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Capacity planning

Capacity is the amount of goods that a firm is capable of producing over a specified
period of time. Capacity can be defined as highest reasonable output rate which can be
achieved with the current product specifications, product mix, work force, plant and
equipment. It is the maximum possible output or use from a system under normal design
or planned conditions in a given time period.

Capacity planning is the process of establishing the output rate that can be achieved at a
facility.

The effective management of capacity is the most important responsibility of production


management. The objective of capacity management is to match the level of operations to
the level of demand. It is easy to plan the capacity in case of stable demand. But in
practice the demand will not be stable. The fluctuation in demand creates problems
regarding the procurement of resources and production to meet the customer demand. In
simple words, capacity is the rate of productive capability of a facility. Capacity is
usually expressed as volume of output per period of time.

Production managers are more concerned about the capacity for the following reasons:

1. Sufficient capacity is needed to meet the customers demand in time.


2. Capacity affects the cost efficiency of production.
3. Capacity affects the scheduling system.
4. Capacity creation requires an investment.

Process of capacity planning


1. Demand forecasting
Capacity planning starts with the setting of up of a business plan which sets out the types
of goods or services to be produced. The Manager has to take a long range forecast of
demand in order to determine the resources needed to produce and offer specified goods
and services. Market trend changes, competitor’s role and technological changes have to
be carefully examined.

2. Capacity decisions
The demand forecasting of goods and services then must be translated in to a measure of
capacity needed. On the basis of forecasting of demand for products, organization will be
able to determine the various resources needed for producing such goods.

3. Facilityplanning
Capacity decisions automatically lead to the setting up of necessary facilities in order to
produce goods and services as determined the previous steps. Facility planning can be
done either by the expansion or contraction of existing facilities or by setting up of
additional new facilities.
4. Decisions and implementation
Finally, alternative resource requirements plan should be properly evaluated. The
feasibility of plans along with its economic impact needs to be analyzed. Detailed study
of economic impact of resource requirements is essential to make the capacity planning a
reality.

Importance of capacity planning


1) Capacity is usually a major determinant of initial cost.
2) Capacity decisions often involve long-term commitment of funds.
3) Capacity decisions can affect competitiveness.
4) Capacity planning reduces the complexity in manufacturing operation.

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