Capacity Planning

CAPACITY PLANNING

Capacity planning involves the identification and evaluation of the long term and short-term capacity requirements of an organization, and the development of plans to satisfy them. Capacity indicates the maximum output that can be produced in a given system. If we say that a factory has a production capacity of 100 units per hour, it means that under optimal conditions, the factory will produce 100 units per hour. In most cases, a hundred percent capacity utilization is not possible. Capacity is normally measured in terms of output such as units per unit of time (i.e. 10 units/hr) or by the available resource hours (i.e. 5 machine hours/day).

Capacity planning is important as overestimation or underestimation of capacity requirements can have an adverse impact on an organization’s performance. If the capacity is not sufficient to market demand, the organization may not be able to meet the customer’s requirements on time, and competitors might gain market share, or the organization may not be able to take advantage of the opportunities available in the market. On the other hand, if the capacity is too large, the company may be left with substantial inventories, and may be forced to produce less profitable products in order to utilize the extra capacity. So, capacity planning is important to determine adequate production capacity to meet forecast demand levels. Capacity planning is also used by organizations when deciding on issues like whether or not to use subcontracting or overtime to achieve production goals. The capacity planning process involves identifying the available capacity and additional capacity requirements, and evaluating and summing up the capacities required at each work center. If there is any gap between planned and available capacity, it is increased by overtime, subcontracting, etc. or the master production schedule is revised. To have an effective capacity plan, an organization has to identify current capacity, forecast the future requirements of the capacity. In the next stage, the sources which can be used to meet the capacity requirements are identified and evaluated. Finally, the most appropriate alternative is selected.