Capacity planning is one of the key aspects of operations management as it determines the amount of goods or services which can be produced within a given time duration. Too less capacity indicates that customers won’t be satisfied and too much capacity would result in the operation being under-utilized with resultant high fixed costs and also affecting breakeven and profitability. A company, when it has to increase its capacity it has various options to consider, from working overtime to building a new facility or a plant. Forecasting demand is critical to capacity planning and companies can adopt different strategies of capacity planning, to ensure customer satisfaction and maintain the operations well within their budget and other constraints. Short term capacity planning is very important for any company be it a product based or a service based company especially when there are seasonal demands, as those demands are totally unpredictable and there can’t a permanent plan in place for short term capacity planning for seasonal demands. Momentary plans like employee overtime, subcontracting have to be considered and the best among them and that incur least cost have to be selected and implemented and this has been discussed in detail in this project.

Home

Chapter-1 Capacity Planning & Decisions

1.1 Capacity Planning

Firstly, Capacity of any facility is said to be the rate of productive capability of it. Capacity otherwise can be assumed as the rate at which a facility produces or in simple words, it is the ability of a facility to produce a certain level of output within a specific time period.

When a firm decides to produce more of a product or plans to produce altogether a new product, it always starts with deciding how much capacity is needed considering the factors that affect capacity such as number of workers and machines, skill set of workers, defects, suppliers, government regulations…etc. This is termed as Capacity Planning.

1.2 Need for Capacity Planning

A firm can determine its facility location and choose the process technologies only after it has found out a need for new or expanded facilities by evaluating the capacity or capacity planning.

Lack of capacity planning can result in under or over capacity and would incur unnecessary costs in exploring ways to reduce or increase capacity.

Lack of capacity planning can also trigger a series of undesirable events such as poor delivery services, an increase in work-in-process and bring about dissatisfaction in the minds of the sales personnel and the team involved in manufacturing.

Decision making such as producing new products, expanding production…etc can be difficult without proper capacity planning.

1.3 Determinants of Capacity

The determinants of capacity are:

Facilities

Product and Service Factors

Process Factors

Manpower Factors

Operational Factors

Supply Chain Factors

External Factors

1.4 How important are capacity decisions?

Capacity decisions have its impacts on many different verticals of a firm. Firstly it affects the ability to meet future demands, as without capacity planning if not done keeping in mind the future demands leads to a shortage of products. If capacity is underestimated or overestimated it directly affects the operating costs as if capacity is overestimated the operating costs involved would get wasted and if underestimated the measures taken to fix it may cost a lot and so is the way it affects the initial costs too. And all these factors affect many other factors such as the competitiveness, management…etc.