Capacity Management Basics

Capacity is the amount of goods that a firm is capable of producing over a specified period of time. Capacity can be defined as highest reasonable output rate which can be achieved with the current product specifications, product mix, work force, plant and equipment. Capacity planning for manufacturing and service systems are different. Both must be designed with capacity limitations in mind. The approaches for long-term and short-term capacity planning will help the managers to make best use of resources. Capacity is the maximum possible output or use from a system under normal design or planned conditions in a given time period. The effective capacity utilisation is expressed as percentage of actual capacity used to design capacity.

The creation of capacity means committing financial and other resources to it mostly on substantial basis. It is an investment decision. It brings out the operational strategy of an organization. In services of organizations, it means creation of more space, furniture, and other accessories and equipment. Planning for capacity is in response to the future growth and expansion plans, market trends, sales forecasting, multiple scenario analysis and our policy towards risk capacity planning decisions has to decide a centralized capacity at one geographical location or decentralized decision of plants at several locations, Some other considerations also affect capacity decisions. How to tide over a temporary deficient in capacity by operating additional shifts giving over-time or holiday work? How best we should satisfy the market demand either the demand to be fully met or can we allow some lost sales? All these factors are a part of capacity planning.

What is Capacity?

A dictionary meaning of Capacity is the ability to hold, receive, store, or accommodate. The capacity is also defined as the maximum output of a system in a given period of time under ideal conditions. Thus the annual capacity of Bajaj is seven lacs scooters currently. It means the production is limited to this productive capacity over a period of time, here a year. The capacity however is subject to the intensiveness of use of the facilities. Imagine a transformation process having many sub processes, each of these interlinked. Here capacity’s is determined by the capacity of that sub process which produces the least. If we want to upgrade the capacity, we can do so by balancing the equipment to create a better balance amongst the processes. The concept of capacity is thus invariably connected with the weakest link in the chain. This means that even when the capacity is fully utilized in terms of definition of capacity, there may be individual processes that may remain underutilized

Determinants of Effective Capacity

• Facilities: The size and provision for expansion are key in the design of facilities. Other facility factors include locational factors (transportation costs, distance to market, labor supply, energy sources). The layout of the work area can determine how smoothly work can be performed.
• Product and Service Factors: The more uniform the output, the more opportunities there are for standardization of methods and materials. This leads to greater capacity.
• Process Factors: Quantity capability is an important determinant of capacity, but so is output quality. If the quality does not meet standards, then output rate decreases because of need of inspection and rework activities. Process improvements that increase quality and productivity can result in increased capacity. Another process factor to consider is the time it takes to change over equipment settings for different products or services.
• Human Factors: the tasks that are needed in certain jobs, the array of activities involved and the training, skill, and experience required to perform a job all affect the potential and actual output. Employee motivation, absenteeism, and labor turnover all affect the output rate as well.
• Policy Factors: Management policy can affect capacity by allowing or not allowing capacity options such as overtime or second or third shifts
• Operational Factors: Scheduling problems may occur when an organization has differences in equipment capabilities among different pieces of equipment or differences in job requirements. Other areas of impact on effective capacity include inventory stocking decisions, late deliveries, purchasing requirements, acceptability of purchased materials and parts, and quality inspection and control procedures.
• Supply Chain Factors: Questions include: What impact will the changes have on suppliers, warehousing, transportation, and distributors? If capacity will be increased, will these elements of the supply chain be able to handle the increase? If capacity is to be decreased, what impact will the loss of business have on these elements of the supply chain?
• External Factors: Minimum quality and performance standards can restrict management’s options for increasing and using capacity.
• Inadequate planning can be a major limiting determining of effective capacity.

There are server levels involved in the capacity management process:

• capacity planning – Capacity planning is the most strategic level of capacity management. This is where long-term decisions are made about matching facilities, equipment, and workforce to demand.
• aggregate planning – The second level of capacity management is aggregate planning. At this point, basic capacity levels and facilities have already been decided on. Within these constraints, aggregate planners now state the capacity requirements to satisfy total demand, period by period, for product groups. An aggregate plan is a defined plan for determining a company’s capacity, production, subcontracting needs, inventory, stock outages, and prices for a specific planning period of time.
• master scheduling – At the next level, master schedulers break the aggregate plan down into time periods, resource categories, and individual orders. Thinking in terms of months and weeks, they load, sequence, and schedule tasks for all jobs during the period. Loading determines the amount of work to be assigned at each stage of the production process, whether to work centers or to staff groups. Sequencing decides the order in which jobs will be initiated and processed at each stage. Scheduling assigns start and finish times to each job.
• short-term scheduling – Short-term scheduling is the most tactical stage of the capacity management process. It involves rescheduling and prioritizing to deal with any unexpected divergence from plans. When, for instance, some key staff member are unexpectedly unavailable, changes to the previously designed schedule will have to be improvised.