About Capacity in Industry

The long range operations strategy of an organization is expressed to a considerable extent by capacity plans. It is in connection with capacity planning that the following issues must be considered. What are the market trends, in terms of market size ad location and technological innovations? How accurately can these factors be predicted? Is there a technological innovation on the horizon that will have an impact on product or service designs? How will capacity needs are affected by new products? Are there process innovations on the business on the horizon that may affect production methods? Is a more continuous productive system justified in the near future? How are capacity needs affected by process innovations? Will it be profitable to integrate vertically during the planning horizon? In planning new capacity, should existing policies for using overtime and multiple shifts be reviewed? In planning new capacity, should we expand existing facilities or build new plants? What is the optimal plant size? Should a series of smaller units be added as needed, or should larger capacity units be added periodically? Should the policy be to provide a capacity with which some lost sales be incurred, or is demand to be met?

The foregoing strategic issues must be resolved as apart of capacity planning .In assessing alternatives, the revenues, capital costs, and operating costs may be compared, but managers may need to trade off the possible effects of the strategic issues against economic advantages and disadvantages.

Capacity is the limiting capability of a productive unit to produce within a stated time period, normally expressed in terms of output units per unit of time. But capacity is an elusive concept because it must be related to the intensity with which a facility is used. For example, it may be the policy to work a plant five days per week, one shift per day, to produce a maximum of 1000 units per week. On this basis, one might rate the regular capacity as 1000 output units per week. But this limit can be increased through overtime, resulting in a capacity limit with overtime of 1150 units. By adding a second shift, however, the capacity can be pushed to perhaps 1800 units per week.

Another way of increasing a capacity limit is to engage in subcontracting when it is feasible. Thus, changing policies with respect to the intensiveness with which facilities are used can change capacities without actually adding any new capacity. These alternative sources of capacity can provide managers with important flexibility in making capacity plans.

Measures of Capacity:

When output units are relatively homogeneous, capacity units are rather obvious. For example, an auto plant uses numbers of autos, a beer plant uses cases of beer, and a nuclear power plant pant uses megawatts of electricity.

When output units are more diverse, it is common to use a measure of the availability of the limiting resource as the capacity measure. For example, the airlines use available seat miles (ASMs) as a measure. They do not use “number of seats” because such a measure does not provide an indication of the potential intensiveness of the use of the seats. Similarly, a restaurant would not use seats as a measure because it does not indicate how many “turns” the restaurant can accommodate. Thus, available seat turns, or the number of people that can be served during mealtime would be an appropriate measure for a restaurant.

Finally, a jobbing machine shop has many different types of equipment for performing a wide variety of machining operations, and the outputs may be unique parts. The value of the labor and material of the outputs could vary widely. There fore, the capacity of the shop is normally stated as the capacity of the limiting resource, the availability of labor hours. Labor hours are used rather than machine hours because there are usually two or three times as many machine hours available as labor hours; that is, skilled machinist is the limiting resources. Table below shows common capacity measures for a number of different types of organizations.


Type of Organization/Capacity Measure

Auto plant: Number of autos
Steel plant: Tons of steel
Beer plant: Cases of beer
Nuclear power plant: Megawatts of electricity
Airline: Available seat miles
Hospital: Available bed days
Movie theater Available seat performances
Restaurant: Available seat turns
Jobbing machine shop: Available labor-hours
School of Business Administration:Available semest quarter ctions

Predicting Future Capacity Requirements:

Long range forecast of demand are difficult to make. There are always contingencies that can have important effects, such as the competitive situation, recessions, wars, oil embargos, or sweeping technological innovations. Therefore, predicting demand also requires an assessment of contingencies. These contingencies are apt to be rather different, depending in the situation. Mature products are likely to have stable and predictable growth, whereas the markets for new products may be quite uncertain.