Capacity Planning

Topics: Time, Finance, Term Pages: 5 (1151 words) Published: December 19, 2012
UNIT – 3

Capacity simply means the ability to hold, receive, share or accommodate. It is a productive capability or a facility. Capacity is a critical consideration for long term strategy. It is generally measured in volume of output per unit of time. Capacity is the limiting capability of a productive unit to produce within a stated time period, normally expressed in terms of output per unit of time. So, capacity is the maximum productive capability. Capacity can be measured in different ways. Capacity has different meaning to different people at different level of management. The top management is concerned with aggregate capacity of all plant of the firm and financial resources require for supporting these plants but operation manager is concerned with capacity planning with individual plant. Therefore, capacity planning is the process of determining the capacity requirement in future. Production and operation manager is concerned with the determining capacity requirement in term of time dimension. They are long-ranged and short-ranged. So, capacity planning is always focus in determination of the overall capacity level of capital intensive resources like facilities, equipment, labours etc. that support the long term competitive strategy of organization.

Capacity planning is the process of testing the feasibility of aggregate output plants and evaluating the overall capacity utilization. In capacity planning process the following steps should be followed: Step 1: Assessing of Existing Capacity

The first step of capacity planning decision is measurement of existing capacity level of each work sectors leading to whole organizations. Capacity is determined as rate of output per unit of time. It is simple to measure capacity if the outputs are of simple nature. Is the outputs are of different nature then it becomes quite difficult to measure capacity.

Step 2: Forecasting Capacity Need
Capacity needs could be viewed into different time dimensions as short term capacity needs and long term capacity needs. In short term capacity planning, manager estimate require capacity to meet short term needs of products or services generally up to one year. If the capacity are insufficient to meet the requirement short term capacity adjustment are needed. Long term capacity refers for capacity requirement forecast for more than one year.

Step 3: Identifying Alternative to Modify Capacity
After existing and future capacity requirement are determined, alternative way of modifying capacity must be identified. Modification techniques are different for short term and long term capacity. Once the short term capacity requirement is determined they should be compared with the existing capacities to identifying the additional short term capacity needs. The techniques of capacity adjustment vary according to following types of production system like capital intensive, labour intensive, nature of product etc. The long term capacity adjustment need more investment in production facilities compared to short term adjustment.

Step 4: Evaluating Financial, Economical and Technical Aspect of Capacity Alternatives
Evaluation of capacity alternatives involves so many ways of analysis in mathematical modeling i.e. linear programming methods are used for evaluation of short term capacity. Decision tree analytical technique is used for evaluation of long term capacity. Net present value technique is suitable if time value of capital investment and funds flow are to be considered. Break even analysis is also important technique used to analyze relationship between cost, volume of output and revenue.

Step 5: Selection of Best Alternative
After evaluating the financial or technical aspect of alternative, the best alternative is selected. The selection of appropriate alternative is more depended on the type of capacity problem. This includes the...
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