UNIT 3 CAPACITY PLANNING CONCEPT:

Capacity simply means the ability to hold, receive, share or accommodate. It is a productive capability or a facility. Capacity is a critical consideration for long term strategy. It is generally measured in volume of output per unit of time. Capacity is the limiting capability of a productive unit to produce within a stated time period, normally expressed in terms of output per unit of time. So, capacity is the maximum productive capability. Capacity can be measured in different ways. Capacity has different meaning to different people at different level of management. The top management is concerned with aggregate capacity of all plant of the firm and financial resources require for supporting these plants but operation manager is concerned with capacity planning with individual plant. Therefore, capacity planning is the process of determining the capacity requirement in future. Production and operation manager is concerned with the determining capacity requirement in term of time dimension. They are long-ranged and short-ranged. So, capacity planning is always focus in determination of the overall capacity level of capital intensive resources like facilities, equipment, labours etc. that support the long term competitive strategy of organization.

CAPACITY PLANNING PROCESS:

Capacity planning is the process of testing the feasibility of aggregate output plants and evaluating the overall capacity utilization. In capacity planning process the following steps should be followed:

Step 1: Assessing of Existing Capacity

The first step of capacity planning decision is measurement of existing capacity level of each work sectors leading to whole organizations. Capacity is determined as rate of output per unit of time. It is simple to measure capacity if the outputs are of simple nature. Is the outputs are of different nature then it becomes quite difficult to measure capacity.

Step 2: Forecasting Capacity Need

Capacity needs could be viewed into different time dimensions as short term capacity needs and long term capacity needs. In short term capacity planning, manager estimate require capacity to meet short term needs of products or services generally up to one year. If the capacity are insufficient to meet the requirement short term capacity adjustment are needed. Long term capacity refers for capacity requirement forecast for more than one year.

Step 3: Identifying Alternative to Modify Capacity

After existing and future capacity requirement are determined, alternative way of modifying capacity must be identified. Modification techniques are different for short term and long term capacity. Once the short term capacity requirement is determined they should be compared with the existing capacities to identifying the additional short term capacity needs. The techniques of capacity adjustment vary according to following types of production system like capital intensive, labour intensive, nature of product etc. The long term capacity adjustment need more investment in production facilities compared to short term adjustment.

Step 4: Evaluating Financial, Economical and Technical Aspect of Capacity Alternatives

Evaluation of capacity alternatives involves so many ways of analysis in mathematical modeling i.e. linear programming methods are used for evaluation of short term capacity. Decision tree analytical technique is used for evaluation of long term capacity. Net present value technique is suitable if time value of capital investment and funds flow are to be considered. Break even analysis is also important technique used to analyze relationship between cost, volume of output and revenue.

Step 5: Selection of Best Alternative

After evaluating the financial or technical aspect of alternative, the best alternative is selected. The selection of appropriate alternative is more depended on the type of capacity problem. This includes the analysis of demand of existing operation and vision of future business condition.

TYPES OF CAPACITY 1. Design Capacity (Theoretical)

It is the maximum rate of output that can be achieved under ideal condition. It depends upon the number and capacity of machines and equipments engaged with the labour. It is the theoretical concept of the capacity because the ideal condition rarely found in practice.

2. Effective Capacity
In the practice sense, if a facility is used to make different product, a set up time will be required between batches of different product to be produced. These setups are required to replace the components for the new batch of different product to be processed on the machine. Also, the machine may require adjustment like oiling, clearing etc. some units of initial output may be lost in quality testing. Thus, it is practically possible to achieve design capacity what can be achieved in the effective capacity. Thus, effective capacity is the maximum rate of output which can be achieved under the operating constraint. It is always lower than the design capacity.

3. Actual Capacity
The maximum output rate which is actually achieved under the constraint of machine breakdown, labour inefficient and absenteeism, defective products, late delivery of materials and so on. Actual capacity can be equal or less than effective capacity. Design capacity > Effective capacity Actual capacity

Cost Optimization

Importance of Long Term Investment Capacity Planning IMPORTANCE OF CAPACITY PLANNING

Safe Investment

Capacity decision is the critical decision to the operations manager to determine facility size, with an objective of achieving high levels of system utilization and high return on investment. Capacity planning is the strategy planning for the competitive benefit of the organization. Hence, the capacity planning is the

Fulfilling Demand

process of determining the capacity requirement in the future. In brief, the importance of the capacity planning can be listed as follows:

1. Cost Optimization
Only optimal capacity leads to optimal cost of production. It is necessary to find the optimal capacity of the facility so that sum of cost of the over capacity and under capacity is minimized.

2. Safe Investment
Major investment for the new ventures will be capacity related. Hence, it can be wise to keep the initial investment in the facility as low as possible to achieve lower break-even volume.

3. Fulfilling Demand
Capacity of the company should be compatible with the possible demand but demand will be uncertain in most cases. Hence, capacity should be flexible enough adjusting with future demand effectively.

4. Long Term Investment

Capacity investment will be long term and cannot be reversed easily. Hence, capacity should be decided well in advance considering all the concerned factors.

DEFINING AND DIFFERENT MEASURES OF CAPACITY Types of Organization

Steel Company Hospitals Warehouse Sugar Factory Job Shop Oil refineries

Capacity Measures
Tones of steel/shift No. of bed Square feet of store space Tones of sugar/shift Number of machine/hour Gallons of oil refined/day

On the basis
Output Input Input Output Input Output

In general capacity is measured as the rate of output per unit of time. Sometime it may not be suitable to measure capacity in terms of the output at this time capacity is expressed in terms of the output. But for the some production the capacity can be expressed in terms of input as well as in output as above.