Interrelationship between capacity and other issues


1. Relationship between capacity and location decision: Decisions about capacity are often inseparable from location decisions. Usually, capacity is expanded by installing new units at new location taking into consideration location factors such as market segment, transportation costs, location of competitors etc.

2. Relationship between capacity and plant layout: The plant capacity determines the physical relation between various processes used in the conversion process, which in turn determines the layout of the plant. In product-layout or product-focused productive system, the capacities of various work centers or machines have to be balanced to get approximately the same rate of output from various work centers or machines. Once the layout is installed, it is not possible to change the capacity in the short term time horizon.

3. Relationship between capacity and process design: In some cases, the rated capacity depends on the type of conversion process selected. For e.g., the conversion processes selected for manufacture of steel is different for the mini-steel plants from that used for major steel plants.

4. Relationship between capacity and equipment selection: The installed capacity of plant determines the standard labor or equipment hours that can be achieved and also determines the number of machines or equipments that must be installed to get the desired output capacity.

Capacity Planning

Capacity planning is concerned with defining the long-term and short-term capacity needs of a firm and determining how these needs will be met.

The Need for capacity planning

Capacity planning is necessary when an organization decides to increase its production or introduce new products into the market. Once capacity is evaluated and a need for new or expanded facilities is determined, decision regarding the facility location and process technology selection are taken.

Capacity Planning Decisions

Capacity planning involves activities such as:

(i) Assessing existing capacity.
(ii) Forecasting future capacity needs.
(iii) Identifying alternative ways to modify capacity.
(iv) Evaluating financial, economical and technological capacity alternatives.
(v) Selecting a capacity alternatives most suited to achieve the strategic mission of the firm.

Capacity planning involves capacity decisions that must merge consumer demands with human, material and financial resources of the organization.

Classification of capacity planning

Capacity planning can be classified as:

(i) Long-term capacity planning
(ii) Short-term capacity planning
(iii) Finite capacity planning
(iv) Infinite capacity planning

Long-term and Short-term Capacity Planning

Long-term or long-range capacity planning is concerned with accommodating major changes that affect the overall level of output in the longer run. Major changes could be decisions to develop new product lines, expand existing facilities and construct or phase out production plants.

Short-term or short-range capacity planning is concerned with responding to relatively intermediate variations in demand. In the short-term planning horizon, capacity concerns involve the fluctuations in demand caused by seasonal or economic factors.

Ways of adjusting the capacity to the varying demands in the short-term time horizon are

(i) Use of overtime or idle time.
(ii) Increasing the number of shifts per day to meet a temporary strong demand.
(iii) Sub-contracting to other firms.

Service industries use flexible work hours, part-time employees and overtime work scheduling to meet peaks in demands.

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However, as with most strategic decisions, the issue is more complex than it first appears.