Capacity Planning
CAPACITY DEFINED
Capacity is productive capability of a facility. It is the maximum rate of output from a process or facility.
Capacity is normally measured
by outputs in product focused firms and
by inputs in process focused firms
DESIGN CAPACITY: Upper limit on output, as determined by planners & engineers, within the parameters of ideal operating conditions.
When measured relative to equipment alone, it is called the rated capacity
Maximum output for a period ignoring normal maintenance and repair downtime etc.
Also called as Peak Capacity that can usually only be achieved for a short time
EFFECTIVE CAPACITY: Upper limit on output, after making certain allowances for ‘practical operation’ such as quality standards, scheduling constraints, product mix change etc.
Maximum output that a process or firm can economically sustain under normal conditions.Can be increased by reducing or eliminating the effect of Bottlenecks
ACTUAL CAPACITY: Total output the plant actually achieves under working conditions during the given period.
BOTTLENECK CAPACITY: Refers to operation that limits output in production or service sequence
BASIS FOR FIRM’S CAPACITY STRATEGY Predicted growth & variability of primary demand
Costs of building & operating plants of different sizes
Rate & direction of technological innovation
Likely behavior of competitors
Anticipated effects of international competitors, markets & resources of supply
There are three key dimensions of capacity strategy which should be examined before proceeding to expand capacity:
The size of the capacity cushion to maintain
The timing and sizing of the expansion
The relationship between capacity and other operating decisions
Capacity Cushion is the amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary losses of production.
Capacity cushion = rated capacity – utilization
It measures the amount by which the average utilization falls below 100%
Small cushions are preferable because:
Unused capacity costs money
They reveal inefficiencies in operations:
Problems with absenteeism
Unreliability of suppliers, etc.
Once revealed, these problems can often be fixed to improve performance
Larger cushions are however useful when:
Demand is uncertain
Product mix is uncertain
Supply is uncertain (materials, labour, etc.)
Resource flexibility is low
Large cushions may be inevitable due to technological considerations
e.g. gamma radiation machines for treating cancer tumors
STRATEGIC TIMING FOR CAPACITY CHANGES
Strategy 1: Anticipate & Lead Demandreferred to as an “expansionist” strategy
Minimizes chance of loss OF sales due to insufficient capacity
May result in economies of scale (fewer, larger jumps) and a faster rate of learning
May allow the firm to take market share from competitors following a “wait-and-see” strategy
Allows for pre-emptive marketing
By adding capacity early (or by credibly announcing plans to expand) it may lead competitors to postpone or cancel their own expansion plans
Strategy 2: Closely Follow DemandReferred to as a “conservative” or”wait-and-see” strategy
Capacity is added in smaller, more frequent jumps, only when needed
Results in higher capital efficiency
Reduces risk of:
over-expansion based on optimistic demand forecasts
Technological obsolescence
Inaccurate assumptions regarding competition
Strategy 3: Lag Demand
Firms employing this strategy rely on short term options to meet shortfalls:
Use of overtime or temporary workers
Subcontracting
Stock-outs
Postponement of preventative maintenance etc.
Criticized as being a short term strategy favored by university trained managers
Fast track managers take fewer risks
Earn promotion by making fewer mistakes and by maximizing short term profits and ROI
Can lead to an erosion of market share in the long run due to:
Pre-emption by more “aggressive” competitors
Inability to respond to unexpected increases
Other (intermediate / mixed) strategies
Expand more frequently (on a smaller scale) than the “expansionist” firm, but don’t always lag behind demand as with the “wait-and-see” firm
“follow-the-leader” – expand when others do
If they are right, then so are you and nobody gets a competitive advantage
If they make a mistake and over-expand, so have you and everyone shares in the agony of overcapacity
Economies of Scale
In most industries, the average unit cost of production can be reduced by increasing the output rate
Primary reasons for cost reduction are:
Fixed costs are spread over more units
Construction costs are reduced
Cost of inputs are reduced
New/alternate technologies are used
At low levels of output, a few units absorb the fixed costs of the facilities, which produce a high average unit cost of output. As the output increases, average costs per unit decrease, until company achieves minimum average unit cost.
Diseconomies of ScaleIn many industries, as the size of the facility continues to increase, the average cost per unit also eventually begins to increase due to
Additional complexity
Loss of focus
Additional costs
Bureaucratization
Risk
Distributional diseconomies
A systematic approach to Capacity Planning
Evaluate existing capacity/facilities
Estimate/forecast future capacity needs
Identify gaps by comparing requirements with available capacity
Develop alternative plans to fill the gaps
Evaluate each alternative, qualitatively, quantitatively and financially.
Select alternative to pursue
Implement alternative chosen
Audit & review actual needs
Capacity is productive capability of a facility. It is the maximum rate of output from a process or facility.
Capacity is normally measured
by outputs in product focused firms and
by inputs in process focused firms
DESIGN CAPACITY: Upper limit on output, as determined by planners & engineers, within the parameters of ideal operating conditions.
When measured relative to equipment alone, it is called the rated capacity
Maximum output for a period ignoring normal maintenance and repair downtime etc.
Also called as Peak Capacity that can usually only be achieved for a short time
EFFECTIVE CAPACITY: Upper limit on output, after making certain allowances for ‘practical operation’ such as quality standards, scheduling constraints, product mix change etc.
Maximum output that a process or firm can economically sustain under normal conditions.Can be increased by reducing or eliminating the effect of Bottlenecks
ACTUAL CAPACITY: Total output the plant actually achieves under working conditions during the given period.
BOTTLENECK CAPACITY: Refers to operation that limits output in production or service sequence
BASIS FOR FIRM’S CAPACITY STRATEGY Predicted growth & variability of primary demand
Costs of building & operating plants of different sizes
Rate & direction of technological innovation
Likely behavior of competitors
Anticipated effects of international competitors, markets & resources of supply
There are three key dimensions of capacity strategy which should be examined before proceeding to expand capacity:
The size of the capacity cushion to maintain
The timing and sizing of the expansion
The relationship between capacity and other operating decisions
Capacity Cushion is the amount of reserve capacity that a firm maintains to handle sudden increases in demand or temporary losses of production.
Capacity cushion = rated capacity – utilization
It measures the amount by which the average utilization falls below 100%
Small cushions are preferable because:
Unused capacity costs money
They reveal inefficiencies in operations:
Problems with absenteeism
Unreliability of suppliers, etc.
Once revealed, these problems can often be fixed to improve performance
Larger cushions are however useful when:
Demand is uncertain
Product mix is uncertain
Supply is uncertain (materials, labour, etc.)
Resource flexibility is low
Large cushions may be inevitable due to technological considerations
e.g. gamma radiation machines for treating cancer tumors
STRATEGIC TIMING FOR CAPACITY CHANGES
Strategy 1: Anticipate & Lead Demandreferred to as an “expansionist” strategy
Minimizes chance of loss OF sales due to insufficient capacity
May result in economies of scale (fewer, larger jumps) and a faster rate of learning
May allow the firm to take market share from competitors following a “wait-and-see” strategy
Allows for pre-emptive marketing
By adding capacity early (or by credibly announcing plans to expand) it may lead competitors to postpone or cancel their own expansion plans
Strategy 2: Closely Follow DemandReferred to as a “conservative” or”wait-and-see” strategy
Capacity is added in smaller, more frequent jumps, only when needed
Results in higher capital efficiency
Reduces risk of:
over-expansion based on optimistic demand forecasts
Technological obsolescence
Inaccurate assumptions regarding competition
Strategy 3: Lag Demand
Firms employing this strategy rely on short term options to meet shortfalls:
Use of overtime or temporary workers
Subcontracting
Stock-outs
Postponement of preventative maintenance etc.
Criticized as being a short term strategy favored by university trained managers
Fast track managers take fewer risks
Earn promotion by making fewer mistakes and by maximizing short term profits and ROI
Can lead to an erosion of market share in the long run due to:
Pre-emption by more “aggressive” competitors
Inability to respond to unexpected increases
Other (intermediate / mixed) strategies
Expand more frequently (on a smaller scale) than the “expansionist” firm, but don’t always lag behind demand as with the “wait-and-see” firm
“follow-the-leader” – expand when others do
If they are right, then so are you and nobody gets a competitive advantage
If they make a mistake and over-expand, so have you and everyone shares in the agony of overcapacity
Economies of Scale
In most industries, the average unit cost of production can be reduced by increasing the output rate
Primary reasons for cost reduction are:
Fixed costs are spread over more units
Construction costs are reduced
Cost of inputs are reduced
New/alternate technologies are used
At low levels of output, a few units absorb the fixed costs of the facilities, which produce a high average unit cost of output. As the output increases, average costs per unit decrease, until company achieves minimum average unit cost.
Diseconomies of ScaleIn many industries, as the size of the facility continues to increase, the average cost per unit also eventually begins to increase due to
Additional complexity
Loss of focus
Additional costs
Bureaucratization
Risk
Distributional diseconomies
A systematic approach to Capacity Planning
Evaluate existing capacity/facilities
Estimate/forecast future capacity needs
Identify gaps by comparing requirements with available capacity
Develop alternative plans to fill the gaps
Evaluate each alternative, qualitatively, quantitatively and financially.
Select alternative to pursue
Implement alternative chosen
Audit & review actual needs
