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Capacity Management

Capacity management aims to minimize waste and maximize resource utilization. It defines ways to balance costs, supply, and demand. Unused capacity that cannot be stored is considered waste. Activity-based costing links costs to activities and identifies natural versus imposed variability. Strategic capacity management works to bridge ongoing management with long-term strategy by focusing on value over cost. Estimating capacity incorrectly can lead to unprofitable decisions if true capacity and unused capacity costs are not understood.

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Hitesh Babbar
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264 views16 pages

Capacity Management

Capacity management aims to minimize waste and maximize resource utilization. It defines ways to balance costs, supply, and demand. Unused capacity that cannot be stored is considered waste. Activity-based costing links costs to activities and identifies natural versus imposed variability. Strategic capacity management works to bridge ongoing management with long-term strategy by focusing on value over cost. Estimating capacity incorrectly can lead to unprofitable decisions if true capacity and unused capacity costs are not understood.

Uploaded by

Hitesh Babbar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Capacity Management

 Capacity is the value-creating ability of an organization


 The essence of capacity issue is the unavoidable fact that resources can not be
used to their fullest (Waste)
 Capacity management defines the various ways of minimizing the waste or
maximizing the utilization of resources
 Capacity has to be defined for every resources or processes
 Goldratt’s theory of constraints, in reality, an elaborate capacity management
system-three important factors-throughput rate, operational expense and
inventory determines the rate of goal achievement (“The Goal”)

Capacity Management: A balancing act
 cost against Capacity – i.e. the need to ensure that processing Capacity
that is purchased is not only cost justifiable in terms of business need,
but also the need to make the most efficient use of those resources, and
 supply against demand – i.e. making sure that the available supply of
processing power matches the demands made on it by the business,
both now and in the future; it may also be necessary to manage or
influence the demand for a particular resource.







(Source: Best-Practice RECOMMENDATIONS Capacity Management and Financial


Performance; Sun Microsystems Inc.)



Capacity costs: Measurement and Management

 Business planning includes defining, measuring and


determining the management policies that will shape the
firm
 Capacity costs management is the first step of reaching
consensus within an organization on what capacity is and
the baseline measures used to capture this capability
 It is then followed by –
Ø Estimation of the cost of a unit capacity
Ø Tracking and reporting existing capacity
Ø Improving company performance in these key areas
 Unutilized capacity that can not be stored is Waste

The basic of Economics of Business
 Price barrier
The profit Squeeze profit

Waste

NVA-R
profit

NVA-R

profit
NVA-R
Waste

Waste
s
fgfg
Value –addingnnd
core of activities

Total available for


profit and waste NVA-R

Waste

profit
Operational Perspective of Capacity

Basic emphasis on controlling the flow of resources


through existing processes or machine centers
Maximizing the velocity of materials through the
plant triggered by the customer demand

Que/Load/
Work in
progress

Source: “Capacity Management” by John Blackstone


Supplemental Rate Method

Charged direct
to
Product using
Utilized
standard
Capacity
Cost
Planned
Process +
Capacity
Total idle cost
Units made
Idle =Supplemental
Capacity cost
Total Resources
Practical Capacity
=Standard Cost
Combined and
Reported to charged to
Management product costs in
general ledger

Source:”Measuring the cost of capacity”, N. J Institute of accountants,1996


Beverage Company
Demand for spring water peaks in hot summer months,
with the least demand in winter.
The raw material availability is lowest when demand is
highest.
Environmental factors can impact on raw material
availability, conditions can not be forecasted.
Main Questions arises :
 Which demand is the most profitable?
 How much inventory should be stored so that it
incurred a maximum profit and what will be the storage
space and distribution capacity.

The tactical perspective in capacity costs
management

 A longer and wider view of the challenges embodied in the


operational approach
 Different tactics are used reflecting the capacity cost estimate
 Normalized Costing: A capacity cost model that uses average
performance over time, adjusted for abnormal events in its
calculations
 Activity based cost systems: A relationship focused on
activity based costing
 Resource Effectiveness Model
 Relational database mode
Activity-Based Costing: Natural vs. Imposed Variability

Materials and Unit variable cost


Final
other simple Natural variability outputs
resources
Use it

Other Intermedi Imposed


Variability
Store it

resources ate Activity-based (100%)


outputs
We create a pool Waste it
of resourcesthat
support an
activity that the Waste
meter
GOAL: Minimize customer values
waste by balancing GOAL: Minimize waste
resources Waste Meter by balancing the capacity
of the activity pool with
customer demand
Strategic Capacity Management: Value vs. Cost

Focused on long term aspects


Built from knowledge gained at operational and
tactical level
Basis for creating corporate future and defining
processes and activities that will form the
foundation for a sustainable competitive
advantage
Mainly focuses on bridging the gap between
ongoing capacity management and strategy
Three specific models are: CUBES, Resource
Effectiveness Model (REM) and CAM-I model


Forces Shaping Strategic Capacity Cost
Management

Current Value Gap Current cost/


Value capacity profile
Profile

New Structures Capacity Strategy New Markets

New Technologies
CAM-I Capacity model
 Rated Capacity=Idle capacity+ Non-productive Capacity + Productive
capacity

Source: A new look at manufacturing by CAM-I capacity


management model; Muras A., Rodrigues M.; 2003 Wiley
Periodicals Inc.
DISASTERS OF WRONG ESTIMATING CAPACITY

 CASE FACTS
 A profitable company started a new plant to provide additional manufacturing
capacity in order to make and sell more products.
 The Company already had available capacity in the old plant, that was known, but this
information was "hidden" due to changes in the measurement base.
 Operation departments with actual operating capacities of 55% to 60% were reported
at or near full capacity
 The flawed data only aided management in the Company’s decision to build a new
plant.
 RESULT
 Sales increased 30%, fixed costs tripled, profits turned into losses, stock prices fell
over 75%
 CONCLUSION
 To avoid this bad decision, the Company needed to understand: its true capacity, the
cost of its existing unused capacity, and the costly effects of adding additional
capacity to existing unused capacity

 ( Research paper by :- Brausch, J. M. and T. C. Taylor. 1997)

Bibliography:
 Total Capacity Management;
 C. J. MacNire;The IMA Foundation for Applied Research, Inc.
 Operations & Supply Management
 Mc Graw Hill; 12th edition (Pg 143-150)
 Operations Management
 Russell and Taylor; Wiley Publications (Pg 252-254)
 ( Research paper by :- Brausch, J. M. and T. C. Taylor. 1997)
 A new look at manufacturing by CAM-I capacity management model;
Muras A., Rodrigues M.; 2003 Wiley Periodicals Inc


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