CHAPTER – 1

CAPACITY PLANNING

1.1 INTRODUCTION
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, design capacity is the maximum amount of work that an organization is
capable of completing in a given period. Effective capacity is the maximum amount of
work that an organization is capable of completing in a given period due to constraints
such as quality problems, delays, material handling, etc.
Capacity planning is the first step when an organization decides to produce more of a
new or existing product. Once capacity is evaluated and a need for new or expanded
facilities is determined, facility location and process technology activities occur. Too
much capacity would require exploring ways to reduce capacity, such as temporarily
closing, selling, or consolidating that might involve relocation, combining of
technologies, or a rearrangement of equipment and processes. Capacity planning
normally involves the following activities:
 Assessing existing capacity
 Forecasting capacity needs
a) Assessing existing capacity & requirements Assessing starts with measurement.
There is no single measurement technique customized for such decisions, rather a
blend of different approaches is utilized when necessary. As noted, there are two
systems of measurements of system effectiveness: efficiency and utilization.
Efficiency is the ratio of actual output to effective capacity and Utilization is the
ratio of actual output to design capacity.
b) Forecasting capacity needs Capacity requirements can be evaluated from two
extreme perspectives – short term and long-term capacity needs:
 Short-term Requirements: Managers often use forecasts of product demand
to estimate the short-term workload that the facility must handle. By
looking ahead up to 12 months, managers anticipate output requirements
for different products or services. Then they compare requirements with
existing capacity and detect when adjustments are necessary.

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  Long-term Requirements: Long-term capacity requirements are more
difficult to determine as future demand and technologies are uncertain.
Forecasting five or ten years ahead is a risky and difficult task. Important
questions include what products and services will the firm produce then for
today’s product may not even exist in the future. Obviously, long-term
capacity requirements are dependent on marketing plans, product
development, and the life cycle of products. Changes in process technology
must also be anticipated. Even if products remain unchanged, methods for
generating them may change dramatically. Capacity planning thus must
involve forecasts of technology as well as product demand.

1.2 NEED OF CAPACITY PLANNING

A firm can determine its facility location and choose the process technologies

only after it has found out a need for new or expanded facilities by evaluating
the capacity or capacity planning. Lack of capacity planning can result in under

or over capacity and would incur unnecessary costs in exploring ways to reduce
or increase capacity. Lack of capacity planning can also trigger a series of

undesirable events such as poor delivery services, an increase in work-in-

process and bring about dissatisfaction in the minds of the sales personnel and

the team involved in manufacturing. Decision making such as producing new

products, expanding production effect can be difficult without proper capacity

planning.

For a number of reasons capacity decisions are among the most fundamental of all the
design decisions that managers must takes (Stevenson 2009). In fact, capacity planning
decisions can be critical for an institution:

1. Capacity decisions have a real impact on the ability of organization to meet future
demands for either products of services; capacity essentially limits the rate of output
possible. Having capacity to satisfy demand can often allow a company to take
advantage of tremendous benefits.

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 2. Capacity decisions affect operating costs. Ideally, capacity and demand
requirements will be matched, which will tend to minimized operating costs. In
practice, this is not always achieved because actual demand either differs from
expected demand or tends to very. In such cases, a decision might be made to
attempt to balance the costs of over- and- under capacity.
3. Capacity is usually a major determinant of initial cost. Typically, the greater the
capacity of a productive unit, the greater its cost. This does not necessarily imply a
one-for-one relationship; larger units tend to cost proportionately less than smaller
units.
4. Capacity decisions often involve long-term commitment of resources and the fact
that, once they are implemented, those decisions may be difficult or impossible to
modify without incurring major costs.
5. Capacity affects the ease of management; having appropriate capacity makes
management easier than when capacity is mismatched.
6. Capacity decisions can affect competitiveness. If a firm has excess capacity, or can
quickly add capacity, that fact may serves as a barrier to entry by other firms. Then
too, capacity can affect delivery speed, when can be a competitive advantage.
7. Because capacity decisions often involve substantial financial and other resources,
it is necessary to plan for them far in advance. For instance, it may take years for a
new lecture hall or a new power generating plant to be constructed and become
operational. However, this increases the risk that the designated amount of capacity
will not match actual demand when the capacity becomes available.

1.3 GOAL OF CAPACITY PLANNING

The goal of capacity planning is to minimize this discrepancy between the capacity of
an organization and the demands of its customer’s results in inefficiency, either in
underutilized resources or unfulfilled customers

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 CHAPTER – 2

PROCESS OF CAPACITY PLANNIG

2.1 Capacity Planning Steps

Estimate future capacity requirements

 Evaluate existing capacity and facilities and identify gaps
 Identify alternatives for meeting requirements
 Conduct financial analysis of each alternative
 Assess key qualitative issues for each alternative
 Select the alternative to pursue that which will be best in the long term
 Implement the selected alternative in the long team
 Monitor results

2.2 Forecasting Capacity Planning Requirements

The decision involved in capacity planning is of both long-term and short term
considerations. Long-term considerations relate to overall capacity level, like the size
of capacity; while short-term considerations relate to probable various in capacity
requirements created by such things as seasonal, random, and irregular fluctuations in
demand (Stevenson 2009).

Long-term capacity needs require forecasting demand over a time horizon and then
converting those forecasts into capacity requirements (Adam, 1978). Some basic
demand patterns that might be identified by a forecast are: power usage, education
welfare and social security checks classroom utilization, student’s accommodation,
staff accommodation, officer accommodation, sports and recreation, etc. In addition to
basic patterns there are more complex patterns, like a combination of cycles and trends.
When trends are identified, the fundamental issues are; how long the trend might
persist, as it is only few things that last forever, and the slope of the trend (Imaga, 2003).
If cycles are identified, interest focuses on; the approximate length of the cycle and the
amplitude of the cycles (Stevenson, 2009).

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 Short-term capacity needs are less concerned with cycles or trends than with seasonal
variations and other variations from average. These deviations are particularly
important because they can place a severe strain on a system’s ability to satisfy demand
at some times and yet result in idle capacity at other times.

2.1 Types Of Capacity Planning

2.1.1 Long -Term Capacity-Planning

Over the long term, capacity planning relates primarily to strategic issues involving
the firm's major production facilities. In addition, long-term capacity issues are
interrelated with location decisions. Technology and transferability of the process
to other products is also intertwined with long-term capacity planning. Long-term
capacity planning may evolve when short-term changes in capacity are insufficient.
For example, if the firm's addition of a third shift to its current two-shift plan still
does not produce enough output, and subcontracting arrangements cannot be made,
one feasible alternative is to add capital equipment and modify the layout of the
plant (long-term actions). It may even be desirable to add additional plant space or
to construct a new facility (long-term alternatives).

2.1.2 Short Term Capacity-Planning

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

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 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, queuing demand, or lengthening
the firm's lead times. Service firms accomplish the same results through scheduling
appointments and reservations.
A more creative approach is to modify the output. Standardizing the output or
offering complimentary services are examples. In services, one might allow
customers to do some of the process work themselves (e.g., self-service gas stations
and fast-food restaurants). Another alternative—reducing quality—is an
undesirable yet viable tactic.
Finally, the firm may attempt to modify demand. Changing the price and promoting
the product are common. Another alternative is to partition demand by initiating a
yield or revenue management system. Utilities also report success in shifting
demand by the use of "off-peak" pricing.

2.2 Capacity-Planning Techniques

There are four procedures for capacity planning; capacity planning using overall factors
(CPOF), capacity bills, resource profiles, and capacity requirements planning (CRP).
The first three are rough-cut approaches (involving analysis to identify potential
bottlenecks) that can be used with or without manufacturing resource planning (MRP)
systems. CRP is used in conjunction with MRP systems. (Jonsson, 2002
Capacity using overall factors is a simple, manual approach to capacity planning that is
based on the master production schedule and production standards that convert required
units of finished goods into historical loads on each work center. Bills of capacity are a
procedure based on the MPS. Instead of using historical ratios, however, it utilizes the
bills of material and routing sheet (which shows the sequence or work centers required
to manufacture the part, as well as the setup and run time). Capacity requirements can

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 then be determined by multiplying the number of units required by the MI’S by the time
needed to produce each. Resource profiles are the same as bills of capacity, except lead
times are included so that workloads fall into the correct periods. Capacity requirements
planning (CRP) is only applicable in firms using MRP or MRP II. CRP uses the
information from one of the previous rough-cut methods, plus MRP outputs on existing
inventories and lot sizing. The result is a tabular load report for each work center or a
graphical load profile for helping plan production requirements. This will indicate
where capacity is inadequate or idle, allowing for imbalances to be corrected by shifts
in personnel or equipment or the use of overtime or a demanded shifts. Finite capacity
scheduling is an extension of CRP that simulates job order stopping and starting to
produce a detailed schedule that provides a set of start and finish dates for each
operation at each work center. A failure to understand the critical nature of managing
capacity can lead to chaos and serious customer service problems (Meredith, et al,
2002). If there is a mismatch between available and required capacity, adjustments
should be made. However, it should be noted that firms cannot have perfectly balanced
material and capacity plans that easily accommodate emergency orders. If flexibility is
the firm’s competitive priority, excess capacity would be appropriate.

2.3 Capacity Planning Problems

1. Demand volatility presents problems for capacity planners
2. Inability to make effective demand forecast. Capacity planning decisions involve both
long-term and short-term considerations. The long-term considerations which relate to
the overall level of capacity such as facility size pose much more problem if an effective
demand forecasting tool is be employed.
3. Inadequate capacity planning can also be a major limiting determinant of effective
capacity.
4. Inadequate finance by the concerned authority (i.e. government)

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2.4 Factors of Effective of Capacity Planning
2.4.1 Facilities Factors:
The design of facilities including size and provision for expansion is an important
factor. Location factors, such as transportation costs, distance to lecture hall from the
various hostels, energy sources, labor supply, as well as room for expansion, are
important. Likewise, layout of the work area often determines how smoothly work can
be performed, and environmental factors such as heating, lighting and ventilation also
play a significant role in determining whether personnel can perform effectively or
whether they must struggle to overcome poor design features.

2.4.2 Product and Service Factors:

Product and service design can have a tremendous influence on
Capacity. Generally speaking, the more uniform the output, the more opportunities
there are for standardization of methods and materials, which leads to greater capacity.
The particular mix of products or services rendered also must be considered since
different items will have different rates of output.

2.4.3 Process Factors:

The quantity capability of a process is an obvious determinant of capacity. A more
subtle determinant is the influence of output quality. For instance, if quality of output
does not meet standards, the rate of output will be slowed by the need for inspection
and rework activities. Productivity also affects capacity. Process improvements that
increase quality and productivity can result in increased capacity.

2.4.4 Human Factors:

The tasks that make up a job, the variety of activities involved, and the training, skill,
and experience required to perform a job all have an impact on the potential and actual
output. In addition, employee motivation has a very basic relationship to capacity, as
do absenteeism and labor turnover.

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2.4.5 Policy Factors:
Management policy can affect capacity by allowing or not allowing capacity options
such as overtime or second or third shifts.

2.4.6 Operational Factors:

Scheduling problems may occur when an organization has differences in equipment
capabilities among alternative pieces of equipment or differences in job requirements.
Inventory stocking decisions, late deliveries, purchasing requirements, acceptability of
purchased materials and parts, and quality inspection, and control procedures also can
have an impact on effective capacity.

REFRENCE
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1. Capacity Planning and Its Implications on the Infrastructural Development Needs
of Some Selected Higher Institutions in the Eastern Senatorial District of Kogi
State. By Sule, Ja’afaru Garba, Dr. Ogbadu, Elijah Ebenehi & Olukotun, Gabriel
Ademola

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