CAPACITY

PLANNING
 Strategies:
INTRODUCTION Lead, Lag,
Match

• Broadly defined, capacity is “the maximum

amount that something can contain or produce.
However, any definition of capacity must show a
measurement of capacity, and must mirror the
capability of an operation or processes to
satisfy demand for goods or services

• Overutilisation and underutilisation of capacity

can be costly.

• Effective utilisation of capacity must result in

goods and services that will meet or surpass the
timing prospects of the customer.

• Capacity is influenced by the sort, quantities

and timing of the facilities available to an
organisation.

Capacity is the highest possible perimeter or highest yield value of a specific operation,
process or system, articulated in a definite unit of time when the said operation, process or
system is operating within an ideal environment.
 INTRODUCTION CONT.
Important questions to be addressed when capacity is
planned

• What is the amount of capacity required?

• What facilities, equipment, machines and labour will be part
of the planned capacity?
• Are the existing facilities adequate to satisfy existing and
impending capacity requirements?
• Does the organization predict any changes in existing and
impending demand patterns?
• What type of capacity is required by the organization?
• Should the organization erect new facilities to meet
impending demands?
• When and how will capacity be totaled to operations,
process and systems?
• When will the organization require the capacity?

It is important for management to revise capacity plans frequently to guarantee

optimal performance of every operation, process and system
 ECONOMIES OF SCALE AND
DISECONOMIES OF SCALE
In basic terms economies of scale is when the size of a production
unit or facility increases, the volume of volume of production will
increase exponentially.

Reasons for the occurrence of economies of scale.

1. Learning by employees.
2. Fixed cost allocation.
3. Purchasing costs decrease.
4. The cost incurred for enlarging facilities.

Diseconomies of scale occur when a production

unit’s size increases beyond tipping point.
 CRITICAL CAPACITY DECISIONS

• Influences will be brought to bear on the critical capacity

decisions by the utilization of the effective capacity.

• In critical capacity decisions, it is necessary for the operations

manager to define capacity as a dimension of time.

Strategic capacity planning is undertaken over very specific time

horizons:

Long term- The longer time horizon is as a result the procurement

of assets required which is such that cannot be done over a
shorter period. Longer than a year.

Medium term- planning can be done on a quarterly basis

between 6 and 18 months.

Short term- from 1 to 30 days. Decisions mostly influence the

scheduling of work within the production unit.
CRITICAL CAPACITY DECISION
MAKING INTERACTION
The following must be taken into account when the critical
capacity decisions are made:

• Capacity decisions have a major bearing on the financial

performance of the organisation. As a result, progressive
capacity planning is important.
• The availability of capacity will affect the production of the
organisation. The higher the availability of capacity, the
higher the input costs will be.
• The management of an organisation will be directly
influenced by available capacity. Managing an organisation
with the harmonised capacity is a great deal easier than
managing an organisation whose capacity is inequitable.
• Capacity planning requires long-term commitment of scarce
resources. As a result it is almost impossible to reverse
capacity decisions once they have been taken.
• Capacity decisions influence the ability of an organisation to
meet demand for goods and services. Capacity is a limiting
factor in meeting demand.
• The availability of capacity determines the competitiveness
of an organisation.
 CAPACITY MEASUREMENT

It is imperative that organisations measure the

performance of capacity. There are different
types of capacity measurement:

Design capacity- hypothetical/theoretical measure

of capacity. It is always the highest parameter or
highest production tempo of an organisation.

• Effective capacity- stated as design capacity

minus all the possible allowances such as
absenteeism, personal time, maintenance and
production of scrap. Calculated using the ration
between expected capacity and design capacity
AC
DC
• Is affected by an organisation’s product mix,
production scheduling, age of equipment and
maintanance standards.
 CAPACITY MEASUREMENT

• Actual capacity- represents the actual capacity

available within an operation and is stated over
a specific time horizon.

• Output capacity-best applied to a single • Input capacity- utilised by low volume,

operation, process or system. Utilised mainly flexible process such as customised products.
when if organisation produces highly • Whatever the demand translates into some
standardised products. form of output.
 MEASURING EFFECTIVENESS,
EFFICIENCY AND LOAD OF
CAPACITY
Can be done using a number of methodologies.
The methodologies measure or define how well a
system works by measuring efficiency and
utalisation. The measures are known as ratios and
normally expressed as a percentage.

Efficiency = Actual Output X 100 Utilisation = Actual Output X 100

Affective Capacity Design Capacity

• The load that an operation, process or system has can also be measured as part
of capacity measurement.
• Load is characterised by the quantity of work that is incomplete and was created
by the input rate into the o, p or s.
• Load is measured by the backlog that is present in the system or amount of WIP.

Lead Time to service the backlog = BackLog in the system

Capacity of the system

The computation will express the time it would take until the last customer in the o,
 ESTABLISHING CAPACITY

Factors that influence effective capacity

• Facility issues – if a facility is poorly designed, the effective

capacity suffers as a result.

• Goods and services issues- the more elaborate the design of

the operation, process or system, the more effective capacity
it will consume.

• Process issues- the lower the capability of the process in

meeting demand, the worse effective capacity utilisation will
be.

• Employee issues- The more difficult the job, the more

effective capacity will be consumed.

• Operational issues- good quality assurance is important when

effective capacity is established: products of inferior quality
must be reworked and consume more effective capacity.
 STRATEGY FORMULATION FOR
CAPACITY PLANNING

• Capacity planning cannot be a succesful it is not included in

the organization’s vision, mission, and strategic plans.
• Numerous influence strategies an organization may utilize in
capacity planning. This can be done using certain
suppositions and forecasts on the topics of long-term
demand, changes in technology and competitors’ reactions to
market forces.
• Speed at which demand increases and grows is key
• The way in which competitors react to the innovations
dictates the strategies that must be developed.
• Strategies must operate within the constraints allowed by
available capital.
Capacity decisions that must be taken into account. Expected demand and
cost capacity must be
1. The importance of maintaining a balance throughout the taken into consideration.
system. Some organisations may
2. The flexibility of the system and the employees who have spare capacity for
operate that system. unforeseen emergencies.
3. Changes taking place within the system and the timing of
those changes.
4. Capacity requirements throughout the system.
 STRATEGY FORMULATION FOR
CAPACITY PLANNING CONT.

• Capacity strategy implemented must satisfy demand

requirements.
• Any changes in capacity influence demand, sales and cash
flows as well as quality, maintenance and supply chain in
general.
Before general steps in capacity planning can be
considered, the following must be adhered to:
The following secondary steps must also be
considered during capacity planning: • Construct for transformation
• Appreciate the technology and capacity growth
1. Estimate future requirements. • Best operational levels (BOL)
2. Evaluate existing capacity and facilities and
identify any gaps. • Demand estimation accuracy
3. Identify alternatives that will support the
organization in meeting customer
requirements.
4. Conduct a full financial analysis of each
alternative.
5. Assess key qualitative issues for each
alternative.
6. Select the alternative with the best analysis
for future utilization.
7. Implement the selected alternative.
8. Monitor the results.