Capacity Planning in Production and Operation Management

Design of the production system involves planning for the inputs, conversion process and outputs of production operation. The effective management of capacity is the most important responsibility of production management. The objective of capacity management (i.e., planning and control of capacity) is to match the level of operations to the level of demand.

Capacity planning is to be carried out keeping in mind future growth and expansion plans, market trends, sales forecasting, etc. It is a simple task to plan the capacity in case of stable demand. But in practice the demand will be seldom stable. The fluctuation of demand creates problems regarding the procurement of resources to meet the customer demand. Capacity decisions
are strategic in nature. Capacity is the rate of productive capability of a facility. Capacity is usually expressed as volume of output per period of time.

Production managers are more concerned about the capacity for the following reasons:

• Sufficient capacity is required to meet the customers demand in time.
• Capacity affects the cost efficiency of operations.
• Capacity affects the scheduling system.
• Capacity creation requires an investment.

Capacity planning is the first step when an organization decides to produce more or new products.

1. Measurement of Capacity Planning

The capacity of the manufacturing unit can be expressed in number of units of output per period. In some situations measuring capacity is more complicated when they manufacture multiple products. In such situations, the capacity is expressed as man-hours or machine hours. The relationship between capacity and output is shown in Fig. 5.6.

1. Design capacity: Designed capacity of a facility is the planned or engineered rate of output of goods or services under normal or full scale operating conditions.

For example, the designed capacity of the cement plant is 100 TPD (Tonnes per day). Capacity of the sugar factory is 150 tonnes of sugarcane crushing per day.

2. System capacity: System capacity is the maximum output of the specific product or product mix the system of workers and machines is capable of producing as an integrated whole. System capacity is less than design capacity or at the most equal, because of the limitation of product mix, quality specification, breakdowns. The actual is even less because of many factors affecting the output such as actual demand, downtime due to machine/equipment failure, unauthorised absenteeism.

The system capacity is less than design capacity because of long range uncontrollable factors. The actual output is still reduced because of short-term effects such as, breakdown of equipment, inefficiency of labour. The system efficiency is expressed as ratio of actual measured output to the system capacity.

3. Licensed capacity: Capacity licensed by the various regulatory agencies or government authorities. This is the limitation on the output exercised by the government.
4. Installed capacity: The capacity provided at the time of installation of the plant is called installed capacity.
5. Rated capacity: Capacity based on the highest production rate established by actual trials is referred to as rated capacity.

2. Process of Capacity Planning

Capacity planning is concerned with defining the long-term and the short-term capacity needs of an organization and determining how those needs will be satisfied. Capacity planning decisions are taken based upon the consumer demand and this is merged with the human, material and financial resources of the organization.

Capacity requirements can be evaluated from two perspectives—long-term capacity strategies and short-term capacity strategies.

2.1. Long-term Capacity Strategies

Long-term capacity requirements are more difficult to determine because the future demand and technology are uncertain. Forecasting for five or ten years into the future is more risky and difficult. Even sometimes company’s today’s products may not be existing in the future. Long range capacity requirements are dependent on marketing plans, product development and life­cycle of the product. Long-term capacity planning is concerned with accommodating major changes that affect overall level of the output in long-term. Marketing environmental assessment and implementing the long-term capacity plans in a systematic manner are the major responsibilities of management. Following parameters will affect long range capacity decisions.

1. Multiple products: Company’s produce more than one product using the same facilities in order to increase the profit. The manufacturing of multiple products will reduce the risk of failure. Having more than one product helps the capacity planners to do a better job. Because products are in different stages of their life-cycles, it is easy to schedule them to get maximum capacity utilisation.
2. Phasing in capacity: In high technology industries, and in industries where technology developments are very fast, the rate of obsolescence is high. The products should be brought into the market quickly. The time to construct the facilities will be long and there is no much time as the products should be introduced into the market quickly. Here the solution is phase in capacity on modular basis. Some commitment is made for building funds and men towards facilities over a period of 3-5 years. This is an effective way of capitalising on technological breakthrough.
3. Phasing out capacity: The outdated manufacturing facilities cause excessive plant closures and down time. The impact of closures is not limited to only fixed costs of plant and machinery. Thus, the phasing out here is done with humanistic way without affecting the community. The phasing out options makes alternative arrangements for men like shifting them to other jobs or to other locations, compensating the employees, etc.

2.2. Short-term Capacity Strategies

Managers often use forecasts of product demand to estimate the short-term workload the facility must handle. Managers looking ahead up to 12 months, anticipate output requirements for different products, and services. Managers then compare requirements with existing capacity and then take decisions as to when the capacity adjustments are needed.

For short-term periods of up to one year, fundamental capacity is fixed. Major facilities will not be changed. Many short-term adjustments for increasing or decreasing capacity are possible. The adjustments to be required depend upon the conversion process like whether it is capital intensive or labour intensive or whether product can be stored as inventory.

Capital intensive processes depend on physical facilities, plant and equipment. Short-term capacity can be modified by operating these facilities more or less intensively than normal. In labour intensive processes short-term capacity can be changed by laying off or hiring people or by giving overtime to workers. The strategies for changing capacity also depend upon how long the product can be stored as inventory.

The short-term capacity strategies are:

1. Inventories: Stock of finished goods during slack periods to meet the demand during peak period.
2. Backlog: During peak periods, the willing customers are requested to wait and their orders are fulfilled after a peak demand period.
3. Employment level (hiring or firing): Hire additional employees during peak demand period and layoff employees as demand decreases.
4. Employee training: Develop multi-skilled employees through training so that they can be rotated among different jobs. The multi-skilling helps as an alternative to hiring employees.
5. Subcontracting: During peak periods, hire the capacity of other firms temporarily to make the component parts or products.
6. Process design: Change job contents by redesigning the job.

Source: KumarAnil, Suresh N. (2009), Production and operations management, New Age International Pvt Ltd; 2nd Ed. edition.