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What Is Capacity?: Name: Moesha Jones

Capacity planning is determining the maximum level of output a system can produce over time. Effective capacity is the maximum output achievable under normal conditions, which is usually less than design capacity due to temporary measures. Capacity utilization measures the percentage of total capacity being used and is important because higher utilization can reduce costs. Methods to improve utilization include reducing capacity, increasing sales, managing peaks and troughs in demand, and outsourcing.

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56 views6 pages

What Is Capacity?: Name: Moesha Jones

Capacity planning is determining the maximum level of output a system can produce over time. Effective capacity is the maximum output achievable under normal conditions, which is usually less than design capacity due to temporary measures. Capacity utilization measures the percentage of total capacity being used and is important because higher utilization can reduce costs. Methods to improve utilization include reducing capacity, increasing sales, managing peaks and troughs in demand, and outsourcing.

Uploaded by

britty
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Name: Moesha Jones

What is Capacity?

According to Investopedia.com, capacity planning is the maximum level of output of goods and/or services that a
given system can potentially produce over a set period of time. In most cases, it is unlikely that any system will
operate at full capacity for prolonged periods, because natural inefficiencies and other factors decrease potential
output. The capacity of a production unit (e.g. machine, factory) is its ability to produce or do that which the
customer requires.

The Importance of Capacity


A corporation doesnt just exist in real time. To survive, it must have a clear understanding of past trends and
performance, current service delivery, future business requirements, and the IT infrastructure supporting it all. The

role of capacity management is to ensure that current and future capacity, performance aspects of the business
requirements, are provided in a cost-effective manner. For example, if you run the credit card services division of a
large bank, you may be faced with the challenge of planning for the capacity required to support the coming years
business volumes. To do this effectively, you will need the following information:
The businesss forecast for transaction volumes
Data regarding the resource requirements for processing those transactions
Financial information regarding the cost of hardware and software alternatives
All of this information should be combined in a single logical location: the CDB. These three sources of data
independently give only a partial picture of the costs and revenue per transaction. However, tied together in a CDB a
capacity manger can report the full financial picture of this business service.

Design Capacity
Design capacity is the maximum output that can be achieved using temporary measures, such as overtime and
subcontracting. Effective capacity is the maximum output that can be achieved under normal conditions,
including realistic work schedules and regular staff levels. Effective capacity is usually less than design capacity.
Effective capacity is what we can achieve over long periods of time, while design capacity can be reached on a
short-term basis.

Efficiency of Capacity Management

Measure of how well a facility or machine is performing when used.


Efficiency = Actual Output/ Effective Capacity x 100%

Calculation of Capacity Utilization


Capacity utilization measures the extent to which a business is using its production potential. Capacity utilization can be defined as
- the percentage of total capacity that is actually being achieved in a given period. Capacity utilization (which is traditionally
expressed as a percentage) is calculated using this formula:

Capacity utilization is an important concept because:

- It is often used as a measure of productive efficiency


- Average production costs tend to fall as output rises so higher capacity utilization can reduce unit costs, making a business more
competitive
- So firms usually aim to produce as close to full capacity (100% utilization) as possible.

Methods of Improving Capacity Utilization


Reducing Capacity
By reducing capacity will make it easier to have 100% capacity utilization. e.g. 5000/10,000 is only 50% Capacity Utilization where
if they reduced the maximum capacity to 7,500, the capacity utilization will rise to 66%.

Increasing Sales
Increasing sales will increase revenue and therefore it would be easier to get a profit. If selling more, you are using more of your
capacity.

Increased Usage - Peaks and trough in demand


-Stock up on stock e.g. Fireworks or Easter eggs.
The capacity utilization is stock that can now be used for next season.

Subcontracting or Outsourcing
Subcontracting is when you take orders and produce 'things' for other businesses. Subcontracting will increase capacity utilization as
you are now making more not just for your business but for other businesses as well.

Bibliography

www.investopedia.com/terms/c/capacity.asp
www.capacitymgmt.blogspot.com/.../importance-of-capacity-management.htm
www.sba.oakland.edu/faculty/wharton/downloads/.../ch09.doc
www.tutor2u.net/.../business.../qa-operations-what-is-capacity-utilisation
www.askwillonline.com/2011/.../capacity-utilisation-business-studies.htm

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