Applying Capacity Planning To Theoretical Scenarios

Published: Last Edited:

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Capacity planning is the process of determining the production capacity needed by an organization to meet changing to meet changing demand for its product. Capacity is the rate of productive capability of a facility. Capacity is usually expressed as volume of output per time period. It is the process determining the necessary to meet the production objectives.


To identify and solve capacity problem in a timely manner to meet consumer needs.

To maintain a balance between required capacity and available capacity.

The goal of capacity planning is to minimize this discrepancy.

Capacity = (number of machines or workers) * (number of shifts) * (utilization)* (efficiency)

Efficiency = Actual output

Effective capacity

Utilization =Actual output

Design capacity


Capacity planning is the first step when an organization decided to produce more of existing products or new product. Once capacity is evaluated and a need for a new expanded facility is determined, facility location and process technology activities occur. Too much capacity would require exploring ways to reduce capacity, such as temporarily closing, selling or consolidating facilities. Consolidation might involve relocation, a combining of technologies, or a rearrangement of equipment and process.

Capacity planning is done in order to estimate whether the demand is higher than capacity or lower than capacity. That is compare demand versus capacity.

It helps an organization to identify and plan the actions necessary to meet customer's present and future demand.

Importance of Capacity Decisions

Impacts ability to meet future demands

Affects operating costs

Major determinant of initial costs

Involves long-term commitment

Affects competitiveness

Affects ease of management

Globalization adds complexity

Impacts long range planning

Determinants of Effective Capacity


Product and service factors

Process factors

Human factors

Operational factors

Supply chain factors

External factors

Strategic capacity planning is to provide an approach for determining the overall capacity level of capital intensive resources - facilities, equipment, and overall labour force size - that best supports the company's long range competitive strategy. Capacity rate selected has a critical impact on the firm's response rate, its cost structure, its inventories policies, and tis management and staff support requirements. If capacity is inadequate, a company may lose customers through slow service or by allowing competitors to enter market. If capacity is excessive, a company may have to reduce prices to stimulate demand; underutilize its workforce; carry excess inventory; or seek additional, less profitable products to stay in business.

Economies of Scale:

The theory suggests that the higher the level of production, the lesser will be the cost, because the company can bargain its suppliers for a cheaper price, which will cut its cost and the fixed cost will be spread over many units. In addition, many economists believe that in a focus strategy, a company will focus or concentrate on producing one or a small number of products as in a mill or factory to attain a better level of economies of scale. Such types of companies are called focused factories.

Diseconomies of Scale:

Through economies of scale, a firm wants to achieve optimum level of efficiency in production but when the sales-forecast does not support the bulk level of inventory, a loss of financial and other resources occur, which is termed as diseconomies of scale. Because the company will hire additional people, buy surplus raw material, machines, and other resources, which will be wastage of essential economic resources since the sales do not support them.

Capacity Expansion Strategies:

Capacity Strategies:

Three of the most common strategies are:

1. Lead Strategy: In a lead strategy, a firm produces little more than its quarterly or annual demand to meet its demand forecast and can sell the surplus if the demand exceeds the forecast due to extra ordinary sales growth, seasonal impact, or any other reason.

2. Lag Strategy: In a lag strategy, a firm produces the goods of exactly the same quantity as its sales forecast suggests. The disadvantage of such strategy is loss of customers' orders, if they exceed the regular demand or sales-forecast.

3. Tracking Strategy: In a tracking strategy, a firm buys such kind of equipment's in which it can add or subtract certain parts to produce more or less output to adjust the increasing or decreasing demand. It provides a flexibility of production.

Purchase one large facility, requiring one large initial investment

Add capacity incrementally in smaller chunks as needed

Steps in capacity planning:

1] Determine service level requirements:

First step is to categorize the work done by systems and to quantify user's expectations.

Define workloads

Determine unit of work

Identify service level for each workload

2] Analyze current capacity:

Second step is to assess current capacity of the system to be analyzed to determine future;

Measure service levels and compare objectives

Measure overall resource usage.

Measure resource usages by workload.

Identify components of response time.

3] Planning for future:

Final step is using forecasts of future business activity, future system requirements are determined. Implementing the required changes in system configuring will ensure that sufficient capacity will be available to maintain service level. Even as circumstanced changes in the future.

Determine future processing requirements.

Plan future system configuration.

Capacity focus:

This concept is operationalized through the mechanism of plants within plants or PWPW's. A focused plant may have several PWP's each of which may have separate sub organizations, equipment and process policies, workforce management policies, production control methods, and so forth for different products - even if they are made under same roof. Firm should not expect to excel in every aspect of manufacturing performance: cost, performance, new product introduction, reliability, low investments. It should select limited set of tasks that contribute the most of corporate business.

Capacity flexibility:

It is an ability to rapidly increase or decrease production levels, or to shift production capacity quickly from one product to other. This flexibility is achieved via flexible plants, workers and strategies.

Flexible Plants: Zero change over time plant using movable equipment, knockdown walls, easily accessible and reroutable utilities.

Flexible processes: these are optimized by flexible manufacturing system on the one hand and simple, easily set up equipment on the other. This permits rapid low cost switching from one product line to other and economies of scope.

Flexible workers: they can have multiple skills and ability to switch easily from one job to other. For this effective training and staff support is needed.

Capacity increase depends on

volume and certainty of anticipated demand

strategic objectives

costs of expansion and operation

Best operating level

% of capacity utilization that minimizes unit costs

Capacity cushion

% of capacity held in reserve for unexpected occurrences

Cost-Volume Relationships

One product is involved

Everything produced can be sold

Variable cost per unit is the same regardless of volume

Fixed costs do not change with volume

Revenue per unit constant with volume

Revenue per unit exceeds variable cost per unit

Break-Even Problem with Step Fixed Costs:

Continuously, increasing capacity when initial investments for expansion are recovered. This means when company reaches to breakeven point investments are made to improve capacity.

Capacity planning in service versus manufacturing industry:

Service capacity is more time and location dependent, it is more volatile in demand fluctuation and utilization directly impacts service quality.

Time as services can't be stored for later use, so capacity is needed when a service is needed.

Location: the service capacity must be located near the customer. But in manufacturing production takes place at one place then distribution of product is done near customers.

Volatility of demand: for services its higher than manufacturing.