Capacity planning is crucial for businesses and organizations to ensure they have the right resources and infrastructure to meet their current and future demands. Several factors can influence capacity planning, depending on the industry, type of organization, and specific needs. Here are some common factors affecting capacity planning. Capacity planning is a dynamic process that requires careful consideration of various factors to ensure organizations can meet demand efficiently, maintain competitiveness, and adapt to changing circumstances.
Factors Affecting Capacity Planning
There are numerous factors affecting capacity planning exercise, of which some of the most significant ones are mentioned below:
1) Process Design
In a production process involving numerous stages, the output rate may be maximized by the lowest capacity stage.
2) Product Design
Product design is paramount; the capacity of production concerning a well-designed product is much more than that of a poorly-designed one, even if there is no change in personnel and equipment. It is one of the major factors affecting capacity planning.
3) Product Variety
If the producer manufactures several products (with many similarities), it is possible to have highly specialized equipment and jobs. The low product variety ensures that the time lost on product changeovers and machine set-ups remains low.
4) Product Quality
How products are made, tested and scrutinized is the deciding factor regarding the rate at which products of acceptable quality can be manufactured.
5) Production Scheduling
The scheduling which ensures:
i) Keeping the product flow well-coordinated.
ii) Reduction in unproductive time can efficiently use men and machines, and the consequent result would be higher effective capacity.
6) Material Management
Inventory level needs to be appropriate; excesses and shortages should be avoided altogether. It is one of the factors affecting capacity planning. While excess inventories may cause congestion and inconvenience in searching for materials, a shortage may lead to a work stoppage. It is one of the important factors affecting capacity planning.
Maintenance of plants, machinery and equipment is crucial. Major reasons behind the loss of production are equipment breakdowns and defects caused by wear and tear of machinery/equipment. It is one of the factors affecting capacity planning.
8) Job Design and Personnel Management
The skill of the personnel operating the system is one of the significant determinants of the output level of a production system. Poor training, inferior job design, overwork and absenteeism are some factors leading to lost production. It is one of the major factors affecting capacity planning.
Steps Involved in Capacity Planning/Capacity Planning Decisions
The steps involved in capacity planning/capacity decisions can be expressed as follows:
1. Assessing Existing Capacity/Measurement of Capacity
Logically, the capacity of a manufacturing plant may be expressed in terms of Rate of Output, e.g. unit per day / per week / per month, tones per month, gallons per hour, labor per hour per day, etc. It is the first steps involved in capacity planning. However, for the manufacturers producing several products, there can’t be a single/common unit of output to measure the plant’s capacity. A logical and scientific approach to measure the capacity of such plants would be to convert the output value per period (day, week, month, etc.) in money terms and then compute the money value of the entire output (covering a variety of products).
For capacity measurement of a plant, two types of approaches, viz. output measures and input measures, may be implemented:
1) Output Measures
Output measures are preferred for high-volume processes. They have been proved very useful under a condition where the manufacturer produces comparatively a small number of standardized products and services or where such an approach is applied to the individual processes within the plant. However, the capacity measurement needs to be calculated carefully.
With the increasing number of customization (as against the standardization) and variety in the product-mix, this type of approach (output measures) as a measuring tool of capacity loses its utility.”
2) Input Measures
Input measures are generally more apt for measuring capacity concerning the processes, which are characterized by low volume and flexibility. A machine shop can be cited as an example, wherein capacity may be measured in terms of machine hours or the number of machines.
Under this approach, the demand, which is necessarily expressed in the output rate, must be converted into an input measure. This conversion process involves comparing demand requirements and capacity on par. In the next step, measuring the capacity in terms of inputs or outputs becomes possible. Conversion of demand into input measures is challenging because capacity is generally perceived as the amount of output a system can achieve over a particular time.
2. Forecast/Estimate Future Capacity Requirements
Estimating capacity requirements is a critical aspect of production and operations management. It involves determining the number of resources, such as labour, machinery, and space, needed to meet an organization’s demand for goods or services. Accurate capacity planning helps avoid overutilization or underutilization of resources, optimizing production and reducing costs.
Evaluation of capacity requirements may be undertaken from two viewpoints (both extreme):
1) Short-Term Requirements
Estimates of product demand are frequently used by managers for assessing the level of short-term workload, which is required to be managed by the facility. Managers can predict the required output level for various products and services after considering the horizon of one year. Such required output levels are compared with the current capacity to identify the timings of capacity adjustments. It helps in estimate future capacity requirements.
2) Long-Term Requirements
Ascertaining the capacity requirements long-term is tedious due to the lingering ambiguity surrounding future demand and fast-changing technologies. Projection of the future covering a horizon of five to ten years is not only a challenging job but a high-risk fraught. The kind of goods and services produced and served by the present manufacturer/service provider in the times to come is difficult to predict today because of the pace of the changing scenario, which is very fast. It helps in estimate future capacity requirements.
Products and services in demand today may not be able to have any market share in the future, say ten years from now; the market may be flooded with the products and services unheard of today. Therefore, the assessment of long-term capacity requirements depends upon many factors, like marketing plans, product development, and the life cycles of the products. Even if there is no change in product mix over a long time, it is necessary to predict changes in process technology because technology up-gradation is inevitable in the current fast-changing world. Therefore, technological forecasting and product demand are two important ingredients of steps involved in capacity planning process.
Methods of Estimation of Capacity Requirements
Two methods used for the estimation of capacity requirements have been discussed in the following points:
1) The required production capacity may be estimated directly with the help of the master production schedule.
2) When the estimation of capacity requirements is made with the help of a master schedule, the Rough Cut Capacity Planning (RCCP) technique is applied. However, a more precise estimate may be arrived at if the Capacity Requirement Planning (CRP) technique is used after selecting the master schedule and going through the MRP computation. If the results obtained by applying the two techniques mentioned earlier are at wide variance, it becomes obligatory to revisit the master schedule and make necessary adjustments. It helps in estimate future capacity requirements.
Forecast Demand: Analyze historical sales data and market trends to forecast future demand for your products or services. Various forecasting techniques, such as time series analysis or market research, can be used to project future demand volumes.
Determine Required Capacity: Once you have the demand forecast, calculate the total capacity required to meet that demand. Capacity can be measured in various units, such as the number of units produced, service hours, or the volume of products. It helps in forecasting future capacity needs.
Identify Utilization Rate: The utilization rate is the percentage of available capacity used. It is essential to consider a reasonable utilization rate to accommodate fluctuations in demand and to leave room for expansion or unexpected demand spikes.
Lead Time and Cycle Time: Understand the lead time and cycle time required to produce or deliver your products or services. Lead time refers to the time between receiving an order and delivering the finished product, while cycle time is the time taken to complete one production unit. These factors influence capacity planning and help in creating realistic schedules.
Resource Constraints: Identify any bottlenecks or resource limitations that might affect your production process. This could be a machine with limited capacity or a particular skill set required for certain tasks.
Consider Seasonality: If your demand exhibits seasonal patterns, account for these variations in your capacity planning. Seasonal adjustments ensure you have adequate resources during peak periods.
Flexibility and Scalability: Design your capacity plan with flexibility and scalability in mind. This allows you to adjust capacity quickly in response to changing demand conditions or business expansion.
Safety Stock: It’s common to build safety stock to buffer against unexpected demand surges or supply chain disruptions. This can help maintain customer satisfaction and prevent stockouts.
Simulation and Modeling: Use simulation or modelling techniques to test your capacity plan under different scenarios and identify potential issues or areas of improvement.
Regular Review: Capacity planning is an ongoing process. Regularly review your production performance against the capacity plan and adjust based on new data and insights. It helps in forecasting future capacity needs.
Identifying capacity alternatives involves assessing and exploring various options to meet specific needs or requirements. Whether you’re looking to increase production capacity, storage capacity, or any other kind of capacity,
3. Identifying Alternative Ways to Modify Capacity
With the current and future capacity requirements estimation, the task may only be considered if the options to modify the capacity have been identified. Such identification may be in the form of ‘short-term responses’, ‘long-term capacity expansions’ or ‘long-term capacity reduction’. It helps in identify capacity alternatives. Each of the above options has been discussed in the following points:
1) Short-term Responses
Fundamental capacity remains unchanged for a short term (i.e. up to one year). Barring a few exceptions, key facilities are open and closed at regular intervals (monthly or yearly). However, it is possible to make adjustments to increase or decrease capacity. Such adjustments are subject to the following conditions:
i) Whether the conversion process is labour-intensive’ or ‘capital-intensive.’
ii) Whether it is possible to store the product in inventory
The short-term responses include the two types of process
i) Capital-intensive processes: It largely depends on the plant, machinery, equipment and other physical facilities. Modification of short-term capacity is carried out by operating the facilities mentioned above either more intensively (than normal) or less intensively (than normal). It helps in identify capacity alternatives. Such types of modifications may be implemented in the following types of operations:
a) Setting up costs
b) Changing over and maintenance of facilities: materials and workforce
c) Obtaining various resources like raw
d) Inventory management
ii) Labour-Intensive Processes: Short-term capacity may be modified through the following kinds of actions:
a) Hiring and firing of employees
b) Allowing employees to work overtime
c) Keeping employees idle without work
All the above labour-intensive processes are considered expensive because of the hiring costs (salaries), firing costs (severance package), overtime costs (OT allowances), costs of keeping employees idle (salaries), costs of losing workers forever, etc. It helps in identify capacity alternatives.
2) Long-Term Capacity Expansion
There are various strategies available that an organization may opt for to expand its long-term capacity. Out of the following, an organization may choose one or more options to achieve its objectives:
i) The job may be handed over as a sub-contract to another manufacturer engaged in the same activities. The sub-contractor would manufacture the required products to be delivered to the main contractor. This is an indirect method of capacity expansion.
ii) Capacity expansion of an organization is also possible through acquiring another manufacturing unit, resources or facilities. Such acquisition, referred to as inorganic expansion, results in the capacity expansion of the acquirer.
iii) An organization, desirous of its capacity expansion, may start from scratch by developing new sites, construction buildings, buying equipment/plants and starting the manufacturing process ab initio. Such type of expansion is referred to as ‘organic expansion.
iv) An organization may consider updating/modifying its available facilities to enhance its production capacity.
v) If some of the facilities were kept on hold, the company may decide to restart them and enhance their capacity.
3) Long-Term Capacity Reduction
At times, a decrease in the capacity of an organization is called for due to various compelling reasons. It helps in identify capacity alternatives. One or more of the following strategies may be adopted to achieve the objective of capacity reduction:
i) The simplest way of reducing the capacity is (a) disposing of the existing resources and (b) laying off the regular employees. However, this type of reduction is irreversible and can’t be undone.
ii) Another option is to shut down the facilities temporarily for the time being and transfer the concerned employees to some other organization under the same management.
iii) Through “Research and Development, some new products may be developed, and the old ones may be phased out systematically. It would ensure a reduction in the capacity.
4. Evaluation of Capacity Alternatives
For undertaking the analysis and evaluation of capacity alternatives, there are various models in existence, which are as follows:
1) Present Value Analysis: Time value of capital investment
2) Break-Even Analysis: Minimum break-even volume for project costs and inflows.
3) Linear Programming: Focuses on short-run questions about ways and means to use existing capacity to optimize the utilization of resources.
4) Decision Tree Analysis: For the analysis of capacity expansion decisions
5. Selecting the Best Capacity Alternative
This is the last and the most significant part of the capacity planning decision. Once the options are analyzed and evaluated, the most appropriate one must be selected and implemented.