Capacity planning process

Capacity planning is the process of determining the production capacity needed by an organization to meet changing
demands for its products.
[1] In the context of capacity planning, "capacity" is the maximum amount of work that an organization is capable of
completing in a given period of time. The goal of capacity planning is to minimize this discrepancy. Demand for an
organization's capacity varies based on changes in production output, such as increasing or decreasing the production
quantity of an existing product, or producing new products. Better utilization of existing capacity can be accomplished
through improvements in overall equipment effectiveness (OEE). Capacity can be increased through introducing new
techniques, equipment and materials, increasing the number of workers or machines, increasing the number of shifts, or
acquiring additional production facilities.
Capacity is calculated: (number of machines or workers) (number of shifts) (utilization) (efficiency).

The broad classes of capacity planning are lead strategy, lag strategy, and match strategy
1) Lead strategy:-adding capacity in anticipation of an increase in demand. Lead strategy is an aggressive strategy with the
goal of luring customers away from the company's competitors. The possible disadvantage to this strategy is that it often
results in excess inventory, which is costly and often wasteful.
2) Lag strategy:-refers to adding capacity only after the organization is running at full capacity or beyond due to increase
in demand (North Carolina State University, 2006). This is a more conservative strategy. It decreases the risk of waste, but
it may result in the loss of possible customers
3) Match strategy: - adding capacity in small amounts in response to changing demand in the market. This is a more
moderate strategy

Three Steps for Capacity Planning

In this paper we will illustrate three basic steps for capacity planning:
Determine Service Level Requirements
The first step in the capacity planning process is to categorize
the work done by systems and to quantify users expectations
for how that work gets done.
•
Analyze Current Capacity
• Next, the current capacity of the system must be analyzed to
determine how it is meeting the needs of the users.

Planning for the Future

Finally, using forecasts of future business activity, future system

requirements are determined. Implementing the required
changes in system configuration will ensure that sufficient
capacity will be available to maintain service levels, even as
circumstances change in the future.

Strategic capacity planning

Strategic capacity planning is a function of planning for optimal levels of output. Achieving this optimal level of output is
a function of integrating customer demand with suppliers. A product's life cycle can be hard to predict, especially with
new technologies aimed at giving the customer more decision power over design. As the velocity of customer demand
increases, so does the need for meeting that demand with optimal levels of product and service flow.

Asset management

1. In many ways, what sets one business apart from another is not the actual product but the administration behind
the product. Asset management is the concept of using assets in the best way for optimal output. For capacity
planning, this means meticulous attention to detail and timing, from product innovation to logistics and
distribution.
 Start early

2. In terms of order, capacity planning should start where financial decisions are made. The location, facility, design,
level of equipment and layout are also decisions to be made in the early stages of planning. These decisions must
be made with a cross functional team because they are difficult to modify once adopted. Timing and changes in
seasonal shits in demand are difficult to management because capacity planning consideration usually involves
looking at long-run trends.

Monitor marginal output

3. Capacity represents the upper limit of the amount of product the system can handle. It is the maximum level of
output. It is often measured in terms of units or rates of output like machine time or labor hours. Planning in
dollars can lead to poor forecasts because prices can change substantially over the life cycle of the product. One
way to measure efficiency is with the ratio of actual output to capacity. The utilization ratio looks at actual output
to design capacity. Identify the break-even point (cost-volume) to measure progress in marginal output.

Capacity Utilization

Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation actually uses
its installed productive capacity. Thus, it refers to the relationship between actual output that 'is' produced with the
installed equipment and the potential output which 'could' be produced with it, if capacity was fully used.

Economic significance

If market demand grows, capacity utilization will rise. If demand weakens, capacity utilization will slacken. Economists
and bankers often watch capacity utilization indicators for signs of inflation pressures.

It is believed when utilization rises above somewhere between 82% and 85%, price inflation will increase. Excess
capacity means that insufficient demand exists to warrant expansion of output.

All else constant, the lower capacity utilization falls (relative to the trend capacity utilization rate), the better the bond
market likes it. Bondholders view strong capacity utilization (above the trend rate) as a leading indicator of higher
inflation. Higher inflation (or the expectation of higher inflation) decreases bond prices (producing a higher yield to
compensate for the higher expected rate of inflation).

Implicitly the capacity utilization rate is also an indicator of how efficiently the factors of production are being used.
Much statistical and anecdotal evidence shows many industries in the developed capitalist economies suffer from chronic
excess capacity. Critics of market capitalism therefore argue the system is not as efficient as it may seem, since at least 1/5
more output could be produced and sold, if buying power was better distributed. However, a level of utilization somewhat
below the maximum prevails, regardless of economic conditions.

Measurement

In economic statistics, capacity utilization is normally surveyed for goods-producing industries at plant level. The results
are presented as an average percentage rate by industry and economy-wide, where 100% denotes full capacity. This rate is
also sometimes called the "operating rate". If the operating rate is high, this is called "overcapacity", while if the operating
rate is low, a situation of "excess capacity" or "surplus capacity" exists. The observed rates are often turned into indexes.

There has been some debate among economists about the validity of statistical measures of capacity utilization, because
much depends on the survey questions asked, and on the valuation principles used to measure output. Also, the efficiency
of production may change over time, due to new technologies.