Capacity Planning

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.

Definition
Capacity is the ability of a systems potential for producing goods or delivering services over a
specific time interval. The capacity decisions within a company are very important because they
help determine the limit of output and provide a major insight to determining operating costs.
Basic decisions about capacity often have long term consequences and this chapter explains the
ramifications of those choices. When considering capacity planning within a company, three key
inputs should be considered. The three inputs are the kind of capacity to be determined, how
much of the products will be needed, and when will the product be needed.
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. Capacity can be broken down in two
categories:
Design Capacity and Effective Capacity: refers to the maximum designed service capacity or
output rate. Effective capacity is design capacity minus personal and other allowances. Product
and service factors effect capacity tremendously.

Concept
The most important concept of capacity planning is to find a medium between long term supply
and capabilities of an organization and the predicted level of long term demand. Organizations
also have to plan for actual changes in capacity, changes in consumer wants and demand,
technology and even the environment. When evaluating alternatives in capacity planning,
managers have to consider qualitative and quantitative aspects of the business. These aspects
involve economic factors, public opinions, personal preferences of managers.

Steps in the Capacity Planning Process

1. Estimate future capacity requirements
2. Evaluate existing capacity and facilities and identify gaps
3. Identify alternatives for meeting requirements
4. Conduct financial analyses of each alternative
5. Assess key qualitative issues for each alternative
6. Select the alternative to pursue that will be best in the long term
7. Implement the selected alternative
8. Monitor results

Key Factors
The capacity decision is strategic and long-term in nature. Capacity planning is described as
matching the capabilities of an organization with the predicted level of future demand. Many
organizations become involved with capacity planning due to changes in demand, technology,
the environment, etc. Organizations have capacities or limits that their system can handle.

Three key inputs to capacity planning:

1. The kind of capacity that will be needed
2. How much capacity will be needed
3. When will it be needed

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.
Design capacity is the maximum output possible as indicated by equipment manufacturer under
ideal working condition.
Production capacity is the maximum output possible from equipment under normal working
condition or day.
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 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 organization for a daily weekly or
quarterly time frame is referred to as short term capacity planning.
Sustainable capacity is the maximum production level achievable in realistic work
condition and considering normal machine breakdown, maintenance, etc.

Defining and Measuring Capacity

When selecting a measure of capacity, it is best to choose one that doesn't need updating. When
dealing with more than one product, it is best to measure capacity in terms of each product. For
example, the capacity of a firm is to either produce 100 microwaves or 75 refrigerators. This is
less confusing than just saying the capacity is 100 or 75. Another method of measuring capacity
is by referring to the availability of inputs. Note that one specific measure of capacity can't be
used in all situations; it needs to tailored to the specific situation at hand.

Efficiency and Utilization

Efficiency/Utilization Example
Actual output = 36 units/day
Efficiency = = 90%
Effective capacity 40 units/ day

Utilization = Actual output = 36 units/day

= 72% Design capacity 50 units/day

Determinants of Effective Capacity

 Facilities: The size and provision for expansion are key in the design of facilities. Other
facility factors include locational factors (transportation costs, distance to market, labor
supply, energy sources). The layout of the work area can determine how smoothly work
can be performed.
 Product and Service Factors: The more uniform the output, the more opportunities
there are for standardization of methods and materials. This leads to greater capacity.
 Process Factors: Quantity capability is an important determinant of capacity, but so is
output quality. If the quality does not meet standards, then output rate decreases because
of need of inspection and rework activities. Process improvements that increase quality
 and productivity can result in increased capacity. Another process factor to consider is the
time it takes to change over equipment settings for different products or services.
 Human Factors: the tasks that are needed in certain jobs, the array of activities involved
and the training, skill, and experience required to perform a job all affect the potential
and actual output. Employee motivation, absenteeism, and labor turnover all affect the
output rate as well.
 Policy Factors: Management policy can affect capacity by allowing or not allowing
capacity options such as overtime or second or third shifts
 Operational Factors: Scheduling problems may occur when an organization has
differences in equipment capabilities among different pieces of equipment or differences
in job requirements. Other areas of impact on effective capacity include inventory
stocking decisions, late deliveries, purchasing requirements, acceptability of purchased
materials and parts, and quality inspection and control procedures.
 Supply Chain Factors: Questions include: What impact will the changes have on
suppliers, warehousing, transportation, and distributors? If capacity will be increased,
will these elements of the supply chain be able to handle the increase? If capacity is to be
decreased, what impact will the loss of business have on these elements of the supply
chain?
 External Factors: Minimum quality and performance standards can restrict
management's options for increasing and using capacity.
 Inadequate planning can be a major limiting determining of effective capacity.

Strategic Capacity Planning

A technique used to identify and measure overall capacity of production is referred to as strategic
capacity planning. Strategic capacity planning is utilized for capital intensive resource like 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 remain
competitive and can achieve the long-term growth plan.

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).
Capacity and output relationship

The system capacity is less than design capacity because of long range uncontrollable factors.
The actual output is still reduced because of short-term effects such as, breakdown of equipment,
inefficiency of labor. The system efficiency is expressed as ratio of actual measured output to the
system capacity. System Efficiency (SE)=Actual output System capacity.
Licensed capacity: Capacity licensed by the various regulatory agencies or government
authorities. This is the limitation on the output exercised by the government. Installed
capacity: The capacity provided at the time of installation of the plant is called installed
capacity. Rated capacity: Capacity based on the highest production rate established by actual
trials is referred to as rated capacity.

Problems in capacity planning

There is no standard terminology
 Every vendor has a different definition of capacity management, capacity planning,
sizing, tuning, and so on.
 Some vendors use the term capacity management to include both capacity planning and
tuning. Others use it to denote tuning only.
There is no standard definition of capacity
 One definition is in terms of maximum throughput.
 Jobs per second, transactions per second (TPS), Instructions per second (MIPS) or bits
per second.
 Another definition: Maximum number of users that the system can support while meeting
a specified performance objective.
 Capacity planning is expressed in workload units.
 Users, sessions, tasks, activities, programs, jobs, accounts, projects and so on.
There are number different capacities for the same system
 Nominal capacity, usable capacity, and knee capacity
 Other terms: practical capacity (usable capacity) and theoretical capacity (nominal
capacity)
There is no standard workload unit.
 In case of users or sessions it is difficult to characterize the workload that varies from one
environment to another environment.
 So workload independent measures such as MIPS are still popular for forecasting.
Forecasting future applications is difficult
 Most of the forecasting is based on the assumption that the future trend will be similar to
the past.
 This assumption is violated if new technology suddenly emerges.
There is no uniformity among systems from different vendors.
 The same workload takes different amounts of resources on different systems.
 This requires developing a vendor independent benchmark and running it on different
systems.
Model inputs cannot always be measured
 Simulation and analytical models are used to predict the performance under different
alternatives.
 Sometimes the inputs required for the model are not accurately measurable.
 Think time is commonly used in analytical models, but it is impossible to measure think
time.