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Capacity Management

N Siva Prasad
 The ability to hold, receive, store or accommodate
 In business terms it is the amount of output that a system is
capable of achieving over a period of time.( Plant capacity,
service capacity etc.)
 Capacity planning is generally viewed in three time durations
 Long Range
 Intermediate Range
 Short range
 Strategic Capacity Planning
 Finding the overall capacity level of capital intensive resources
to best support the firm’s long-term strategy.
Capacity Utilisation
 It is attainable rate of output
 Normally compared with best operating level
 Capacity utilisation = Capacity used/Design capacity X100
 Efficiency= capacity used/effective capacity or best
operating level X 100
 How to define and arrive at “Best Operating Level or
effective capacity”?
 Internal decision
 Benchmarking
 Compare similar type of industries
Determinants of effective capacity
 Facilities
 Product and service factors
 Process factors
 Human factors
 Policy factors
 Operational factors
 Supply chain factors
 External factors
Steps in Capacity Planning Process
 Estimate future capacity requirements
 Evaluating existing capacity and identify gaps
 Identify alternatives to meet requirement
 Conduct financial analyses of each alternative
 Assess key qualitative issues with each alternative
 Select the best alternative
 Implement and
 Monitor for effectiveness
Developing Capacity Strategies
 Design flexibility into systems
 Take stage of life cycle into consideration
 Take a system approach to capacity changes
 Prepare to deal with capacity chunks
 Attempt to smooth out capacity requirements
 Identify the optimal operating level.
 Choose a strategy if expansion is involved
Capacity Analysis
 Considerations in Changing Capacity
 Maintaining System Balance
 Frequency of Capacity Additions
 External Sources of Operations and Supply Capacity
 Decreasing Capacity
 Determining Capacity Requirements
 Use forecasting techniques
 Calculate resource requirements
 Availability of resources to be analysed
Decision Tree Analysis
 Evaluating capacity alternatives using decision tree
 Consider alternatives and list them
 Associated probabilities for alternatives are mapped
 Construct a decision tree with all possibilities ( with
associated cost)
 Cost analysis is done ( different pay offs are calculated)
 Compare all decision points wrt cost ( final value)
 Choose the best alternative
 NPV should be considered for long durations
Constraint management (TOC)
 Market: insufficient demand
 Resource: shortage of manpower etc.
 Material: Shortage of some material
 Financial : Insufficient funds
 Supplier: unreliable
 Knowledge: insufficient knowledge
 Policy: Local laws or regulations
Service Capacity-Challenges
 Need to be near customer
 No inventory possible
 Unpredictable variations in demand

 Use demand management strategies like discounts,

promotions, pricing etc.
 Stagger the demand
 Augment the resources