Table of Contents
Capacity Management
The production system design planning considers input requirements, conversion process, and output. After considering the forecast and long-term planning organization should undertake capacity planning.
Capacity is defined as the ability to achieve, store or produce. For an organization, capacity would be the ability of a given system to produce output within a specific time period. In operations, management capacity is referred to as an amount of the input resources available to produce relative output over a period of time.
In general, terms capacity is referred to as maximum production capacity, which can be attained within a normal working schedule.
Capacity planning is essential to be determining optimum utilization of resources and plays an important role decision-making process, for example, an extension of existing operations, modification to product lines, starting new products, etc.
Strategic Capacity Planning
A technique used to identify and measure the overall capacity of production is referred to as strategic capacity planning. Strategic capacity planning is utilized for capital intensive resources like the plant, machinery, labor, etc.
Strategic capacity planning is essential as it helps the organization in meeting the future requirements of the organization. Planning ensures that operating cost are maintained at a minimum possible level without affecting the quality. It ensures the organization remains competitive and can achieve a long-term growth plan.
Capacity Planning Classification
Capacity planning based on the timeline is classified into three main categories long-range, medium-range, and short-range.
Long Term Capacity: Long-range capacity of an organization is dependent on various other capacities like design capacity, production capacity, sustainable capacity, and effective capacity. The design capacity is the maximum output possible as indicated by equipment manufacturer under ideal working conditions.
Production capacity is the maximum output possible from equipment under normal working conditions or day.
Sustainable capacity is the maximum production level achievable in realistic work conditions and considering normal machine breakdown, maintenance, etc.
Effective capacity is the optimum production level under pre-defined job and work-schedules, normal machine breakdown, maintenance, etc.
Medium Term Capacity: The strategic capacity planning undertaken by the organization for 2 to 3 years of a time frame is referred to as medium-term capacity planning.
Short Term Capacity: The strategic planning undertaken by an organization for a daily weekly or quarterly time frame is referred to as short term capacity planning.
Goal of Capacity Planning
The ultimate goal of capacity planning is to meet the current and future levels of the requirement at a minimal wastage. The three types of the capacity planning based on goal are lead capacity planning, lag strategy planning, and match strategy planning.
Factors Affecting Capacity Planning
Effective capacity planning is dependent upon factors like production facility (layout, design, and location), product line or matrix, production technology, human capital (job design, compensation), operational structure (scheduling, quality assurance) and external structure ( policy, safety regulations)
Forecasting v/s Capacity Planning
There would be a scenario where capacity planning is done on the basis of forecasting may not exactly match. For example, there could be a scenario where demand is more than production capacity; in this situation, a company needs to fulfill its requirement by buying from outside. If demand is equal to production capacity; the company is in a position to use its production capacity to the fullest. If the demand is less than the production capacity, the company can choose to reduce the production or share its output with other manufacturers.
Capacity and Production Planning for a New Product
If you’re just launching your business or planning to release a new product, capacity planning may seem like guesswork. After all, how can you forecast sales if you don’t yet know your likely customers? You can usually get a good idea of what demand for your product will be like by doing some market research.
First, you should know your likely customers and how you will get your product to them, such as with direct sales or using a distribution network of wholesalers, distributors and/or retailers. Talk to potential customers and take surveys, asking them:
- How often do they buy products similar to yours?
- Where do they buy these products?
- How often do they buy these products?
- In what quantities do they buy them?
- When do they usually purchase them? (for seasonal products)
Most industries have people who make a living by gathering data and analyzing factors like market size, demographics, sales history and trends. These may cost a few hundred dollars, but if you use them wisely, they help you turn a wild guess into a highly educated guess, which could save you thousands.
Types of Capacity Planning Strategies
There are three basic strategies you can use to approach capacity planning. Each has its own advantages and disadvantages, so you should examine them carefully to determine which best suits your needs.
- Leading strategy: Like a runner stepping off first base, lead strategy anticipates an upcoming surge in demand. This can be particularly useful if competitors are vulnerable to inventory shortages in the face of a seasonal increase in demand. This is an aggressive strategy, however, and it can be very costly if demand falls short of your expectations.
- Following strategy: Where the lead strategy is aggressive, the lag strategy is conservative. The lag strategy involves waiting for demand to increase before boosting production. Its strength is in not having to worry about the costs of excess inventory. However, if your competitors can fulfill increases in demand quicker than you can, you could lose sales.
- Tracking strategy: Also known as match strategy or hybrid strategy, in terms of risk, tracking strategy lays right between lag strategy and leadership strategy. Instead of increasing capacity before demand grows or waiting until the orders start pouring in, match strategy involves small increases in production to match increases or expected increases in demand. While this can be a difficult balance, it does reduce the risk of having excess inventory or falling too short when orders begin to spike.
Determining Maximum Capacity
The best-laid plans will come to naught if your strategy is to produce more goods than your company can handle.
- Design capacity: This is the maximum production your company can handle based on systems design. For example, if a bakery has one oven that can bake 10 loaves of bread each hour, then baking around the clock will give you a design capacity of 240 loaves per day. You can think of this as the theoretical maximum capacity.
- Effective capacity: This is the design capacity reduced as needed for working in the real world. Workers need to take breaks and sleep and systems often need to be shut down for regular maintenance and cleaning. Assuming you have only one baker and he is willing to work 12 hours each day, the theoretical 240 loaves per day would be an effective maximum capacity of 120 loaves.
Determining Efficiency in Your Operations
While the effective capacity is a more realistic number than the design capacity, it still isn’t accurate for most companies, at least not all the time. To zero in on the most accurate numbers, you should also look at your company’s efficiency and utilization rates.
Efficiency is a percentage representing your actual production divided by your effective capacity. Utilization represents your actual production divided by your design capacity.
Efficiency = Actual Production / Effective Capacity
Utilization = Actual Production / Design Capacity
So, using the bakery example, suppose you determined after a week that your daily production was 100 loaves of bread. Your effective capacity is 120 loaves, so this means your efficiency rate is 83% (100 / 120 = 0.83). Your utilization rate, however, is only 42% (100 / 240 = 0.416), meaning you are producing less than half of what your oven is technically capable of making.
Capacity Planning Process Flow
Once you have identified the best capacity strategy for your operations, understand your design and effective capacity rates and have begun to measure your efficiency and utilization rates, you have the information you need to begin planning for future capacity needs. This is essentially an eight-step process:
- Estimate your future capacity needs through market research, annual trends in your sales cycle or both. This will also be based on your capacity strategy.
- Evaluate your existing capacity to determine your effective and design capacities as well as your current efficiency and utilization rates.
- Identify ways to increase your capacity based on your evaluation. This will depend on the weaknesses but could include performance bonuses, retraining or improving workflow practices.
- Find alternative methods for meeting capacity requirements, such as hiring more staff, leasing new equipment, subcontracting work to other companies, etc.
- Analyze the financial feasibility of each alternative. Hiring additional full-time staff may not be financially practical, for example, but hiring students or temporary staff for busy periods may be.
- Compare the qualitative benefits for each alternative. If you outsource parts of your production, for example, could you maintain the same quality standards?
- Select the best method for increasing capacity based on your financial and qualitative analysis.
- Monitor the results of the new system(s) and modify them as needed to ensure you get the output and efficiency rates you require.