The formula for the moving average is:Learning Objectives, Capacity Planning

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Production and Operations Management MGT613

Lesson 15

After completing discussion on product or service design, organizations end up answering the questions

relating to capacity and demand. Since we have already discussed demand forecasting, we should now

focus on what capacity planning decisions are. We should also try to understand the importance of

capacity.

Capacity decisions are important to all departments of the organization; an accountant would be

interested in collecting cost accounting information in order to ensure that correct capacity expansion

decision is reached. Similarly a financial manager would be interested in performing the financial

analysis of whether the investment decision is justified for a plant or capacity increase. An Information

Technology Manager would end up preparing data bases that would aid the organization again to decide

about the capacity and last but not the least an operations manager would select strategies that would

help the organization achieve the optimum capacity levels to meet the capacity demand.

Learning Objectives

Capacity planning lectures deal with different types of Capacity like Design, Effective; Utilization etc

Quite often the operations manager has to identify various determinants of Effective Capacity. The

manager has to formulate Strategy with respect to Capacity Planning and plans by looking in to

developing Capacity Alternatives and studying Economies of Scale and focusing on Cost Volume

Relationship

Hopefully by completing the lecture on Capacity Planning an Operations Management the students

would be able to:-

Understand, appreciate and explain the importance of capacity planning.

Discuss ways of defining and measuring capacity.

Describe the factors that determine effective capacity alternatives.

Discuss the major considerations related to developing capacity alternatives.

Capacity Planning

Capacity is the upper limit or ceiling on the load (demand for a product or service) that an operating unit

can handle.

An Operations Manager is supposed to identify tactics and formulate a strategy in order to answer the

basic questions with respect to capacity handling. These questions are:

1. What kind of capacity is needed?

2. How much is needed?

3. When is it needed?

This word "Capacity Planning" reached us a day after the tragic and life changing incident of

earthquake of 8th October 2005. We were exposed to the idea of capacity limitation with respect to food,

shelter, medicines and rescue operations. As a consequence we also faced the challenge of planning how

to overcome this shortcoming.

If you could recall in our earlier lectures we talked about Irregular variations caused by unusual

circumstances such as severe weathers, earthquakes, worker strikes, or major change in product

or service. These irregular variations do not capture or reflect the true behavior of a variable and

can distort the overall picture. These should be identified and removed from the data.

There are two uses for forecasts. One is to help the Operations Manager plan the system and the

other one is to help him plan the use of the system.

Planning the system refers to planning long term plans about the type of products or services to

offer, what facilities and equipment to have, where to locate and so on and so forth. Planning

the use of the system relates to short range and intermediate range planning which means

planning inventory workforce resources, planning of purchasing and production activities,

budgeting and scheduling etc.

Production and Operations Management MGT613

Importance of Capacity Decisions

Capacity decisions impacts ability to meet future demands, affects operating costs. These decisions

often act as a major determinant of initial costs, as they involve long-term commitment. These

decisions affect competitiveness and gives ease of management. Capacity Decisions focus on

globalization as it is more complex and impacts long range planning.

Impacts ability to meet future demands. Capacity essentially limits the rate of possible output.

Having capacity to satisfy demand can allow a company of taking advantage of tremendous

opportunities. An international automobile manufacturer of good repute increased its production

by working on its capacity decision after its quality product received a lot more demand than it

was originally anticipated.

Affects operating costs. We already know that estimated or forecasted demand differs from

actual demand, so the ideal concept of capacity matching demand is untrue. Organizations

should be willing to take a critical decision to balance the cost of over and under capacity.

Overcapacity reflects overkill of resources and under capacity shows a weak management

philosophy to make best use of an available market.

Acts as a major determinant of initial costs. It is typical to see that greater the capacity of a

productive unit, greater would be the cost. This does not mean I am advocating a one to one

relationship for higher capacity for production to costs; in fact larger units tend to cost

proportionately less than smaller units. E.g. Pakistan Steel Mill at Karachi is one good example,

where higher costs are misunderstood as the mills capacity is not being fully utilized

Involves long-term commitment. Once long term commitments of resources have been taken,

the difficulty of reversing would cost more. Indicating a capacity increase or decrease for an

organization set up would mean additional costs.

Affects competitiveness. This is very critical, if a firm has an excessive capacity or can quickly

add capacity, which fact may serve as a barrier against entry by other firms.

Affects ease of management. Capacity increase or decrease decisions involves management to

answer the question of operating the organization as well as an increase or decrease in the plant

capacity

Globalization adds complexity. Capacity decision often involves making a decision in a foreign

country which requires the management to know about the political, economic and cultural

issues.

Impacts long range planning. Capacity decisions extend beyond 18 months and thus get

classified as long term in nature.

Organizations often end up making use of rupees amount in order to show their capacity ceiling this

unfortunately needs a constant updating due to changes in price of raw materials as well as utilities. A

simple way out is to reflect the load or capacity in terms of unit produced but this has the limitation that

its only good for a single unit and fails in case of multiple types , designs of units being produced. A

preferred type of capacity measurement is to identify capacity in terms of availability of input units.e.g.

like hospitals are identified to have a capacity of 200 beds, a workshop by its man-hours and so on and

so forth.

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