Page 69 - DMGT501_OPERATIONS_MANAGEMENT

Unit 3: Capacity Planning

Introduction Notes

Product design, capacity and process selection have a direct relationship. Product design
determines the value provided to the customer; the value determines the market size; the
market size determines the volumes and therefore the capacity; and capacity leads to the process.
Capacity planning should be solely based on the principle of maximizing the value delivered to
the customer. This reflects in minimizing costs of producing products and services, providing
them in a timely manner, and ensuring that the products provide the highest level of quality.

Capacity planning has become a strategic tool in the operations function. It guides our choices
on capacity, locations, and layout for the long-term. It also helps in managing supply and
demand, and these choices in turn, affect the ways a firm uses its resources and facilities in the
short-term.

3.1 Defining Capacity

It is necessary to recognize the difference between theoretical capacity and normal capacity.
Theoretical capacity is what can be achieved under ideal conditions for a short period of time.
Under these conditions, there are no equipment breakdowns, maintenance requirements, set up
times, bottlenecks, or worker errors.
However, to an operations manager, this description of Capacity may be quite meaningless. As
no equipment operates around the clock, seven days a week, there have to be allowances made
for maintenance, breakdowns, set up times, errors, etc. Capacity, therefore, is the quantity of
output, which is estimated on the basis of normal conditions.
Normal Capacity describes the maximum producible output when plants and equipment are
operated for an average period of time to produce a normal mix of output. Due to defining
capacity in this manner, it is not unusual for a facility to operate at more than 100 per cent
capacity. Capacity is mathematically expressed as:
Capacity = (Maximum production rate/Hour) x (Number of hours worked/Period);

where, Production Rate = Number of units produced/Amount of time
The firm's capacity to produce, whether measured as output or input, depends on the number or
type of equipment it has – the intensity with which this equipment is used – the production
efficiency, the nature and extent of the supply chain; the product mix to be produced, the demand
levels, and distribution capabilities.

Example: Capacity can be changed by changing the number of working hours, production
rate, or product mix.
Though, the normal capacity can be measured in the manner described above, it is often difficult
to measure operational capacity. There are day-to-day variations, job changes, product mix
changes, absenteeism, equipment breakdown, facility downtime, etc. Due to these variations,
the capacity of a facility can rarely be measured in precise terms, so measurements must be
interpreted with care.
Effective Capacity (utilization): It is found that an organization can operate more efficiently
when its resources are not stretched beyond a limit. Effective Capacity is the Capacity, which a
firm can expect to achieve, given it's product mix, methods of scheduling, maintenance, and
standards of quality.

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