Capacity Planning Meaning, Definition, Process, Aspects

Table of Contents:-

  • Meaning of Capacity Planning
  • Definition of Capacity Planning
  • Capacity Planning Process
  • Aspects of Capacity Planning

Meaning of Capacity Planning

Capacity planning specifies the production capacity required by an organization to meet changing product demands. It is a long-term strategic decision that establishes a company’s overall level of resources. The findings are strategic because they often commit the organization’s resources for long periods. For example, Reliance’s decision to put up an ethylene cracker required an investment of hundreds of crores of rupees. Similarly, significant investments are needed to build a refinery or a caustic soda plant.

As these expenditures are usually for fixed assets (plant and equipment), they are expensive to sustain and even more expensive to change. Capacity decisions affect product lead times, customer responsiveness, operating costs, and a firm’s ability to compete effectively. They also impact the survival of the firm; too much capacity can result in low return on assets, low morale, damaging layoffs, and facility closures (which are often expensive), while too little power can result in lost sales, high operating costs, and often result in erosion of customer loyalty.

Definition of Capacity Planning

According to APICS, “Capacity planning or capacity requirements planning is the function of establishing measuring and adjusting limits or levels of capacity. The term ‘Capacity Requirements Planning‘ in this context is the process of determining how much labour and machine resource is required to accomplish the tasks of production”.

It is also defined as “Capacity planning is the study of the level of capacity the organization provides at each stage of the production or service delivery system to meet its objectives.”

Capacity Planning Process

Capacity planning involves activities such as:

  1. Assessing Existing Capacity Measurement of Capacity
  2. Estimating/Forecasting Future Capacity Needs
  3. Identifying Alternative Ways to Modify Capacity
  4. Evaluation of Capacity Alternatives
  5. Selecting the Best Capacity Alternative

The capacity Planning Process is explained below:

1. Assessing Existing Capacity/Measurement of Capacity

The capacity of a plant can be expressed as the rate of output, viz., units per day, week or month, tonnes per month, gallons per hour, labour hours/day, etc. However, finding a standard output unit is difficult for organizations with more diverse product lines. The more appropriate measure of capacity for such firms is to express the power in terms of the monetary value of the production per period (day, week, or month).

In general, capacity can be described in one of two ways:

i) Output Measures

Output measures are the usual choice for high-volume processes. This type of capacity measurement requires to be taken with some caution.

For example, Maruti established itself to manufacture 100,000 passenger cars per year. The Maruti plant produces three different types of vehicles on a single platform. Since the man-hours required to produce the different models are not identical, Maruti could manufacture 125,000 vehicles if it exclusively produced the Maruti 800, perhaps 110,000 vehicles if it exclusively produced the Omni, and 85,000 vehicles if it exclusively produced the Gypsy. The 100,000 number represents an average to simplify the capacity measurement. As customization and variety in the product mix increase, output-based capacity measures become less valuable. Firms best employ output measures when they offer a relatively small number of standardized products and services or when applying such measures to individual processes within the overall firm.

ii) Input Measures

These measures are generally applied to low-volume, flexible processes. For example, in a machine shop, one can measure capacity in machine hours or the number of machines.

To compare demand requirements and capacity on an equivalent basis, it is necessary to convert demand, typically expressed as an output rate, into an input measure. Capacity can then be measured in terms of the inputs or outputs of the conversion process.

However, translating demand into input measures can be quite challenging. In a general business sense, most people often perceive capacity as the amount of output that a system can achieve over a specific time period.

Some of the examples of common measures of capacity are given below:

2) Estimating/Forecasting Future Capacity Needs

Capacity requirements can be evaluated from two major perspectives:

i) Short-term Requirements

Managers frequently utilize product demand forecasts to estimate the short-term workload that the facility must manage. By projecting up to 12 months ahead, managers anticipate the output requirements for various products or services. They then compare these requirements with existing capacity and identify when adjustments are needed.

ii) Long-term Requirements

Determining long-term capacity requirements is more challenging due to uncertainty about future demand and technologies. Forecasting five or ten years into the future is complex and risky. What products or services will the firm be producing then? Today’s products may not even exist in the future. Long-range capacity requirements depend on product development, marketing plans, and the product life cycle.

Changes in process technology must also be anticipated. Even if products remain unchanged, the methods for generating them may change dramatically. Capacity planning must involve forecasts of technology as well as product demand.

Estimation of Capacity Requirements

Capacity requirements can be estimated in two different ways as follows.

i) One possibility is to forecast the needed production capacity directly from the master production schedule.

ii) White choosing the master schedule, the capacity requirements are estimated by Rough Cut Capacity Planning. After selecting the master schedule and going through the MRP calculations, a more accurate estimate is obtained from Capacity Requirements Planning. If there are significant deviations between these two estimates of the capacity requirements, it may be necessary to go back and adjust the master schedule.

3) Identifying Alternative Ways to Modify Capacity

After existing and future capacity requirements a assessed, alternative ways of modifying capacity must be identified.

i) Short-term Responses

For short-term periods of up to one year, fundamental capacity is fixed. Significant facilities are rarely opened or closed on a regular monthly or yearly basis. Many short – adjustments for increasing or decreasing capacity are possible. However, adjustments to dependent on whether the conversion process is primarily labor – or capital -intensive and whether the product can be stored in inventory.

Capital-intensive processes rely heavily on physical facilities, plants, and equipment. Short-ten capacity can be modified by operating these facilities more or less intensively than normal. The costs of setting up, changing over, and maintaining facilities, procuring raw materials and manpower, managing inventory, and scheduling can all be modified by such capacity changes.

In labour-intensive processes, short-term capacity can be changed by lying off or staffing people or by having employees work overtime or idle. These alternatives are expensive, though, since hiring com severance pay, or premium wages may have to be paid, and scarce human skills may be lost permanently.

Several of the most common strategies for changing capacity are summarized in  the  table:

Type Action
Inventories Stockpile finished goods during slack periods to complete later demand.

During peak demand periods, ask willing customers to wait sometime before receiving their product. File their order and fulfil it after the peak demand period.

Employment levels Hire additional employees or lay off employees as demand for output decreases and increases.
Workforce utilization Arrange for employees to work overtime during peaks and idle or work fewer hours during slack demand periods.
Employee training Instead of having each employee specialize in one task, train them in several tasks. Then, as skill requirements rotate, change employees’ job positions among different roles. This is an alternative to hiring and layoffs for acquiring the needed skills.
Process design Alter the job content at each workstation to enhance productivity. Utilize work methods analysis to redesign jobs.
Subcontracting During peak periods, temporarily hire other firms to manufacture the product or some of its subcomponents.
Maintenance Temporarily discontinue routine preventive maintenance on facilities and equipment so that during peak periods the facility can be operated when it would otherwise be idle.

ii) Long-Term Capacity Expansion

For expansion of the long-term capacity of the term the firm may decide to adopt any one or more of the following:

a) The firm may give a sub-contract to some other company. The sub-contractor may produce the goods for the main contractor. This will act as via for expanding the capacity of the firm.

b) To expand its capacity, a firm may decide to acquire other companies, facilities or resources. In this case, the capacity will be expanding for the firm itself to produce in the times to come. However, the capacity is created by acquiring rather than producing resources.

c) Thirdly, the firm may develop new sites, construct buildings or buy equipment to expand its capacity. Here, the capacity is created right from scratch for the company.

d) Also, the firm may update or modify its existing facilities to increase its capacity to produce.

e) Finally, the firm may decide to restart its facilities that may have been put on hold previously. The re-activation of stand-by facilities is going back to some higher facilities that were explored earlier by the firm.

iii) Long-Term Capacity Reduction

Capacity planning does not necessarily mean the expansion of the capacity. It may also mean a reduction of the capacity, which may be done in the following ways:

a) Capacity reduction may happen by selling off the existing resources and laying off the employees. The capacity, reduced in this manner, is difficult to gain again.

b) Secondly, it can be done by temporarily shutting down the facilities. This must be accompanied by the transfer of employees to another company under the same  management or some other concerned firm.

c) Finally, the facility can also be reduced by developing and phasing in new product. This conclusion is accompanied by the decision to phase out the old products.

4) Evaluation of Capacity Alternatives

To analyze capacity alternatives, several models are found useful.

Models available to assist in capacity planning are listed as follows:

i) Present Value Analysis (time value of capital investment).

ii) Break-even Analysis (min. break-even volume for project cost and revenue).

Linear Programming (the model focuses on short-run questions of ways to use existing capacity to optimize the utilization of resources). Decision Tree Analysis (for the analysis of capacity expansion decisions, decision Tree Analysis is often used).

5) Selecting the Best Capacity Alternative

It is the last decision in capacity planning. After evaluating the alternatives regarding capacity, choose those alternative which are the most promising ones and follow them.

Aspects of Capacity Planning

Capacity-related problems may manifest in three primary forms. The first is the large increments in capacity needed for changes in demand over the long term, say 5 to 10 years ahead. For most technologies, capacity increments can only be made in large chunks, even though they cannot be fully utilized when installed (such as another shift, steel mill, or aircraft added when demand exceeds available capacity). Due to the addition of productive capacity, there will be incremental increases in fixed costs that cannot be absorbed immediately. This will be absorbed by the gradual increase in expected demand over a long period. This type of capacity change establishes the upper limit of the productive capacity of a plant, often referred to as the system design capacity.

Second, within the constraints imposed by the system design capacity, limited adjustments can be made for up to a year or two to cover fluctuations in demand due to seasonality and business cycles. The resulting aggregate planning relies on inventories, changes in the size of the workforce through hiring and layoffs, use of overtime, and subcontracting orders to another firm.

Finally, finer adjustments in capacity may be needed to cope with short-term random fluctuations in demand. This is done weekly or even daily, and the corresponding methods used for this refinement are the subject of operation scheduling. Spontaneous changes in order, which are unpredictable and uncontrollable, affect the accuracy of these methods in a given situation.



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