth, basic capacity is fixed. Majority of the installations are seldom opened or closed on a regular monthly or annual footing. Many short-run accommodations for increasing or diminishing capacity are possible anyhow. The accommodations to be made depend on if the transition procedure is largely labour or capital intensive and if the merchandise is one that can be stored in the stock list.

Capital-intensive procedures depend a batch on physical installations, works, and equipment. Short term capacity can be modified by runing these installations more or less intensively than normal. The costs of puting up, altering over, and keeping installations, securing natural stuffs and work force, pull offing stock list, and scheduling can all be modified by doing such capacity alterations.

2.2.2 Long Term Responses

From World War 2 through the sixtiess, the US economic system was flourishing and scaling great highs. Since the 1970s, the United States has faced jobs of scarceness of resources and a more competitory economic system. Organizations today can non be constrained into believing merely about spread outing the resource base ; they must besides see appropriate attacks to undertaking it.


A repositing operation foresees the demand for an extra 100,000 square pess of infinite by the terminal of the following five old ages. One option is to add an extra 50,000 square pess now and another 50,000 square pess after two old ages. Another option is to add the full 100,000 square pess now.

Estimating costs for constructing the full add-on now are $ 50/square pes. If expanded incrementally, the initial 50,000 square pess will be $ 60/square pes. The 50,000 square pess will be $ 60/square pes. The 50,000 square pess to be added subsequently are estimated at $ 80/square pes. Which alternative is better? At a lower limit, the lower building costs plus extra capacity costs of entire building now must be compared with higher costs of deferred building. The operations director must see the costs, benefits, and hazards of each option.

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

2.3 Categorization of Capacity Planning based on Time

Long Term Capacity Planning

Short Term Capacity Planning

2.3.1 Long Term Capacity Planning

Long Term capacity be aftering solves strategic issues affecting the house ‘s major production installations. Besides, long-run capacity issues are interrelated to location planning. Technology and the ability to reassign the procedures to other merchandises are besides interrelated to long-run capacity planning. Long-run capacity planning may come in to the image when short-run amendments in capacity are scarce. For case, if a house adds a 3rd displacement to its present two-shift program and if the end product is still deficient, and besides if subcontracting options are unavailable, one practical option is adding capital equipment and modifying the layout of the works. An extra infinite or building an extra installation can besides be options.

2.3.2 Short Term Capacity Planning

In the short term, capacity planning concerns issues related to programming, labour displacements, and equilibrating resource capacities. The end of short-run capacity planning is to pull off unexpected displacements in demand in an expeditiously economic manner. The clip frame for short-run planning is frequently merely a few yearss but may travel on every bit long as six months. Options for doing short-run alterations in capacity are legion and can even take determinations to non run into demand at all. A really easy and most commonly-used method to increase capacity in the short term is working overtime. This is a really flexible and least expensive option. While the house has to pay one and one half times the normal labour rate, it is saved from the disbursals of hiring, preparation, and paying extra benefits. When non used abusively, most workers welcome the chance to gain excess rewards. If overtime does non supply plenty short-run capacity, other options are besides available. These include adding displacements, using insouciant or portion clip workers, the usage of drifting workers, renting workers, and installations farm outing.

Firms may besides increase the capacity by bettering the usage of their resources. The most common options in this class are employee/labor transverse preparation and imbrication or astonishing displacements. Most manufacturing houses inventory some end product in front of demand so that any demand for a capacity alteration in future is absorbed by the stock list buffer. From a proficient angle, houses may originate a procedure design aimed at increasing productiveness at work Stationss. Manufacturers can besides switch demand to avoid fluctuations in capacity demand by backlogging, line uping demand, or lengthening the house ‘s lead times. Service houses achieve the same consequences through scheduling assignments and reserves. A more originative attack is to modify the end product. Standardizing the end product or offering complimentary services are illustrations of the same. In services, clients might be allowed to make some of the procedure work themselves ( e.g. , self-service fuel pumps and fast-food eating houses ) . Another alternate reduction quality is an unwanted yet possible fast one. Finally, the house may take stairss to modify demand. Changing the monetary value and advancing the merchandise are common. Another option is to divide demand by originating a output or gross direction system. Utilities besides report success in switching demand by the usage of “ off-peak ” pricing.

2.4 When capacity does n’t run into demand?

When capacity does n’t equal demand, so in short term capacity planning, it can be managed by impermanent steps such as increasing or diminishing the labour force or making and transporting stock list in the thin period to be used in the peak demand period.

If there happens to be a mismatch between demand and capacity in long term capacity planning, it can be handled by altering or modifying the capacity. If the capacity is short so a new installation can be built or spread out the bing installation. In instance of an extra capacity so a impermanent shutdown/sale/consolidation of installations would assist.

2.5 Best Operating Degree

Beginning: Operations Management by William J Stevenson

The term capacity means an come-at-able rate of end product but references nil about boulder clay what point of clip that rate can be sustained. Therefore, if we say that a given works has a capacity of x units, we do non cognize if it is a one-day extremum or a six-month norm. To avoid this issue, the construct of best runing degree is brought into being. This is the degree of capacity for which the procedure was designed and therefore is the volume of end product at which mean unit cost is at a lower limit. When the end product of the installation falls below this degree ( underutilization ) , mean unit cost will increase as overhead must be allocated to fewer units. Above this degree ( overexploitation ) , mean unit cost besides increases-here due to overtime, increased equipment wear, and heightened defect rates.

2.6 Capacity Planning Models

Present Value Analysis:

It is used to measure the clip of capital investing and fund flows.

Aggregate Planning Models:

It helps in analyzing the manner of utilizing the bing capacity for short term planning.

Break Even Analysis:

It determines the minimal interruption down volumes of production.

Linear Scheduling:

It helps in finding the optimal merchandise mix for maximising part, sing the restraints imposed by capacity.

Computer Simulation:

It is helpful in finding the effects of assorted scheduling policies.

2.7 Economies of Scale

This well known rule of Economics illustrates the relationship between cost and capacity in an operating system. When end product additions in an operating system, the system is likely to see cost benefits on assorted factors. Due to the undermentioned grounds the mean unit cost begins to fall with the rise in end product degree:

Spreading the fixed costs of capacity over a larger end product.

Improved use of several resources in the system.

Cost benefit in procurance on history of increased volume.

Efficient usage of supervisory and direction staff.

The economic systems of scale cease to happen beyond a degree of production or end product. This is called “ Diseconomies of Scale ” . There can be several grounds for this:

Inefficient direction due to big size of operation and the ensuing deficiency of coordination.

Overexploitation of machines and interrupt down of stuff handling equipments.

Over hiring of employees, or overtime transcending justifiable bounds.

Service slows down due to increasing complexnesss.

Addition in choice debasements because of misdirection and deficiency of focal point.

An Example for Economies of Scale:

Economies/Diseconomies of Scale

Beginning: Microeconomicss by Robert S. Pindyck, Daniel L. Rubinfeld, Prem L. Mehta

Chapter-3 Capacity Planning Techniques

3.1 Capacity Planning Techniques

There are four processs for capacity planning ; capacity planning utilizing overall factors ( CPOF ) , capacity measures, resource profiles, and capacity demands be aftering ( CRP ) . The first three are approximately cut attacks that involve analysis to place possible constrictions that can be used with or without fabricating resource planning ( MRP ) systems. CRP is used along with MRP systems. Capacity utilizing overall factors is a simple and a manual attack to capacity planning that is based on the maestro production agenda ( MPS ) and production criterions that convert required units of finished goods into historical tonss on each work station. Bills of capacity are a process based on the MPS. Alternatively of utilizing historical ratios, it uses the measures of stuff and routing sheet that shows the sequence or work Stationss required to bring forth the portion, every bit good as the apparatus and run clip. Capacity demands can so be determined by multiplying the figure of units required by the MPS by the clip required to fabricate each. Resource profiles are the same as measures of capacity, except lead times being included so that workloads fall into the right periods. Capacity demands be aftering ( CRP ) is applicable merely in companies utilizing MRP or MRP II. CRP uses the information from one of the old coarse methods, plus MRP outputs on bing stock lists and batch size. The consequence will be a tabular burden study for each work station or a graphical burden profile for assisting plan-production demands. This will state where capacity is non equal or idle, leting for instabilities to be corrected by displacements in forces or equipment or the usage of overtime or added displacements. Finite capacity programming is an extension of CRP that simulates occupation order fillet and get downing to bring forth a elaborate agenda that provides a set of start and finish day of the months for each operation at each work station. A failure to understand the really nature of pull offing capacity can take to perturb and serious client service issues. If there is a mismatch between available and needed capacity, accommodations should be made. However, it should be taken attention that houses can non Have perfectly-balanced stuff and capacity programs that easy accommodate exigency orders. If flexibleness is the company ‘s competitory precedence, extra capacity would be appropriate.

3.2 Use and Efficiency

Use is the per centum of design capacity achieved.

Use = Actual Output/Design Capacity

Efficiency is the per centum of effectual capacity achieved.

Efficiency = Actual Output/Effective Capacity

Bakery Example:

Actual production last hebdomad = 148,000 axial rotations

Effective capacity = 175,000 axial rotations

Design capacity = 1,200 axial rotations per hr

Bakery operates 7 days/week, 3 – ‘8 hr displacements ‘

Design capacity = ( 7 x 3 ten 8 ) ten ( 1,200 ) = 201,600 axial rotations

Utilization = 148,000/201,600 = 73.4 %

Efficiency = 148,000/175,000 = 84.6 %

Efficiency = 84.6 %

Efficiency of new line = 75 %

Expected Output = ( Effective Capacity ) ( Efficiency )

= ( 175,000 ) ( .75 ) = 131,250 axial rotations

3.3 Pull offing Demand

There are three instances in which demand has to be managed and they are:

Demand Exceeding Capacity

Control demand by raising monetary values, scheduling longer lead clip

Long term solution is to increase the capacity

Capacity exceeds demand

Stimulate market

Merchandise alterations

Adjusting to “ SEASONAL DEMANDS ”

Produce merchandises with complimentary demand forms

Capacity planning in short clip or short term capacity be aftering to run into seasonal demands is explained in item in the undermentioned subdivisions.

Chapter-4 Seasonal Demands

4.1 Seasonal Demands

Seasonal Demands are those demands those cause remarkably big ups or downs in demand. Seasonal demand occurs in a figure of different scenarios ; most frequent of them is listed in the followers:

Natural seasonal fluctuations ( e.g. greater demand for ice pick in summer and for cold redresss in winter ) .

Specific calendar linked Events like Diwali ( Crackers, Sweets ) , Mother ‘s Day ( e.g. salutations cards and flowers ) , and Christmas.

Regular every twenty-four hours Promotions that can go on often and semi-randomly throughout a twelvemonth.

4.2 Impacts and Challenges of Seasonal Demand

Pull offing seasonal demand acquiring a good prognosis done, be aftering production and procurance and pull offing the fulfilment procedure introduces considerable extra challenges into the procedure that is already complex. For most makers, the two key and of import planning procedures are Forecasting & A ; Demand Planning, and Production Planning & A ; Scheduling.

The challenge in Forecasting and Demand Planning is chiefly managing the high demand volatility and variableness, and unexpected demands. Specifically, publicities & A ; events tend to do most of the issues, and consequence in much larger and more frequent demand spikes and dips than natural seasonal fluctuations. If these are non planned good in a timely manner and introduced into downstream production and distribution programs, the consequence can be important decrease in fabrication and distribution efficiencies, addition in costs, lower client service degrees and satisfaction and all these finally can ensue in a lost concern.

In Planning and Scheduling, the greatest of jobs is covering with frequent alterations in prognosiss and orders. The ability to respond fleetly while doing the best determination on the manner of fulfilling demand is frequently the coveted scheme of “ Make to Order ” makers. For makers who are unable to run into peak demand because of capacity restraints, and for those that “ Make to Stock ” or utilize a combined MTO/MTS scheme, tactical planning requires careful tweaking of demand and production in order to be after for a suited pre-building of stock list and to guarantee that the long lead clip points are purchased in synchronism with the modified production programs.

Manufacturers, of class, may, to work out some or all of their capacity issues, resort to sub-contracting. The recent upward tendency in contract fabrication, and the addition in practical fabrication, that is, buying and administering merchandises from foreign states significantly add to the overall supply concatenation complexness. In this, with really long supply lead times, truth of prognosis is once more paramount, and, the ability to give your providers precise projections of your demands in a timely mode is one of the most critical factors.

Despite the push of thin schemes and rules of client driven supply concatenation, one of the most common ways of covering with any type of demand uncertainness in many of the companies of today still appears to be to see against the uncertainness by keeping an excess stock list across the supply concatenation which is an expensive and unacceptable solution.

4.3 Focus on Customers and Demand

“ Geting the demand right ” attack benefits every subsequent supply concatenation planning and executing procedures from production planning, through sourcing and procurance to fulfilment and this consequence in decreased costs every bit good as betterments in the top line gross revenues and market portion. On the other manus, acquiring the demand incorrect adds cost to about all downstream processes, badly impacting fight and once more finally consequences in losing the concern.

In prediction and demand planning, one really much seeable guideline is to concentrate more on the abnormal than the normal. This does non intend non paying attending to natural seasonal fluctuations, but paying more attending on publicities and events as these are the things that about cause the highest volatility in demand ever and are the most tough to manage.

Puting in excess attempts to guarantee you understand your clients and the reliable beginnings of demand can besides pay really good dividends. Many makers still use their clients ‘ demand from on their warehouses but often, their client ‘s ordering procedure is non that good and is a hapless beginning of history of demands or demand tendencies. Wherever possible, it ‘s a batch better to hold eyes on the existent beginning of demand, viz. the consumer. Using their client ‘s POS informations as portion of the demand be aftering procedure frequently gives much better thought of the existent demand.

The ability to maximise and continuously better prognosis truth is really of import. Increasing gross revenues and market portion with the aid of improved perfect order public presentation and influencing and making demand is every bit of import. Concentrating good on demand and acquiring nearer to your clients is an indispensable demand to accomplish these ends.

Chapter-5 Decision


Short term capacity be aftering to run into seasonal demands, therefore is critical for any company and proper prediction of seasonal demands and a proper program to run into all those seasonal demands should be in topographic point. Any defect in this, can take to high stock list costs, employee dissatisfaction, deteriorating client service degrees and high client dissatisfaction that leads to losing the clients and finally losing the concern. A house should be at vigil all the clip to see the alterations go oning in demands and should maintain altering its schemes of short term capacity planning and achieve and prolong an outstanding concern value.


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