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Unit 3: Capacity Planning

3.7 Developing Capacity Alternatives Notes

1. Design flexibility into systems: The long-term nature of many capacity decisions and the
risks inherent in long-term forecasts suggest potential benefits from designing flexible
systems.
2. Take stage of life cycle into account: Capacity requirements are often closely linked to the
stage of the life cycle that a product or service is in.
3. Take a "big-picture" (i.e., Systems) approach to capacity changes: When developing capacity
alternatives, it is important to consider how parts of the system interrelate.
4. Prepare to deal with capacity "chunks": Capacity increases are often acquired in fairly
large chunks rather than smooth increments, making it difficult to achieve a match between
desired capacity and feasible capacity.
5. Attempt to smooth out capacity requirements: Unevenness in capacity requirements also
can create certain problems.

Figure 3.6: Smoothening of Capacity

6. Identify the optimal operating level: Production units typically have an ideal or optimal
level of operation in terms of unit cost of output.
Economies of Scale: Economies of scale can also be realized as a result of the company's
geographical location. Thus all industries located in the same area could benefit from
lower transportation costs and a skilled labour force. Moreover, ancillary industries may
then begin to develop, and support such industries.
External economies of scale can also be obtained if the industry shares technology or
managerial expertise. For example, this can lead to the creation of standards within an
industry. Just as there are economies of scale, there are also diseconomies of scale. An
example of economies and diseconomies of scale in the capacity decision of a hotel is
shown in Figure 3.7.

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