Page 75 - DMGT501_OPERATIONS_MANAGEMENT

Unit 3: Capacity Planning

Large capacity cushions are common in industries where demand is highly variable, resource Notes
flexibility is low, and customer service is important.
Tactics for matching Capacity to demand: Even with good forecasting and facilities built to that
forecast, there may be a poor match between the actual demand that occurs and the capacity
available.

In the case of seasonal or cyclical pattern of demand, the organization can offer products with
complementing demand patterns, that is, products for which the demand is opposite. With
appropriate complementing products, perhaps the utilization of facility, equipment, and
personnel can be smoothed.
1. Adding people to the production process; if the operation runs two shifts five days a week,
then overtime or another shift could be considered.
2. Increasing the motivation of production employees; by providing incentives, involving
people in the operating problems, improving job satisfaction etc.
3. Adjusting equipment and processes, which may require purchase of additional machinery
or selling or leasing existing equipment.

4. Redesigning the product to facilitate more throughput.
5. Improving the operating rate of equipment; better scheduling, improved operating
procedures, or improved quality of raw materials can increase capacity by increasing
product yield.
Another important concept to remember is system capacity. To increase the capacity of a system,
it is necessary to increase the capacity of only the bottleneck operation. It may be possible to
outsource capacity to supplement the bottleneck operation and increase overall capacity. An
example of such outsourcing is US banks subcontracting book-keeping operations to Indian
companies. Another option is to share facilities.

Did u know? Indian Airlines and Alliance Air share capacity by exchanging aircrafts, as
they have different seasonal demands.

When capacity exceeds demand, the firm may want to simulate demand through price reductions
or aggressive marketing, or accommodate the market through product changes. When demand
exceeds capacity, the firm may be able to curtail demand simply by raising prices, scheduling
long lead times and discouraging marginally profitable business. However, in a competitive
environment the long-term solution is usually to increase capacity.
The best operating level for a facility is the percentage of capacity utilization that minimizes
average unit cost. At higher levels of utilization, demand fluctuations can create havoc.
Management would find it difficult to increase market share, if operations cannot deliver the
product.

Where it is essential to add capacity in one step, an option is to cut into the lead time.

Example: RIL has created a reputation for setting up projects quickly; it set up its Worsted
spinning plant in eight months. Its PFY plant was ready in fourteen months – a feat its
collaborators, DuPont, had not managed to achieve anywhere else in the world.

LOVELY PROFESSIONAL UNIVERSITY 69