ACCMAN

INSTITUTE OF MANAGEMENT
(GREATER NOIDA)

PROJECT
ON
CAPACITY PLANNING

SUBMITTED TO:- SUBMITTED BY:-

PROF.SUBIR GUHA MOHD.ARISH

 WHAT IS CAPACITY PLANNING?

Capacity planning is the process of determining the production capacity

needed by an organization to meet changing demand for its products.
Capacity is the rate of productive capability of a facility. Capacity is
usually expressed as volume of output per time period. It is the process of
determining the necessary to meet the production objectives. The
objectives of capacity planning are:
 To identify and solve capacity problem in a timely manner to meet
consumer needs.
  To maintain a balance between required capacity and available
capacity.
 The goal of capacity planning is to minimize this discrepancy.

Capacity is calculated: (number of machines or workers) ×

(number of shifts) × (utilization) × (efficiency).

 THE NEED FOR CAPACITY PLANNING:

Capacity planning is the first step when an organization decided to

produce more or a new product. Once capacity is evaluated and a need for
a new expanded facility is determined, facility location and process
technology activities occur. Too much capacity would require exploring
ways to reduce capacity, such as temporarily closing, selling, or
consolidating facilities. Consolidation might involve relocation, a
combining of technologies, or a rearrangement of equipment and
processes.

 Capacity planning is done in order to estimate whether the demand

is higher than capacity or lower than capacity. That is compare
demand versus capacity.
 It helps an organization to identify and plan the actions necessary
to meet customer’s present and future demand.

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 HOW IS CAPACITY MEASURED?

For some organization capacity is simple to measure. General Motors

Corporation can use “numbers of automobiles per year.” But what about
organization whose product lines are more diverse? For these firms, it is
hard to find a common unit of output.

As a substitute, capacity can be expressed in terms of input. A legal

office may express capacity in terms of the number of attorneys
employed per year. A custom job shop or an auto repair shop may express
capacity in terms of available labour hours and/or machine hours per
week, month, or year.

 Capacity can be expressed in terms of input & output, depending

on the nature of business.

Organization Measure
Output

Automobile manufacturer Numbers of autos

Steel producer Tones of steel

Power company Megawatts of electricity

Input
Airline Numbers of seat

Hospital Number of beds

Tax office Number of accountants

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 CAPACITY PLANNING DECISION:

Capacity planning normally involves the following activities:

1. Assessing existing capacity.

2. Forecasting capacity needs.
3. Identifying alternative ways to modify capacity.
4. Evaluating financial, economical, and technological capacity
alternatives.
5. Selecting a capacity alternative most suited to achieving strategic
mission.

 THREE STEPS OF CAPACITY PLANNING:

 Determine Service Level Requirements:

The first step on the capacity planning process is to categorize the
work done by systems and to quantify users’ expectation for how
the work gets down.
(a) Define workloads
(b) Determine the unit of work
(c) Identify service levels for each workload

 Analyze current capacity:

Next, the current capacity of the system must be analyzed to
determine how it is meeting the needs of the users.
(a) Measure service levels and compare to objectives
(b) Measure overall resources usages.
(c) Measure resource usages by workload
(d) Identify components of response time

 Planning for future:

Finally, using forecasts of future business activity, future system
requirements are determined. Implementing the required changes
in system configuring will ensure that sufficient capacity will be

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 available to maintain service level, even as circumstanced change
in the future.
(a) Determine future processing requirements
(b) Plan future system configuration

 ESTIMATING FUTURE CAPACITY NEEDS:

Capacity requirements can be evaluated from two extreme perspectives-

short term and long term.

Short-term Requirements-
Managers often use forecast of product demand to estimate the short-term
work load the facility must handle. By looking ahead up to 12 months,
managers anticipate output requirements for different products or
services. Then they compare requirements with existing capacity and
detect when capacity adjustments are needed.

Long-term Requirements-
Long term capacity requirements are more difficult to determine because
future demand and technologies are uncertain. Forecasting five or ten
years into the future is a risky and difficult task. What products or
services will the firm are producing then? Today’s product may not even
exist in the future. Obviously, long-term capacity requirement are
dependent on marketing plans, product development, and the life cycles
of the products.
Changing in process technology must also be anticipated. Even if
producers remain unchanged, the methods for generating them may
change dramatically. Capacity planning must involve forecasts of
technology as well as product.

 STRATIGES FOR MODIFYING CAPACITY:

After existing and future capacity requirements are assessed, alternative

ways of modifying capacity must be identified.

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 Short-term Responses-
For short-term periods of up to one year, fundamental capacity id fixed.
Major facilities are seldom opened or closed on a regular monthly or
yearly basis. Many short-term adjustments for increasing or decreasing
capacity are possible, however. Which adjustment to make depended on
whether the conversion process is primarily labour-or capital-intensive
and whether the product is one that can be stored in inventory.

Long-term Responses-
Expansion from World War II through the 1960s, the U.S. economy was
one of abundance and growth. Since the 1970s the United States has
encountered problems of scarce resources and a more competitive
economy. Organization today cannot be locked into thinking only about
expanding the resource base; they must also consider optimal approaches
to contracting it.
Example:- A warehousing operation foresees the need for an additional
100,000 square feet of space by the end of the next five year. One option
is to add an additional 50,000 square feet now and another 50,000 square
feet two year from now. Another option is to add the entire 100,000
square feet now.
Estimated costs for building the entire addition now are $50/square foot.
If expanded incrementally, the initial 50,000 square feet will cost
$60/square foot.
The 50,000 square feet to be added later are estimated at $80/square foot.
Which alternative is better? At a minimum, the lower construction costs
plus excess capacity costs of total construction now must be compared
with higher costs of deferred construction. The operation manager must
consider the costs, benefits, and risks of each option.

 WHAT IS DONE IF THERE IN AN INBALANCED

BETWEEN DEMAND AND CAPACITY:

 If there is an imbalance in the demand and the capacity in the short

term then it can be tackled by temporary measures /adjustments such
as increasing/ decreasing the labour force or creating and carrying
inventory in the lean period to be used up in the peak-demand period.

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  If there is an imbalance in the long term demand and the capacity then
an organization can respond by changing /modifying the capacity.
 If capacity is short then it can create new facility or expand
existing facility
 If there is excess capacity then it can temporarily close/ sell/
consolidate facilities. Consolidation can be done by relocation
(combining technologies) rearrangement of equipment.

 WHAT ARE THE MODELS AND TECHNIQUES

THAT ARE USEFUL FOR CAPACITY
PLANNING?

 Present value analysis: It is used to evaluate the time of capital

investment and fund flows.
 Aggregate planning models: it is useful for examining the way of
using the examining the way of using the existing capacity in the short
terms.
 Break even analysis: to determine the minimum break even volumes
of production.
 Linear programming: this is helpful in determining the optimum
product mix for maximizing contribution, considering the capacity
constraints.
 Computers simulation: it is helpful to determine the effects of various
scheduling policies.
 Decision tree analysis: this can be applied for long term capacity
problems.

 WHAT ARE ECONOMIES OF SCALE?

 It is well known principle of economics. It indicates the relationship

between cost and capacity in an operating system.
 When output increases in an operating system, the system is likely to
experience cost advantages on account several factors. Due the
following reasons the average unit cost begins to fall with the rise in
output level :
 Spreading the fixed costs of capacity over a larger output

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 Improved utilization of several resources in the system
 Cost benefit in procurement on account of increased volume.
 Efficient use of supervisory and management staff.
 The economies of scale cease to occur beyond a level of production
or output. This is called ‘Diseconomies of scale’. There can be
several reasons for this:
― Inefficient management due to largeness of operation and
resultant lack of coordination.
― Overuse of machineries and break down of material handling
equipments
― Over hiring of employees, or excessive overtime.
― Service slowdowns due to increasing complexities
― Increase in quality problems because of mismanagement and
lack of focus.

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 EFFECIENY AND UTILIZATION:

Actual output
Effeciecny =
Effective capacity

Actual output
Utilization=
Design capaity

Both measures expressed in percentage

Example:- Design capacity= 50 trucks/day

Effective capacity= 40 trucks/day

Actual output= 36 units/day

Actual output
Effeciecny =
Effective capacity

36 units/day
=90 %
40 units/day

Actual output
Utilization=
Design capaity

36 units/day
=72 %
40 units/day

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