WHAT IS CAPACITY PLANNING?

Capacity is referred as maximum production capacity, which can be attained within a normal
working schedule.
Capacity planning is the process of determining the production capacity needed by an
organization to meet changing demand for its products. Capacity is the rate of productive
capability of a facility. Capacity is usually expressed as volume of output per time period.
It is the process of determining the necessary to meet the production objectives. The objectives
of capacity planning are:
To identify and solve capacity problem in a timely manner to meet consumer needs.
To maintain a balance between required capacity and available capacity.
The goal of capacity planning is to minimize this discrepancy.

In the context of capacity planning, design capacity is the maximum amount of work that an
organization is capable of completing in a given period. Effective capacity is the maximum
amount of work that an organization is capable of completing in a given period due to constraints
such as quality problems, delays, material handling, etc.

THE NEED FOR CAPACITY PLANNING

Capacity planning is the first step when an organization decided to produce more or a new
product. Once capacity is evaluated and a need for a new expanded facility is determined, facility
location and process technology activities occur.
 Capacity planning is done in order to estimate whether the demand is higher than
capacity or lower than capacity. That is compare demand versus capacity.
 It helps an organization to identify and plan the actions necessary to meet customer’s
present and future demand

ESTIMATING FUTURE CAPACITY NEEDS:

Capacity requirements can be evaluated from two extreme perspectives- short term and long
term.
Short-term Requirements
Managers often use forecast of product demand to estimate the short-term work load the facility
must handle. By looking ahead up to 12 months, managers anticipate output requirements for
different products or services. Then they compare requirements with existing capacity and detect
when capacity adjustments are needed.

Long-term Requirements
Long term capacity requirements are more difficult to determine because future demand and
technologies are uncertain. Forecasting five or ten years into the future is a risky and difficult
task. What products or services will the firm are producing then? Today’s product may not even
exist in the future. Obviously, long-term capacity requirement are dependent on marketing plans,
product development, and the life cycles of the products

CAPACITY PLANNING DECISION:

Capacity planning normally involves the following activities:

 Assessing existing capacity.
 Forecasting capacity needs.
 Identifying alternative ways to modify capacity.
 Evaluating financial and technological capacity alternatives.
 Selecting a capacity alternative most suited to achieving strategic mission.

IMPORTANCE OF CAPACITY DECISION

Impacts ability to meet future demands

Affects operating costs
Major determinant of initial costs
Involves long-term commitment
Affects competitiveness
Affects ease of management

STRATEGIES/TYPES OF CAPACITY PLANNING

The broad classes of capacity planning are lead strategy, lag strategy, and match strategy.

 Lead strategy is adding capacity in anticipation of an increase in demand. Lead strategy is an

aggressive strategy with the goal of persuade customers away from the company's competitors.
The possible disadvantage to this strategy is that it often results in excess inventory, which is
costly and often wasteful. it is planning for demand that currently does not exist and may not
materialize.
 Lag strategy refers to adding capacity only after the organization is running at full capacity or
beyond due to increase in demand. This is a more conservative strategy. It decreases the risk of
waste, but it may result in the loss of possible customers. The Lag strategy is a reactive approach
which adjusts it capacity in response to demand.
 Match strategy is adding capacity in small amounts in response to changing demand in the
market. This is a more moderate strategy.The match strategy closely tracks capacity use and
incrementally increases capacity as needed.the Match Strategy emphasizes small, incremental
modifications to capacity based on changing conditions in the marketplace.