Capacity Planning

Question 1a

Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, "capacity" is the maximum amount of work that an organization is capable of completing in a given period of time. A discrepancy between the capacity of an organization and the demands of its customers results in an inefficiency, either in under-utilized resources or unfulfilled customers. The goal of capacity planning is to minimize this discrepancy. Demand for an organization's capacity varies based on changes in production output, such as increasing or decreasing the production quantity of an existing product, or producing new products. Capacity can be increased through introducing new techniques, equipment and materials, increasing the number of workers or machines, increasing the number of shifts, or acquiring additional production facilities. By definition, design capacity is the maximum output that can possibly be attained (Stevenson 1999).

Question 1b

In the short term, capacity planning concerns issues of scheduling, labor shifts, and balancing resource capacities. The goal of short-term capacity planning is to handle unexpected shifts in demand in an efficient economic manner. The time frame for short-term planning is frequently only a few days but may run as long as six months.

Alternatives for making short-term changes in capacity are fairly numerous and can even include the decision to not meet demand at all. The easiest and most commonly-used method to increase capacity in the short term is working overtime. This is a flexible and inexpensive alternative. While the firm has to pay one and one half times the normal labor rate, it foregoes the expense of hiring, training, and paying additional benefits. When not used abusively, most workers appreciate the opportunity to earn extra wages. If overtime does not provide enough short-term capacity, other resource-increasing alternatives are available. These include adding shifts, employing casual or part-time workers, the use of floating workers, leasing workers, and facilities subcontracting.

Firms may also increase capacity by improving the use of their resources. The most common alternatives in this category are worker cross training and overlapping or staggering shifts. Most manufacturing firms inventory some output ahead of demand so that any need for a capacity change is absorbed by the inventory buffer. From a technical perspective, firms may initiate a process design intended to increase productivity at work stations. Manufacturers can also shift demand to avoid capacity requirement fluctuation by backlogging,