Capacity plans – generation process


Capacity plans may not match the capacity required. We have to see what alternative capacity will be used or whether there is a provision of lost sales.

Capacity Enhancement: Size

To meet the growing demand, the added capacity is either added in small doses frequently or in large doses less frequently.

Capacity can be added in anticipation of the growing requirement or can wait till the requirement overtakes the available capacity.

There can be mixed options also. We can enhance the capacity substantially but as the demand is not static, soon it outstrips the available capacity thus leading to another enhancement on substantial basis.

Alternative capacity Sources:

It is not always necessary to create additional capacity. We can also increase the existing working facilities intensively say overtime, holiday work, and shifts to get more output. We can also sub-contract either fully or partly our work-load. In case of continuous process industry however, it is not feasible to have more intensiveness of use. So also sub-contracting is ruled out for sophisticated processing.

Whenever alternative capacity sources are possible to be tapped, we reduce the cost of carrying a high capacity, along with the attendant risk of not using it all along. Alternate capacity plans may have capacity gaps, which are to be filled up by alternative capacity sources.

Cost-Volume (CV) Relationships:

There are two types of costs involved which are fixed costs and variable costs. For a given volume of output as we increase the output the variable costs do increase, but since the contribution is enough to cover fixed costs we get a lower cost per unit. Break even volume is the volume where there is no profit and no loss (total costs and sales intersect of plotted on a graph)

Economies of Scale:

High capacity plants have high fixed costs but since variable costs per unit are low, they offer economies of scale. Besides, there are other economies of scale like less investment in inventories, less investments in construction costs for a process industry etc.,

Lost Sales:

Lost sales result into losing our market share which might prove very risky as it could be permanent. Business organizations in the private sector therefore avoid less than required capacity In case of public utilities, like telephones, suburban trains, electricity boards, water supply, the facilities operate at less than required capacity which could not be built up due to infrastructure problems. Perhaps the culprit is the budgetary system where a particular amount only could be earmarked for a particular purpose. Even private sector business organizations encounter demand spurts leaving no other alternative than accepting the lost sales (thus loss in possible contribution)

Multiple and anti-cyclic outputs:

In case of petroleum refineries, there are outputs at higher temperatures and lower temperatures in fractional distillation. Now the higher distillates and the lower distillates do not show the same pattern of demand, their PLC’s being totally different. There the overall capacity does not show much fluctuation, but individual outputs do show them.

There are some products where there is a seasonal spurt in demand, e.g. cough, syrups and woolens in winter, electric fans and Air Conditioners in summer, electric heaters and converters in winter etc. Fire-crackers are consumed only during festival season and only occasionally in other months of the year. So also is the case of greeting cards, and account books.

Here anti-cyclic production is built up over non-seasonal months. Produce more crackers throughout the year to accommodate Deepavali demand and/or produce non-crackers like match sticks using the same production facilities.

Evaluation of Alternative Plans:

The various alternative capacity plans are to be evaluated for consequences in future which are uncertain. The plans have a different set of constraints. Certain effects in future are not easy to quantify. The analysis of risks and other consequences is therefore qualitative as well as quantitative.