Page 73 - DMGT501_OPERATIONS_MANAGEMENT

Unit 3: Capacity Planning

3.4 Determining Capacity Requirements: Planning Capacity Notes

In the first place, capacity planning has to address the external environment of the firm. One
needs to assess the company's situation and think about why the decision to alter capacity
should be considered. Is the company responding to a competitor's move?

Example: Indian Airlines and Jet Airways are competing in the same market segment of
air travelers. If Indian Airlines increases its frequency of service, it is likely to draw passengers
from Jet Airways to Indian Airlines. If Jet Airways does not respond to the Indian Airlines move,
it risks losing market share. However, in adding to capacity Jet Airways might also risk under-
utilization of capacity. Jet Airways has to assess the risks. On the one hand, Jet Airways does not
want to add any more capacity if the present demand levels do not warrant it. On the other hand,
Jet Airways might have to do so in order to preserve their market share. Such situations occur
regularly in the competitive arena.
In the second place, capacity planning has also to be based on the demands for individual
product lines, availability of more efficient technologies, and introduction of new products. As
demand for the individual product line increases, there is a need to examine the capacity.
Addition of assets to enhance capacity should be considered only when available assets do not
meet the gap in capacity envisaged by the management.

Similarly, new technologies can make you uncompetitive. It is important to understand why
you are making a change in your capacity levels. Management, before taking a decision on
capacity, needs to take the following steps:
1. Forecast demand for individual products within each product line.
2. Calculate the array of assets required to meet product line forecasts.
3. Project availabilities of the existing array of assets over the planning horizon.

Informed capacity decisions can be made only when management knows the ability of its
present resources and the bottlenecks in the existing array of assets (system capacity) and what
causes them.
An assessment of individual plant capabilities and allocation of production throughout the
plant network has to be made.
There must be a high level of confidence in the accuracy of the demand forecast. Once a forecast
is available and management determines the point where demand exceeds existing capacity, the
time it takes to add on the additional capacity needs to be determined.
If capacity is expected to exceed two years in the future and it takes eighteen months to add that
capacity, then management should begin to plan the construction of the additional capacity six
months from date. Possibilities are that management can meet the capacity shortfall in the third
year, as depicted in Figure 3.1 by using the various tactics for matching capacity to demand,
described further.
Finally, investment in assets is also necessary to raise the marginal efficiency of capital employed,
till it equals the interest rate.

Example: Reliance Industry's investments in additional capacity were based on a strategy
to preempt competition and dominate the market. It expanded capacities in each of its businesses,
and expanded capacities even as it was installing the originally planned smaller capacities.
Using this strategy, RIL grew into the largest private sector company in the country. In the 90's,
no one would have believed that Reliance Industries, a company that went public in the 1970's,
would turn out to become the largest private sector enterprise in India.
Therefore, when and how much to increase capacity are critical decisions.

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