Capacity planning refers to determining what kind of labour and equipment capacities are required and when they are required. Capacity is usually planned on the basis of labour or machine hours available within the plant. Thus, capacity planning is planning for quantity or scale of output.
There are four major considerations in capacity planning:
- Level of demand
- Cost of production
- Availability of funds
- Management policy.
Production has no meaning unless its products can be sold at a remunerative price. Generally, the capacity of plant is limited by the level of current demand. Stable demand makes the task of capacity planning simple while fluctuations in demand create problems concerning the acquisition of resources and matching them up with demand levels. Estimation of demand is, therefore, the first step in capacity planning. Size of the market depends upon the sales potential rather than on the geographical areas.
Importance of Capacity Planning
Capacity planning is important due to the following reasons:
- Capacity limits the rate of output. Therefore, capacity planning determines the ability of an enterprise to meet future demand for its products and services.
- Capacity influences the operating costs. Capacity is determined on the basis of estimated demand. Actual demand is often different from estimated demand. As a result, there arises excess capacity or under capacity. Excess or idle capacity increases the cost per unit of output. Whereas under capacity results in the loss of sales.
- Capacity decisions leave a direct impact on the amount of fixed investment made initially.
- Capacity decisions result in long-term commitment of funds. Such long-term decisions cannot be reversed except at major costs.
The following concepts of capacity are involved in capacity planning:
- Design Capacity: It refers to the maximum output that can possibly be produced in a given period of time. It is the ideal situation.
- Effective Capacity: Refers to the maximum possible output, given the changes in product mix, machine maintenance, schedulingand operating problems, labour problems, etc. It is usually less than the design capacity.
- Actual Output: It is the rate of output actually achieved. It cannot exceed effective capacity due to machine breakdowns, labour absenteeism, irregular supply of raw materials, unusual delay in supply of equipment, power breakdown, etc.
The effectiveness of a production system (system effectiveness) can be measured in two ways:
- Efficiency which is the rate of actual output to effective output, and
- Utilization which implies the rate of actual output to the design capacity.
Capacity Planning Classification
Capacity planning based on the timeline is classified into three main categories long range, medium range and short range.
Long Term Capacity: Long range capacity of an organization is dependent on various other capacities like design capacity, production capacity, sustainable capacity and effective capacity. Design capacity is the maximum output possible as indicated by equipment manufacturer under ideal working condition.
Production capacity is the maximum output possible from equipment under normal working condition or day.
Sustainable capacity is the maximum production level achievable in realistic work condition and considering normal machine breakdown, maintenance, etc.
Effective capacity is the optimum production level under pre-defined job and work-schedules, normal machine breakdown, maintenance, etc.
Medium Term Capacity: The strategic capacity planning undertaken by organization for 2 to 3 years of a time frame is referred to as medium term capacity planning.
Short Term Capacity: The strategic planning undertaken by organization for a daily weekly or quarterly time frame is referred to as short term capacity planning.