128

Econo

operalions Management

Capacity lllanageneI

it

Ruh Leryth : \N hen a fim is producilg an item and

keeping it in inventory lor later use.
instrdd of buying il. rhe formula used ro crlcu,are
ecor.rilr
tie economic production quantity referred to as Econori.

capacity mak

equipne[t

"l.rlrrruir,'iOql;;I,;O;:Ir;;
n* f*gtfl iinii'

(e.9.,

If'p'is the production rate and,d,is the denand rate (or consumption
rate), A is the annualdemand lbr
the item io uaits, I is the inventory carrying ciarges (p"c,ntrgr),
C i, rt,,

proir,;;;;;il;;;il

br1

j dals-!

etc., nust be

estimated ink
output ftrt a
into account

,h*

Economic Run Length (ERL)

machinery ar

(i,

c'(,-%)

Design crpac
the marimunt

i e., Economic Run Length

/ii,

fProduction

per un

scheduling dit)

. lAnnLral denand)^ I Sel up cosr I

(rn unrrs)
I per set up ]

Effective capat

co,t

carrling

t J1, Ilnrenton
lchargcs (percentag ,).['

Effecri! crp

capacity iosses

Demrnd rate

I Prorluction

rare

\l

ofequipmert,

Actual outplt

shortage ofnar

TONG.RANGE CAPACIIY PI,ANNING

Capacity plan ning is long-term strategic
.lhat eslablishes
a finn's overall
a

(i1,, l\Iaximunr cap

d ec is ro

n (also re ie

ned l0

as

levelof resources. Cxpacit] may be defined r,

inputs available.elative to outpul requirenenrs
ove. a pariicular period oflime.

,il;;r;;;;;.r"rr..

ob.jective ofstrategic capacity plan[ing ts rc pror

.lerel. The
oicaprtal-irlcnsive

Lde an

that best support the firm,s long,ranse competitive strategy.

Tie Ievel of capac*y,,f*,A

apprcach for drlennrninq the overall

re,ou,ce.-focilirres. machir.... rqripn.., una or,r.,
_

;;;';i.:;:;;;"r,..

(r)

ratd capac

i{easures ofra

etanple,

capact

produced per ur
terms oI the nur

eitler neasured

Capacity decisions alfect p.oduct lead ijme, customer

responsiveness, operating costs and a firm,s

Output mcasur
mcasures are used fc
product or seNice, n]

fina\

abiliry lo respond to customer ae,nana

1i.e.,

",pon"'ru,r1,
inventory policies and its management and staffsupport requirements.

l"

as

.
"i,"A
iir-."rirtruo*,,
i,,

impact on the

achieve under

tra! gic cap acit) plan ning)

ability to compere. Inadequate capacily can result in

to" of.rrto.r^ unaii,ritrJ-gr""_li,. d"lfr,

hand, excess capaciry can result in under uliljsation ofmachines,

eqr.riprnent anrl

iighercosrs andlesser!rofits. Thereforethe major capacitydecisions

inuolved

ri,,\\hcn'oir,rJ.ec,,prciryard,rii

rf",

l;;;.r;r;;;,",.,X

ar;,(1iH;;,;;;;;p.rry

l0rrmuchroilc-e,\. 1;;;;;,rp,,,i
llle.l.rl,,*,
lldnnrng dersrcnr L\rJly irr olve r\e f
irg
acrrvit.es.
'llou
(, Eslimaiirg the cafacities ofthe cunent (existirg)iacilitis.
fi, Foreca$ing the loig-ranqe futur capacity nceds for allproducts and seNices offered hy the finn.
/iir) Identifying and

analysing soLrces ofcapacity to meet future capacity

needs.

/il

Develcpingcaplcity altemrtives.

,r,

\r.ec..nt flo,

. d. rong

capacity ofa photocol

An jmlorlant nll
close a fimr is to its br

Calacity

Besf operating I
yolunte ofoutput

at wl

Another measLlra

t:e ?llelta .\e )oL c(,

oi.rI.c.l).

effccti!e ca!acity.

fstimatiflg the Capacities 0f Current (or Existing) tacilities

To estintate thc calacilies olerisling facilities in
a firm, it is necessary to knorvn about lhe various

tyles ofcapacity and the rueasures ofcapacily.

Dctcrminants (]l

Types of Capaciti'

f,

Producti0n

.tpacit!

js the maximum
rate olproductron (or oLrtprLr)

100 crrs 1er day or 200 refrigerators per

cfrn orgilrisatron.Jol eranple,

dr) erc. But sererai fr.t"" urjl:rlfi,,g ti,,',*c,pt of

Ifft

lilany decisions al
have an intfaat on calta

Capacity

lperations Managemenl

lvanagement
IZS

capaciry makes its understauding and rse

some\\hrt co0tller. V,iriatlon nr employee
absenteeism,

for iater use,

! entory

,. ,.rdr.onL holrdr5.

detd), in..,er;
1.c,*,.",' a.rii,,i, ,,.r,i,n* , ,,
::
lip::l,ll,:::.,"8,ruiryrree\v0-t.uork1eh.Lhrr0-,\h1,...e^lo.e-:.te.r(mlor-rjuolLar..-r,orr..n:

be used to calculate

etc., must be kken into accou,.rt

:e annual denuRd lor

..st ler uiit,

$l.n

esrimatirg

then

(,

tl.

proau,tion

,riui;. ;";;;l;;;pr,,,y

,s

ixlcms of susrainable praciical cap.iritl

i,n,,i,r'l,i,iJ.i:ii,, n,.,rirri,,r*, .,
0ulput that ir plant crr maintain nithin the
fr.an,. urrk ot a .,rlirtl, ,ro,* ,',iair,a,
*Urg
int0.rccount oi n0rmrl dorlntime, ard assuming
sul.ficient arrifrf,ifi,f r:il,,irir'i. .p,*n
nachinerr and equipment in plxce.,
estimaled

Design captcit) : Dcsign cepacit),refers

to rhc ntilxnnuln uuifut thdt can possrbly
be alralned It is
:Dt. lC,..\.d .a(.tO!_.Oroit,t\

ll(n \,,-n .-t-0.

,rl,'r fllL,;rirL cJt,acil\ | l,c,j.\e.A..L
rv..l.e r-",.nLI r..jble o".prr;irer : p.oCLrC nr,.,
-'
-' 0ult1s J.i.:.Lll.....na \.ne r..nr:r.rce. q.. lirr,,. 0.,,
Iller..e,. -.'.i L. u ll1 lc., h..d..i;n..p,...r,.r..r: "b,.,,,...rr.,.i''
.
capaciN losses dre to rec ihes ruch
-mand

rare

J*,iar

,,'.,,,p,

,J

rr1a ]

.,, p,.:r,,, .'.

i-l

e\.!edo(..gn c.pr..ty/De..aL,eoi

as

rrorjr

';l-:".,

.T,l,i. i ,;
":,;il;'J
ctf:cil\ b.cause olmacirine
;::,.:

Actual outlul ctn be lesser ltan elfccti!.e

hrcahtlo$n, absenieeism,

.l' rr,;e,,r:.r..'.d Jq....:.,.

5. r
lir) Mrrimum calaitt\ : \l.o lno\\n t, De!l

..r,.,,.,"0.,,,r,,i,.,.,i,;;

i caprcityplrnIing)

as

r Jmount ol resource

t*mining

:: of

f!,

the overall

labour force

Lr, excess inventoll,

Ilow muchcalacit)
i-cng-renge capacity

olcapaciry are applicable in diiierent situations,

rranrple, uaJracrrl of dn ,rutomobrlc 0tcir can
b.
ini:r;;;;,,,,

r*,*,d

iiol

;,.,','r

,, nji

"rrl,,

fol

.i:rra.*,r.,

r"itl,l;'rtr)

used to ex|ress lhc capacitl. of line

flow processes whereas

lrocesscs

ai.crarr

An imlortant measure of system cllectiven.ss

is rhe capac;t' utilisati.n rate
.lo:e a fimr is ro it. b.,r operdlrl g p! int. i 1.
le.icnc.rr..t).

.r

input

;, "i;"il :' :, :,:i: :l;:::i:,:i::i:T ;:ffj

p,od,,. ;,,;.,,;; ;,
.
c 1...ctr olapho.ocop .\o;..:r-. _.-,....,,,n<.."1o.,,.

(aJ.-:rrolTcred b! tlie lr.m.

!sually

^^,9.llprl.*:rr

"_re
measures are used for
flexible
_

the other

Nkr5uresofcapxcitr.:Dillererrtneasures

ler uf it ol trmc lsnilt. dar.'ueek or nonth) *,hereas, capacity ofa

hospital is measured in
terms ofthe nunber ofpatients that
can be
Therelole capacitv ola lacihq can be
either measured in rems or.r,o*,

;ts cost structuie, its

j.owth. 0n

,;;,;:lrll,iiili,illHI;,I,;Jl;:ffiT.lifi::fiIil#l

rated capacit),

produred

rlected has a critical

ng costs and a firm's

ill,Iff:X

.r. r.rc crpr'] 1u'ed'ie-:.ual ,r.|,"t

r(( ofe. t.I: lcrc / r dL.ipn r"T"crq

'hich

reveals how

Best opcrrting ler,cl rs the leyel ol capacit].

lor nhich tlle facility was designed and lhus
is the
lolunle ofout!ut at \!,llch alerage unit
cost is minimurn

Ancther neasure ol syslelr effe.livcncs.

is rlficicrtcl rL,t*l; is Il:: .-.:..

:f!.ctiye.rpacit,!.

liiicicnc)'
\n about lh. larious

"i 1r:!iln!tto{lr.

- : -1!lql!{!11Ellcctive capacity

Dcterminants 0l Effuclire Crpacitl

I'-nvd.:..
.salton,Jar e*ntple,
)

ing ihe concept of

:al-ourde

r.lr ,.1, ., r

l...e-nrrrp...r 6'1.,;1-1.. ,1... ,. . t.r . .t0.. -rl

r..nloper.trorolrre;r^d.rro.r1..cn1..1

,.o .I.1. ..tl

r30

0peralions Management

f,
and

Iv,

Facilities,

fi,

Product orservices,

fii,

Process,

fil,

Human resource considerations,

fri olerations

External forces.

Fatilities factors : The key lactor is the design offacilities including

size and provision

Capacity MaIaqeme

(, The lirm may n(

(i, Because ofthe

fcr future

prioritiesofthe

expaasion. Other locational factois such as costs olhanslortation, distance to na.ket, supply of suitable

e/.,

arc also imporlant. In addition fiant layout. sho! Iayout, utilities such
heatirg, liglrfing, r,ertilati an e!c., may aff.ct labau. effcicncy and tfierebl ef&ctive capacit).
labour. energy soLuces

Product/servic. factors iUniformity olproductsiserrices ie.g.,

leads to greater

Advantages

eflective

capacity.
Procss factors : The quantity and qLiality capabiliry ofa process or equipment increase the raie

of

output and hence dre effctive capacity.

lluman resource factors

f,

Job desigi,

iol,

fi,

/ir,) Employer motivation,

fi)

fii,

Training, skill and experierce required to perform

Employee absenleeism and ar', EmploJ,ee turnover

Operational factors : Differences in capabilities ofaltemative equipments and differences in job

olI

(a) Extra capacity li

satisf,

0J
/r)

AbiLity

fr,
f4

Product ard volr

10

Reduced produc

Human factors lhal afltct poientiai and actual output are:

Variery ofactjvities involved,

oflrodr

as

producl line ratherthala product

mix)provides oppcrrunities for standardisation ofmelhods ard mateials, $!ich

amcunt

lmproved qualil

Anotlel imporit
firm for its products

capacities. The firm

capacity)and tler

der

requirements mal create scheduling problems. other faciors sLlch as inventory decisions, late deli!enei
by suppliers, quality of purchas ed materials andparts, inspection and quality control procedures may als0

ldentilying and Ana

have an impact o[ effective capacity.

Ertcrlal fact0rs

There are manY

: These relate to producl standards, salety regulatiors, labour activities, p0llution

capacity or excess ci

foilorvilgways:

control standards etc., which nay often reduce effective caprcitv.

forecasting t0ng-term Iuture Capacity Demand

services, capaci

Long-range capacity planrting involves providing facilities suctr as land, buildings, machines. tools,

qui!ments, naterials, personnel and utilities. Planning and establishirt

fr,
(l)

new production facility could

take 5 to l0 years and therefore such a facility would be expected to remain economically productive fol

willalsc vary. This makes itnecessary thatfrovisions nrustbemade ioi erp anding or contracting production

oithe production system. AIso, technological developnent must be anticilated and iltegrated
into facility pianning because the manufacturing process and equipmnts used may have a significani

capacity

impact on the capacity ofthe plant.

lroduci or

servrce usually involves

tie lollowing four

siepsr

(i,

$her

thc Pres{

(o) Selling off

employees.

(5) Placing

som

Estimate the demand ior the comlany

by

(c) DeveioPing

Economies and 0is

has l0 be forecasted.

ultipLying the total deniand by its

surplus can

particxlar pr.duct f.om all produceis.

(ii) Estimate ihe ma.ketshare lor the comprny lor +hich capacity

ma

et share.

Then the !ioduction capacity must be allocaled to each product and ser!ice based o[ lhe best estinlsies
each product and/or service.

However, tl,e production capacity to be provided by a firm ntay notlecessatily equalthe amount of

product afld seivices exlected to be dcmanded. There are several reasons for this. They arc

The concePt

of

reduced by increasinl

(rv) TraDslate rhe pr!duct and senice demand for tie company inio capacity needs.

ofdenand for

(eJ Reaclivatinl

empLoyers

Forecasting prod,rction calacity for

(iii)

Acquiring o

(dl ExPandirg,

the extemallusiness environment, forecasts over such long periods of time are difficult to make and may

not be reLiabic. Anotler factorto be considered is the product life cycle. The demand fol the lroduct will
vary accordirg to the stage ofthe Foduct in its life cyclc and therefore the production capacity reeded

Subcontract

1c) Buiiding ne

another 15 to 20 years or so. Therefore, foftcasting demand for lhe lroducts or services to be pmduced
from such a facility mr.rst coyer a time horizon of l0 to 30 years. But because of clanges taking place in

(i) Estimate the total denand fQr

Wher presert

c,itput rhich results i

rfthe facility.
Exhibit 7.3 i\]"tt

0perations Maragehent
Capacity Managemenl

rdcrations,

fr, 0perations

' and provjsjor for

future
iarket, supply olsuitable

f,
i/i,

l.

ratler than a product

.eads lo

ient

lreater effectiye

of

.,d actual oLrtput are:

.e

Advantrges olhaving capacity cushton are

/0, Extm calaciry b

(A Ability

fd
increase the raie

required to periornr

, and difieretces
in job

'cryons, late
delivedes
.rlprocedures may
also

ur activities. polluiion

irllou,ing foursteps;

to sariify leak denards

and volume

flexjbility
and services

There are many rvays available to a firm to change

its capacity. Firms may either have shortage of
The tons.range capacity needs of an-organisarion can ie
Jrrg.a ,r,,

::11:lll
:i:""t "p"ity.
I0ll0wrng riays:

where present capaci$ is

n.t

snfficient t0 meet rhe forcast demand for the products

and

services, capacity can be expanded byt

(a,/ Subconkacting comlonent pads, sub-units

or even entire products to other finns (subcontractors).
fU Acquiring other finns, facilities or resources.

(c) Buiiding

new plants ard buyine equipments/machinery

etc.

(d) Erpanding, mcdemising ormoriifyingexisting facilities.

f4

for tle productwill

r,ry have a significant

a.*una.

ldentifying and Anaiysing S0urces 0f Capacity to Meet

Iuture Capacity Needs

':anges taking place in

,aultlo make and mav

.ntracting production

^
tt, .rp."t.J

rrlically productive
for
llices lo be produced

:iirated and integrated

;iJi;i r*aoi,io*l

Another important cotsideration in detemining

much long-range capacity has to be provided by a
for
fim
its products and sewices is ioiv much capacity
its comietitois are iikriy a ,aa ain.l, ,rir,ing
capacities. Iie firm shor.rld examine the capacitf srtuatron
in the rndusrry 1r e, .,.,
*a,,
capacity)atd thendecide whether to add calacity or nor.
"1,ci[

lilgs, macli!es, tools,

needed

mpetitive

meet dentand iu excess oiforecasted denand

/e) lmproved quality ofproduch

,rduction facility could

,.tion capacity

co

Reduced production costs

fdJ Product

,11

e *prc,q,

amount ofprOduction capacity over and above

the required capacity to meet

iayout, utilities such

a;
:ive capacity.
rne

The firm may nQt have enough capital and

other resources to satisfy al1 the demanrl
Because of the ucertainlies 0f forecasts a
nd rh e r eed to link prod uc fion calac ity to
priorities of the iirm, a caparity cushio n may
have to
p."ia.O.

fi,

Reactivating facjliiies which are on stand-by status.

lYhen the !resent capacitr is in excess oIth expccted

future needs,capacity can be reduced by:
(a) Selling offexisting facilitles, selling inventories and laying_off
or.transfening (redeploying)
employees.

@) llacing

some

facilities onstandbystatus andselling the invcntories

and laying"off o. tralstedng

employers of such surplLrs facilities.

(c/ Developing

and phasing in nerv products as otler products

decline, so ,rat capacity rendered

surplus can be made use of.

,.1ed.

Economies and 0iseconomies ol Scale

rlarket share.

The concept 0f,,cconomies 0f scale', states that,,tlte

average unit cost ofa good or
ofout put,'. For a given productio'n facility, thc"

reduced by increasing the rate

r.n thi

'o.s i estima
tes

out!utwhicl resulh in the least

;,

average unit cost. This levelofoutput is calied

ofthe facility.
equal the anlount

tey are

of

,;ririr

ZJ iilu$ratcs this concepr.

se icecanbe

. rrrrf ,rlr,", .f

tf,,,,f,,rt rp,.^ting f,r,i,,

132

0pentions lvlanageme

Capacity Management

it

is believed that as

decrcases and autom

scale. But io reaLity,l

o\r to other pioduct

the cost of automate(

The erperienc
additional capital inv

m.rlcds

and their pr

rheirjob, gaining

ex1

Large capacity
production capaciiier
because it produces r

cunes as a compelili
loNer costs to price tlr
operaiing level

/Best

rual volume (units)

of their higher volum

enable them to hlrth
sales vclume furlher.
abi to meel lustome

Four principal reasons rvhy economics olscale can dLire costs dcrrvn wlen output incraases are:

/,

Fixed costs can be spread over a large number olunits produced.

fii)

ProCnctioD or operating costs do not increase linarly

$ith output lelels.

fii,

Quantity discounts are available lor material purchases and

/ir)

Operrtirg efli..ercl in.rcd((\ as ,^o-ler5

i:.n

e\p3r e1-c.

higher volume ofpro

Developing Capaci
To enhauce
developed:

(,

Diseconomies of scale : Ecolomics ofscale do nor ccntinue inCefinitely Above a cefiain level of
output, additional volume oi output resuhs in ever-incrcasing average unil costs. Tltis phel0menon ts

Developing subcontracto. and supplier networks provides a viabie

altemalive to larger calacity production facilities. The manufacturing firm ibcuses on lesser backn,ard

A)so conrpanies can increase iheir cafacitv lo run their bLrsiness bv outsourcing services such as
.janitory serrices, building maintetance. rectuitmcnt, employee trayel arfungemenls, desktop ccmputer

rnppiy/maintenance, installaiio!/maintenanc. of inlormatioli system. transportation. warehoLrsin3.

advefiising, payroll accounting etc. Activities whidl hayc!otentirlto be outsourccd include product rlesign,
telcmarketing, custonler service, datapr0cessing, personal selling elc.

highly flexible mlnrfacturing faciiitv at a lesser cos(

thri

in separate production iaciiities. Traditionally,

1on!

wa

ilexibiliti
plans later. oth
and equipment

fi,

Difterrntiatin!
products can b(
possible limitec
use for the iesul

to can-y higher
accurately. The

(,

Takirg

"big-l
fimmust consi
ola five star ho
increased demat

increase in

lle

(iv) Prparing tc d
the form of fair
a

Economics ofscope : This is another coIcept that nrL6t bc talen into consideration vhen consiCering
econotuies olscale. Economics ofscopc reler to the lbilily ola Ilrm to produce nany product tlps in on.

il

When

irtegralion and instead develops long-term contractualrelationships with suppliers ofIarls, compone!its
and assembiies. The manufacturing firm olerates prith less 'in,hcuse' manufacturing capacity because
much of lhe firm's capacity leeds hale been "outsourced" to sLrbcontractors/suppliers This approach
pioyides ntore fleribility to the prtent mtnufact,Jrer to varv ihe finn's capacity during slack or peak
pe ods ol dema[d. But the ln[itaticn ol this approach is that outsoiricing may b. aflected when the
supplren.u_.ontr.ctor,fd:earl.ct.y:noil .'e. ." t, lon..

i[

nryle,

st.ucture ralher

increased use ofovedime and the corresponding increase in labour costs, dilficulty in co-ordination and
management aciivities etc. The impact of diseonomies of scalc increases when tI production volume

Subc0fltrartor Ieitrorks

Dsigring fleii
benefits

refened to as diseonomies of scale. Diseconomies ofscaie include overloading ofmachines, increased

coflgestion ofmaterials and handling eq,.ripments, Jower senice times, poor quality requiring more rework,

increases beyond the best operating ieve1.

cal

steelllant, th(

an

additional fr

installed in sma

loerations Manaqement

Capacity

Manaoement
lJ3

it is believed that

as

capital ilyestment, mechanisation and

automatton arc increased,
!.oduct i_lexibility
rroducrion ctn be jr_srified fo,

0,":,:t::ll1:X-.T,:q

riri".i,,,,

i'.i,,,,'t#,1
,,
J'o*. DU' r(d ,y, nrgnry rexrble and
'.
lrogrammable autonation allows ihe ploduction system to change
o!rtoolherlroduJrsquicllyanCIirhor- n:che.per!e
Ajarer,lt.econo.tie.,r.l:r,"nAoj ,pr,.O.ng
rhe cosl ol"u!,rml:jd JJc:litres o!$ d u
-r
ioe tpe , t prodJc. lrre..
The erperience curve : Thir conceot aI
,aa

,i.,i ,.J"i'i,,.,.,# ;1,,:;:.,,.XJ.:

,iilr,,.n..,

;.;,:,iil":l .,lllli ll,,lii,il:,ii],i Xj; ii#,lli

merhod. dnd :her- produclion co:r, ci,n ne

renuceJ . or sioer,bly. Alio r.,e u lr k,,,
theirjob. gaining experience (leaming curve
effect) rvtrite aoing ,epetiti"e jJs.

,rt. I,"..-',ira

,o ,to

Large capacity plants can have a two_wa),cosl

advantage orer theu competito^ ha\ing lesser
produ.aon c"pactie.. Ihe largcr plant g-,n.
[r^m eroromic: ot qrale ar.d al o ,ron, arp,rl,n,'
,ru,
because il prodLce. more. Companie,
can rse the dla ddvantogeofeconon.iesolscaieandexperience
cufles asn competitive strategy by fiNt building
a large plant rviri econornies

l.wcr.costs to pnce theirproducts aggresively

and incirus,
oftheir hrgher volumes ofproducrion, these fimrs

oir*f, r"i il.r rrlr, *,i,

m,i rrte, uotr,r,s rni;;;;il;.;,,r,

r,

oiexferi.*r.rr. *fr"f, *ilf

o l th eir-producti ,f,.,.iy ;r:,r.,ia
,lm

can have the advantages

enable them to iurrher reduce their costs

ard tlrerr the prices

5.le) r,ol"rn- rJthc:

,r.,0,..,"
.,

irt increases are:

tl

xs.er,:or rhr,.o,no:r.r

.10..,,'n.,i.',,r,,,,

higler volume of pro<1uclion.

iiJJ.""io,.li*llf i,l,,lf,li,"n.,l,Ii[iiJ,illl,ii

Developing Capacity Alternatives

,To

enhance

cilacity managemell, the following

developed:

:e

a certain

levelof

@ Designing neiibirity into the slstem : Desigmng Irexible prociucrio,

benefits in long-range rapaciry planning beczuse-of
rh, ,i,i,
ewtkple, ii wot)ld be lex.expensive to provide
for future *pr^im
structure rather lhan remodeling an existilq
struchre to acconmodate

ruachines, increased

iuiring more rework,

rn co-ordination and
production yolume

cn lesser backward

,llarts, c0mponenh
:g capacily because

iiers This approach

,uing slack or peak

tl,tlen

allected u,hcn the

ng scnices such as

'. dcsktop computer

tion, *,arehousing,
lude product design,

rn rvhen

consideiing

'roducl types in one

ities.'lraditionally,

fle,ihiliq

i. ,#Jgi..ij,rig, .r .

higher proiuaion cipacity.

builr in rhe des:gn ofthe )y"len itseli it qou.d

beco.n..;
plars larei. OrLer facrors ro be coln,id.red
in 0e.ibt,:e..ign,ncluae
is

;
^;;;;r,;;*r,.,
la);;,:i;;r;;;;;i;,r,,".

and equipmenr selection, production pianning,

scheduling and invenrorl

,,,
provides a viable

sysrems can offer potential

il,;;;i; t;;; ,r* ir".i,,,. ,.r,

ihis phenomenon is

approaches to capac]ty ahenatives could

be

polici"l'-...-"

on1:er nn and m atdr e p mdrcts 0r serliccs :

Capdcrr) reqjiremenh of nrdrure
3.,11::::'11f1*
ca1
preot.ted m.re piecisely and m.ture
De
Pruuuus
Drod-cr5 mo\ h_ e i.rr:fed I "e r-rr5 thg
po.ible linired ,fe span ofrhe m*u-ed p"ocL.crs
or r.*i,.
use r0r lte rer ll,g excc\( capa..ily
al the end ot lhe

"rr;;i,.;,;.;,;;;;;;;ilrr,,r.
orher
J, nei. prodlcrs tend

life,par 0n t-e

to carry higherisk because the quantity

den!nded ana au*tion
accurately. Thereiore having flexibility becomes

a nore atractive

/llr) Taking a -big.pictrre

Imr mu'r con iJcr

approach lo

hc,w drffercnt oan.

crprcitl

oi

h r-

oilt. a,,rrnilrrr"iu, r"or,*e

oltion to production

managers.

chrngcs : \,. hen devclopin-. ia;a. iry aluna.rves,

n.

r"..,1,."i,,r",';.; il ;;.;.:l::f:i:"T: :[#:lliTil]:;:: liT,lilil

scatingc,p"i,y, t6g.,;ri,,l irl e,.Jii*,
!ql
- ' - i! ^iN rrr ir*.:u,
ircre,.e .n r.rc r-nrbcr ofhorel
", "

increased denrand forparking lots, restaurart

lelping, ufl,rc.
"r-"i"nd
/;u/ Prcl,rring^t0 dcrl $irh -chunk\" 0[callxcit\
: U"ualll. caprcity rrcrer,c, rre ohen acquired iI
rJlc rorm 0r tatl) iarge chLll r ol capdcil)
nt\cr t\an smdll increme .ts in c,:fac,ty Fo" ernl,,ple, in
a steelrlait, the existing capacily, ofa fumlce
nrar not b..norgh to.e.t tr,, J,r*ro, ur, irrlrr*g
hou,e

additional furnace would result in having excess

capacity because additional
ut\ldrr(s tn smati calr ly chUnks
an

fr_.*, ,r*.r

be

t3{

0peralions ll4anagemenl
Capacity Managemei

(t) Attempting t0 sm0oth out clpacity requirements

: Havlng unevelness in capacity requirement
cal be problematic. fr," e,ranple, during seasons ofbad 0r extreme
weathers,,nor, urd moi, peopl,

Theteclniqu
costs are categods

may tend to use public transporl velicles for fteir travel rather
them using tieir own ve'hicles.
consequently the !ublic tianslotation system may tend to aitemate
betweeiunder uiirisatior ald
o,,,er utilisation. Demand for consumer products could
vary panly because ofchance factors (i.?.,
random variatjon) because olseasonaltty. Seasonal lariatjons cal
le predicted and hence can be

changes.

errzal

experses etc. vada

costs. The total co

!olLme of outlut (

betier coped wiih than random variations. Horvevel seasonal vanations

cal still pose problems
because of thcu uneven demands on the productron systent (1.r,
u\erloairnl cutl underl.,adrngl.
This problem ofseasonaiity can bc overcome by prorJucilg products
laving compiernentary

The total

dentand

patlefis (lor exa lLe,heatingand air conditionirg equipments).If!roilucts

Iaving complemelta.y
demand lattems involve the use of the same resources but ai different
times (seasons), then the
orerail capacitv requirements renain fajrly stable.

("t

Ior

lroi

i.e.,

Identifyitrg the 0p tim al 0p erating lelel i The optimal olerating lelel is the
ideal level oi operatiol
at whici thr cost.ler unit is tle lowest lor lhe production umr.
Larger 0r smaller volumes
oioutput

would resull in higher

ulit

cost.

Selecting from Am0ng the Alternative S0urcs 0f Capacity (0r

Capacity Alternativesl
Belore selecting tle besi alteinatiye tiom ainotg the seyeral alternative
sources ol calactl). on
organisation needs to examine oi eyaluate the altematives for futur.
capacitl irom several djfferent
perspeciives.
The rnost important perspective is ecolomic consideration. The quesliois
ro be ansu.ered are

fi) Will an altemative

be economically feasible?

(i, What would be the operaLing and ntaintenance .osts?

fii, [ow soon it car be acquired?
(ilJ Whatwould
/u) Would it

(r,,

When total rr

be its usefullife?

be cornpatible with present personnel and present operating methods?

What would be the public opinion or reacticn to

new facility?

Then

(ie., community attitude).

For erample, the decision to build a nerv porverplant (coa1fired or nuclear)is

almost certain to stir
up hostile public reaction because ofthe ueed to relocate the people
rcsidiflg in the area and also because

ofpollution problems that would

Fdr cost-voir
ai3;mpti0ns must

(r) One or a levr

be created by the nerv plant

The caoacity planning anrlfacility planning dechions can be anall,cd

b1 d,iferent aplroaches s!ch

(ir) The volume,

AS:

(lli)

(i) Break-even analysis orcost-volume analysis

(it) Financial analysis (orpresent value analysis

(ii)

(iv, Fixed
and cash

flor, analysis)

These approaches are

and waiting line lnalysis

briefll

costs.c

(r,) The revenue

Decision analysis cr decisior tree analysis and

(n) Co.nputer sintLllati0n

The variable

f1,, Revelue per

(iy'

financialAr

discussed in the following sections:

Filancialanr
(i)

Brexk-ercn Analysis 0r C0sfyolumc Analysis

Break-even Analysis or coslvolume Analysis focuses on rclationships

behl,ccn cost, revenue and
volume ofoutput. Since tlis analysis iacilitates e$imation ofprofit
under ditiirent operating conditions,

il

is

!articularly usefullor comparing capacity altematives.

investment piopos
va1,;e.

Cash flow re
matedals, ovcihea
Present
'i

lr

it

ralr

tlree most co