Page 91 - DMGT501_OPERATIONS_MANAGEMENT

Unit 3: Capacity Planning

No matter how broadly we may define capacity, in the final analysis, in manufacturing, it Notes
has to come down to capacity of individual machines.

To estimate Capacity, you must first select a yardstick to measure it. The first major task in
Capacity Measurement is to define the unit of output.
Whatever the measure, the Capacity decision is critical to the management of an
organization because everything from cost to customer service is measured on the basis of
the Capacity of the process, once the Capacity is determined.

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.
The timing and sizing of expansion are related. Capacity gap analysis is essential in
determining when demand will exceed Capacity and by how much.
When capacity exceeds demand, the firm may want to simulate demand through price
reductions or aggressive marketing, or accommodate the market through product changes.
Decision Trees are most commonly used in capacity planning. They are excellent tools for
helping choose between several courses of action.

Processes underlie all activities and hence are found in all organizations and functions. In
addition, processes create an inter-connected set of linkages, which connect the external
and internal linkages.
Despite their differences, the concepts of determining system capacity and finding
bottlenecks apply to service as well. The principles are the same but in some cases the
application is different.
Cost-volume-profit (CVP) analysis is a technique that examines changes in profits in
response to changes in sales volumes, costs, and prices.

3.11 Keywords

Capacity: Maximum output of a system in a given period under ideal conditions.

Contribution Margin: Total revenue minus total variable costs.
CVP Analysis: Technique that examines changes in profits in response to changes in sales
volumes, costs, and prices.
Decision Tree: Provide highly effective structure within which you can lay out options and
investigate the possible outcomes of choosing those options.
Effective Capacity: Capacity, which a firm can expect to achieve, given its product mix, methods
of scheduling, maintenance, and standards of quality.
Efficiency: Measure of actual output over effective capacity.

Expansionist Strategy: It involves large, infrequent jumps in capacity.
Input Measures: Generally used for low-volume, flexible processes.

Normal Capacity: Maximum producible output when plants and equipment are operated for an
average period of time to produce a normal mix of output.

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