Capacity planning


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Capacity can be defined as the ability to hold, receive, store, or accommodate; a measure of an organization’s ability to provide customers with the demanded services or goods in the amount requested and in a timely manner. Capacity planning is the process of determining the production capacity needed by an organization to meet changing demand for its products. 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).


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.


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


Capacity planning normally involves the following activities:

Assessing existing capacity.
Forecasting capacity needs.
Identifying alternative ways to modify capacity.
Evaluating financial, economical, and technological capacity alternatives.
Selecting a capacity alternative most suited to achieving strategic mission.


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.

Define workloads
Determine the unit of work
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.

Measure service levels and compare to objectives
Measure overall resources usages.
Measure resource usages by workload
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 available to maintain service level, even as circumstanced change in the future. Determine future processing requirements

Plan future system configuration

After existing and future capacity requirements are assessed, alternative ways of modifying capacity must be identified. Capacity refers to a system’s potential for producing goods or delivering services over a specified time interval. Capacity planning involves long-term and short term considerations. Long-term considerations relate to the overall level of capacity; short-term considerations relate to variations in capacity requirements due to seasonal, random, and irregular fluctuations in demand.

Excess capacity arises when actual production is less than what is achievable or optimal for a firm. This often means that the demand in the market for the product is below what the firm could potentially supply to the market. Excess capacity is inefficient and will cause manufacturers to incur extra costs or lose market share.

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.


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.


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

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.


Utilisation = Actual Output
Design capacity

Both measures expressed in percentage
Example:- Design capacity= 50 trucks/day
Effective capacity= 40 trucks/day
Actual output= 36 units/day

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